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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 1998
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
12% Senior Secured Pay-In-Kind Notes due 2003
Indicate by check II 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 II No ___
Indicate by check II if there are no delinquent filers to disclose
herein pursuant to Item 405 of Regulation S-K, and there will not be any
delinquent filers to disclose, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check II 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 II No ___
Number of shares of common stock outstanding at March 30, 1999: 100
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PART I
ITEM 1. BUSINESS
GENERAL
Colorado Gaming & Entertainment Co. ("CG&E" or the "Company"),
formally known as Hemmeter Enterprises, Inc. (referred to as the "Predecessor
Company" for the period prior to June 7, 1996), develops, owns and operates
gaming and related entertainment facilities. The Company owns and operates,
through wholly-owned subsidiaries, BWBH, Inc. ("BWBH" or "Bullwhackers Black
Hawk") and Silver Hawk Casino, Inc. (the " Silver Hawk Casino") in the
historic mining towns of Black Hawk, Colorado (Bullwhackers Black Hawk,
Bullwhackers Central City and the Silver Hawk Casino are referred to together
as the "Colorado Casinos"). Until March 1999, through another wholly-owned
subsidiary BWCC, Inc. ("BWCC" or "Bullwhackers Central City"), the Company
operated a casino in the adjacent historical mining town of Central City. In
addition, through a wholly-owned subsidiary, Millsite 27 Inc. ("MS27"), the
Company owns a parking lot with a capacity of approximately 500 cars, which
is located directly between, and is used by, Bullwhackers Black Hawk and the
Silver Hawk Casino. References in this Annual Report on Form 10-K to CG&E or
the Company include its subsidiaries unless the context otherwise requires.
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.
On August 21, 1998, Ladbroke Gaming Corporation ("Ladbroke Gaming")
acquired beneficial ownership of 100% of the issued and outstanding shares of
common stock, $0.01 par value, of the Company for $6.25 in cash per share
pursuant to the terms of an Agreement and Plan of Merger, dated as of August
22, 1997, by and among CG&E Acquisition Corp., a subsidiary of Ladbroke
Racing Corporation ("Ladbroke Racing") and the Company, as amended by a first
Amendment to Agreement and Plan of Merger dated as of October 21, 1997 and
assigned to Ladbroke Gaming pursuant to an Assignment of Agreement and Plan
dated as of March 18, 1998. In association with the merger, on August 21,
1998 the Company's outstanding common stock was canceled and the Company
issued one hundred common shares, with $0.01 par value, to Ladbroke Gaming.
Ladbroke Gaming is a wholly-owned subsidiary of Ladbroke plc.
REORGANIZATION
As a result of the financial difficulties of a riverboat gaming
project undertaken in 1995 by Grand Palais Riverboat, Inc. ("GPRI"), a
wholly-owned subsidiary of the Predecessor Company, the Predecessor Company,
BWBH, BWCC and MS27 sought protection under Chapter 11 of the United States
Bankruptcy Code on November 7, 1995 (the " Reorganization"). The First
Amended Joint Plan of Reorganization of the Predecessor Company, BWBH, BWCC
and MS27 was confirmed on April 8, 1996 and became effective on June 7, 1996
(the "Effective Date"). As a result, among other things, the Company
significantly reduced its consolidated debt, issued new shares of common
stock and sold GPRI.
PRIVATE SECURITIES LITIGATION REFORM ACT
Certain statements set forth above and elsewhere in this Annual
Report on Form 10-K which are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to future competition, financing and
refinancing sources and availability, plans for future development or
expansion activities and capital expenditures. Such statements can be
identified by the use of forward-looking terminology such as "might," "may,"
"will," "would," "could," "except," "anticipate," "estimate," "likely,"
"believe, "or "continue" or the negative thereof or other variations thereon
or comparable terminology. Such forward looking statements involve a number
of risks and uncertainties that may significantly affect the Company's
liquidity and results of operations in the future and, accordingly, actual
results may differ
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materially from those expressed in any forward-looking statements. Such risks
and uncertainties include, but are not limited to, those related to leverage
and debt service and financing and refinancing efforts, competition,
inclement weather, general economic conditions in the Denver metropolitan
area, changes in gaming laws, regulations or tax rates and risks related to
development and construction activities. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations-Statement on
Forward-Looking Information."
COLORADO CASINOS AND RELATED AMENITIES
BULLWHACKERS BLACK HAWK. Bullwhackers Black Hawk opened on July 17,
1992 and is located 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 a 36,000 square foot facility which contains approximately
12,000 square feet of gaming space on four levels. The casino currently has
approximately 740 slot machines and nineteen 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.
On February 13, 1998, the Company purchased the assets comprising
Bullwhackers' Bullpen Sports Casino (the "Bullpen") from Pioneer Associates
Limited Liability Company for approximately $5.5 million. On May 1, 1998, the
Company commenced operations at the Bullpen. This purchase expanded
Bullwhackers Black Hawk's original capacity to approximately 840 slot
machines at the end of 1998. The Bullpen is a 15,000 square foot facility
which contains approximately 5,000 square feet of gaming space on three
levels. As of December 31, 1998, the casino currently had approximately 240
slot machines and three table games. The facility has two bars on two of the
levels, a full service restaurant and office space. Bullpen is a sports theme
with multiple televisions and team decor. In January 1999, the Company closed
the second floor of the Bullpen, which eliminated a restaurant and
approximately 113 slot machines from Bullwhackers Black Hawk operations.
In June 1997, the Company completed construction of a day care
facility adjacent to Bullwhackers Black Hawk, operated by New Horizons Kids
Quest III, Inc.("Kids Quest"), at a cost of approximately $1.4 million. Kids
Quest is solely responsible for the day-to-day operations of the day care
facility.
BULLWHACKERS CENTRAL CITY. Bullwhackers Central City opened on June
15, 1992 and is located at one of the town's two main intersections. This
31,000 square foot facility contained approximately 8,750 square feet of
gaming space on two levels. Bullwhackers Central City had approximately 320
slot machines and four table games at the facility as of year-end. The
facility had two bars, a 126-seat full service restaurant and office space.
In January 1999, Bullwhackers Central City closed its full service restaurant
and removed an additional 50 slot machines.
The Company believes that proximity to convenient parking is
extremely important to the Central City casinos and the Colorado market in
general. However, except for the largest casino in Central City which
constructed an on-site parking garage in 1997, none of the casinos currently
operating in Central City offer on-site parking for more than 50 cars. There
are several public parking lots in Central City offering parking for a total
of approximately 550 cars, including a 200-space lot across from Bullwhackers
Central City. As a result of the lack of adequate convenient parking, many of
the operators in Central City, including the Company, increasingly rely on
costly busing programs, which offer cash back promotions and other incentives
designed to enhance incremental patron visitation and play.
For the last several years, Bullwhackers Central City has operated
in an environment of declining revenue levels, and has generated limited
operating profits. In an effort to address the situation over the last
several years, management has cut costs and periodically reduced the number
of slot machines from 534 in 1994 to approximately 320 by the end of 1998.
Additionally, the revenue declines in the third and fourth quarters of 1998
were progressively worse. Generally, management's efforts were successful in
maintaining some profitability in the face of year over year revenue
declines. Management believes that the significant expansion of new
properties in the Black Hawk market, and other projects, which are expected
to open in Black Hawk by the end of 1999, would put further pressure on the
Central City market and specifically Bullwhackers Central City. Accordingly,
management believes that generating operating profits at Bullwhackers Central
City in 1999 and beyond would be unlikely. Additionally, efforts to manage,
staff, market, and maintain the slot product necessary to offer a competitive
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operation in Central City would continue to divert management's time,
attention and Company resources from its core property, Bullwhackers Black
Hawk. Given these factors, in February 1999, the Company announced that
Bullwhackers Central City would cease operations on March 31, 1999.
Subsequently, on March 10, 1999, the Company closed Bullwhackers Central City
due to lack of business levels. The Company recorded a $4.3 million write
down of this property as of December 31, 1998. All value related to Central
City assets, other than the certain gaming and other equipment that has value
in the Company's other operations, has been written-off on the Company's
consolidated balance sheet.
SILVER HAWK CASINO. The Silver Hawk Casino is an approximately
12,000 square foot four-story building constructed in 1993. The Company
purchased the Silver Hawk Casino on April 12, 1996. The Company completed
minor interior remodeling and reopened the facility on June 26, 1996.
Currently, the Silver Hawk Casino has approximately 250 slot machines. The
facility has two bars, a full service restaurant and office space.
PARKING LOT. The Company owns an approximately 3.25-acre surface
parking lot located between Bullwhackers Black Hawk and the Silver Hawk
Casino. The Company believes that proximity to convenient parking is
extremely important in Black Hawk. In May, 1997 the Company completed the
process of expanding its parking lot to accommodate a total of approximately
500 cars.
CANADA. In September 1997, the Ontario Gaming Control Commission
announced that Diamond Gaming of Ontario Inc., a partnership between the
Company, a subsidiary of Ogden Corporation and Diamond Gaming Services Inc.,
was the successful bidder to develop and operate charitable gaming clubs in
the cities of Kingston and Belleville, Ontario. On June 26, 1998, the
Government of the Province of Ontario advised the partnership that the
Government canceled the charity casino initiative. Accordingly, the Company
and its partners ceased all activity with respect to the development of
charity casinos in Kingston and Belleville. The partnership is seeking, at a
minimum, reimbursement from the Ontario Government of its expenses incurred
in such development activities. The Ontario Government has expressed a desire
to reimburse the successful bidders a reimbursement of costs incurred on the
project. Over the last several months the partnership has submitted project
costs detail to the governmental authorities and been negotiating a
settlement agreement. While an executed agreement has not been finalized, the
Company has every indication that the agreement will be finalized shortly.
Accordingly, the Company anticipates a reimbursement of approximately
$400,000 in 1999 for its share of the partnership costs.
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 1.8 million
people live in the Denver metropolitan area, approximately 2.4 million people
live within a 50-mile radius of Denver, and approximately 3.0 million people
live within a 100-mile radius of Denver, 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.
According to the Colorado Division of Gaming, there were 49 gaming
facilities operating in Colorado at the end of 1998, with a total of 14,376
slot machines and 227 table games. Of these, 19 facilities, 7,181 slot
machines and 125 table games were located in Black Hawk; 12 facilities, 3,142
slot machines and 46 table games were located in Central City; and 18
facilities, 4,053 slot machines and 56 table games were located in Cripple
Creek. Generally, Central City facilities have not been able to compete
effectively with facilities in Black Hawk, primarily because 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. For the year ended 1998, the average daily win per slot machine was
$128.88 in Black Hawk, $64.41 in Central City and $54.52 in Cripple Creek.
The cumulative gaming win in Black Hawk as a market was $257 million in 1998
as compared to $220 million in 1997, a 17% increase. The total gaming win in
the Central City market was $90 million in 1998 as compared to $82 million in
1997. Although
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these figures reveal an increase in the cumulative gaming win in Central City,
the growth is a direct result of the largest competitor located off Main
Street in Central City, continuing to grow due to the addition of their
parking garage in mid 1997, while the results of the Main Street operators,
including Bullwhackers Central City, have seen revenues decline over the past
few years.
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; (iii) promoting customer
awareness through marketing of the Bullwhackers name and theme; (iv)
providing excellent customer service with a motivated staff; (vi) utilizing
strategic busing programs; (vii) offering customer promotions; (viii)
providing desirable food products and refreshments; and (ix) providing
incentives to higher-value repeat customers.
In particular, the Company has used extensive marketing programs to
build customer awareness, including 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 slot club membership
in the "Bullwhackers Five Star Players Club." The Company also has instituted
several new busing programs, transporting customers to and from Black Hawk
and Central City.
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. The Company believes that its primary
competition are other casinos operating in Black Hawk and Central City. 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, 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 34% increase over prior year) that entered the Black Hawk market in the
second half of 1998 may dilute existing operators' win per unit and revenue,
including the Company's. Accordingly, such increase in capacity may have a
material adverse affect on the Company's results of operations. Management
believes the new properties adversely affected the Company's revenues and
operating results in 1998, and will continue to affect the Company's
performance in 1999.
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 late 1999, which is expected to include 1,000
slot machines and 500 space covered parking garage. Additionally, Bullseye
Gaming has commenced construction of the Black Hawk Brewery Casino and is
scheduled to open in late 1999, 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
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State Highway 119. The projects currently under construction and, or the
projects may have a material adverse impact of the Company's results from
operations.
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. The Silver Hawk Casino is
smaller, has a less advantageous location and currently has less name
recognition than some of its direct competitors.
Since limited stakes gaming was instituted in Colorado in 1991, a
number of casinos have ceased operations. In addition, several operators,
including the Company, have reduced staffing and have closed temporarily or
reduced their square footage and/or hours of operations. The Company believes
that the casinos that failed in Central City did so primarily due to Central
City's Main Street disadvantages of location and parking as compared to Black
Hawk. In Black Hawk, the Company believes the properties that have failed
have done so for a variety of reasons, including inferior design,
inconvenient parking, inadequate size, inexperienced management and
undercapitalization.
Several lobbying groups placed initiatives for additional Colorado
limited stakes gaming venues, including Denver, on the November 1996
statewide ballots. Although each of these initiatives were defeated by a wide
margin, similar initiatives, legislation or regulations 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.
During the 1996-1997 legislative session, the Colorado Legislature
passed a bill that would have authorized the installation of a minimum of 500
video lottery terminals ("VLT's") at six horse and dog tracks located
throughout Colorado. VLT's are games of chance, similar to slot machines. The
Governor of Colorado vetoed such bill. A similar bill is pending in the
current Legislative Session. If the bill passes and the Governor of Colorado
does not veto such bill, or if any such veto is overridden, the bill would
become law and would add a significant amount of gaming device capacity in
the Denver metropolitan area. Any such additional capacity may have a
material adverse impact on the Company's results of operations.
In addition to competing with other gaming facilities in Colorado,
the Company competes to a lesser degree, both for customers and in potential
future gaming sites, with gaming facilities nationwide, including casinos in
Nevada and Atlantic City, many of which have substantially greater financial
resources and experience in the gaming business. The Company also competes
with other forms of gaming on both a local and national level, including
state-sponsored lotteries, bingo parlor operations, charitable gaming and
pari-mutual wagering, among others, and competes for entertainment dollars
generally with other forms of entertainment.
A decline in the Denver economy, a decline in the Black Hawk-Central
City gaming market, or increased competition for Denver metropolitan area
residents from other gaming jurisdictions both inside and outside Colorado,
could have a material adverse effect on the Company's consolidated results of
operations, financial position and cash flows.
COLORADO GAMING REGULATIONS
The State of Colorado created the Colorado Division of Gaming ( the
"Division") within the Department of Revenue to license, implement, regulate
and supervise the conduct of limited stakes gaming. The Director of the
Division, under the supervision of the Gaming Commission, has been granted
broad power to ensure compliance with Colorado law and regulations adopted
thereunder (collectively, the "Colorado Regulations").
The Director of the Division (i) may inspect, without notice,
premises where gaming is being conducted; (ii) may seize, impound or remove
any gaming device; (iii) may examine and copy all of a licensee's records;
(iv) may investigate the background and conduct of licensees and their
employees; and (v) may bring disciplinary actions against licensees and their
employees. It may also conduct detailed background checks of persons who loan
money to or invest money in a licensee.
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It is illegal to operate a gaming facility without a license issued
by the Gaming Commission. The Gaming Commission is empowered to issue five
types of gaming and gaming-related-licenses. The licenses are revocable and
non-transferable. 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
Bullwhackers Black Hawk expires on December 2, 1999 and the license for the
Silver Hawk Casino expires on June 24, 1999 and currently is in the process
of being renewed. The Bullwhackers Central City license was surrendered in
March 1999. There can be no assurance that the Company will successfully
renew its licenses in a timely manner or at all. The failure or inability of
the Company, BWBH, Silver Hawk Casino, or associated persons to maintain
necessary gaming licenses will have a material adverse effect on the
operations of the Company. 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 gaming
licenses in Colorado. The Company currently has two such licenses, one each
for Bullwhackers Black Hawk and the Silver Hawk Casino. The Company has
applied for a separate license to operate the Bullpen. Should such license be
approved, the Company estimates it will reduce its gaming tax expense by
approximately $700,000 annually.
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.
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 all officers of the
Company, among others, all hold key licenses in Colorado. Subsequent to
year-end, Mr. Szapor and Mr. Mayer resigned from their positions with the
Company.
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, 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.
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 any interest in an entity licensed to conduct limited stakes gaming in
Colorado without the prior approval of the Gaming Commission, except for a
less than 5% interest in a publicly traded corporation. The Gaming Commission
also has the right to request information from any person directly or
indirectly interested in, or employed by, a licensee, and to investigate the
moral character, honesty, integrity, prior activities, criminal record,
reputation, habits and associations of (i) all persons licensed pursuant to
the Colorado Limited Gaming Act, (ii) all officers, directors and
stockholders of a licensed privately held corporation, (iii) all officers,
directors and stockholders holding either a 5% or greater interest or a
controlling interests in a licensed publicly traded corporation, (iv) all
general partners and all limited partners of a
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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" 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.
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 July 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 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. 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 REGULATION
LIQUOR REGULATION. The sale of alcoholic beverages is subject to
licensing, control and regulation by the Liquor Agencies. The current liquor
licenses for Bullwhackers Black Hawk and Bullwhackers Central City, which
were recently renewed, expire in January and February of 2000, respectively.
The Silver Hawk liquor license expires in June 1999 and is in the process of
being renewed. There can be no assurance that such renewals of the Liquor
Agencies will be obtained. As of March 10, 1999, the Bullwhackers Central
City has ceased operations and will surrender its liquor license in 1999.
All liquor licenses are renewable, revocable and not transferable.
The Liquor Agencies have full powers to limit, condition, suspend or revoke
any liquor license. Any such disciplinary action could, and any failure to
renew or other revocation of any of its liquor licenses would, have a
material adverse effect upon the operations of the Company.
Under Colorado law, it is a criminal violation for any person or
entity to own a direct or indirect interest in more than one type of
alcoholic beverage license or more than three gaming tavern liquor licenses.
Each Colorado Casino has a gaming tavern liquor license. Accordingly, the
Company's expansion opportunities in Colorado are limited by such licensing
restriction. Furthermore, no person that holds an interest in the Company may
hold any direct or indirect legal, equitable or voting interest in any other
Colorado alcoholic beverage licensee, and vice versa.
7
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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 in the gaming tax rates, 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:
<TABLE>
<CAPTION>
Annual Tax Rate from Annual Tax Rate from Annual Tax Rate from
Annual Gross Proceeds 10/94 thru 9/96 10/96 thru 6/98 7/98 thru 6/99
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
First $2 million.................... 2% 2% 2%
Next $2 million..................... 8% 4% 4%
Next $1 million..................... 15% 14% 14%
Next $5 million..................... 18% 18% 18%
Proceeds over $10 million........... 18% 20% 20%
</TABLE>
In 1997, the Gaming Commission changed the gaming tax year from
October 1 through September 30 to July 1 through June 30. Accordingly, the
new tax rate for the gaming tax year 1999-2000 will be set by the Gaming
Commission in June, effective as of July 1. While it is difficult to
speculate on how the Gaming Commission may adjust the tax rates, if at all,
any material increase in the tax rates could have a material adverse effect
on the Company's consolidated results of operations and financial position.
EMPLOYEES
The Company employs approximately 503 persons, including cashiers,
dealers, food and beverage servers, facilities maintenance, accounting,
marketing and human resources personnel. No labor unions currently represent
any employees of the Company. A 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, this
access road may be 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 casino. The Company believes it carries adequate flood
insurance on Bullwhackers Black Hawk. 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.
ITEM 2. PROPERTIES
The Company owns, through wholly-owned subsidiaries, the Colorado
Casinos and the parking lot including, with the exception of Bullwhackers
Black Hawk, free title to the real property underlying the buildings. The
Company leases the real property underlying Bullwhackers Black Hawk pursuant
to a 23-year land lease expiring in 2014. The terms of the ground lease
require base minimum payments for the calendar year through 1999 of $150,000
per quarter. The base minimum quarterly payments increase thereafter for each
five-year period for the
8
<PAGE>
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.
In February 1998, the Company entered into an amendment to this lease,
commencing upon the opening of the Bullpen, requiring the Company to pay 80%
of the above additional rent (1.9% of adjusted gross revenues) on the joint
premises of Bullwhackers Black Hawk and the Bullpen. 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.
On February 11, 1998, the Company entered into three ground lease
agreements for the real property underlying the facility of the Bullpen. The
terms of the first lease requires a monthly $35,000 base rent and additional
rent equal to 40% of Net Win (as defined therein) of the gaming operations
conducted on the premises through September 2022, with an option to extend
the lease term to July 2024. The terms of the second lease requires a $22,500
monthly lease payment through July 2024. This lease contains a purchase
option for $1.2 million expiring in March 2001. The terms of the third lease
requires a monthly rent between $12,500 to $16,500 per month, based on a
range of Average Daily Proceeds from all gaming devices on the premises,
which monthly rent escalates throughout the term of the lease, through July
2024.
In March 1997, the Company relocated its corporate offices from Denver
to Lakewood, Colorado pursuant to a $10,000 a month lease, which expires
April 2002.
ITEM 3. LEGAL PROCEEDINGS
GENERAL. The Company is or may become a defendant in pending or
threatened legal proceedings in the ordinary course of business. The
Company's management believes that the ultimate resolution of all such
currently pending legal proceedings will not have a material adverse impact
on the Company's financial position or results of operations.
LADY LUCK. 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.
In 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 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 settlement is for
$300,000, which is accrued for in the Company's consolidated balance sheet.
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.
9
<PAGE>
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, including a Phase I on the Bullpen Sports Casino. Based on
these examinations, the Company is not aware of any environmental problems
affecting the Colorado Casinos which would likely result in material costs to
the Company. Although the Company has not conducted environmental evaluations
of the real property underlying the Silver Hawk Casino, 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 properties could have, or could in the
future have, a detrimental impact on adjacent or nearby properties or
persons. No assurance can be given that no such impact on a third party will
arise in the future, nor that such an impact, if it arises, will not have a
material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to each
individual who is an executive officer of the Company:
<TABLE>
<CAPTION>
Name Age Position(s)
- --- --- -----------
<S> <C> <C>
John Long 51 Chief Executive Officer and Director
Richard S. Rabin 52 President and Chief Operating Officer and Director
Robert J. Stephens 31 Senior Vice President of Finance and Treasurer
Jack Breslin 44 Vice President of Marketing
</TABLE>
JOHN R. LONG has served as Chairman of the Board of Directors of the
Company since August 1998 and as Chief Executive Officer beginning in January
1999. Mr. Long has served as President and Chief Executive Officer of
Ladbroke Racing Corporation since December 1992.
RICHARD S. RABIN has served as President and Chief Operating Officer
of the Company since January 1999. Mr. Rabin served as Senior Vice President
of Operations of the Company since March 1996 through December 1998 and
served as an interim director from the Effective Date through October 1996.
Mr. Rabin served as Vice President, Finance & Administration of the Company
from August 1995 until March 1996. From 1994 until joining the Company, he
served as Chief Financial Officer of a riverboat gaming facility operated by
Sahara Gaming Corporation in Missouri and then as General Manager of a gaming
facility operated by Sahara Gaming Corporation in Nevada. From 1991 to 1994,
Mr. Rabin was Chief Financial Officer and Vice President and, beginning in
1993, also General Manager, of the Glory Hole Saloon and Gambling Hall in
Central City, Colorado. From 1985 until 1991, Mr. Rabin served in various
positions in the gaming industry in Reno, Nevada. Mr. Rabin holds a key
license from the Gaming Commission and is a Certified Public Accountant.
ROBERT J. STEPHENS has served as Vice President of Finance since
September 1996. He served as Controller, Chief Accounting Officer and
Treasurer of the Company from August 1995 until September 1996. Previously,
Mr. Stephens served in various finance and accounting positions since joining
the Company in May 1994. From 1990 to 1994 Mr. Stephens was associated with
Arthur Andersen LLP. Mr. Stephens holds a key license from the Gaming
Commission and is a Certified Public Accountant.
10
<PAGE>
JACK BRESLIN has served as Vice President of Marketing since February
1997. Mr. Breslin served as President and Partner of CCI Advertising, Inc. in
New Jersey, which produced campaigns for Horseshoe Casinos and Sands Hotel
and Casino in Atlantic City, the Santa Fe Casino in Las Vegas, and Gold River
in Laughlin, Nevada and several other casinos and riverboats throughout the
country from 1991 to February 1997. Prior to that, Mr. Breslin served as
in-house Creative Director for Trump's Castle Casino Resort in New Jersey.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS
MATTER
Not Applicable.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below is derived
from the Company's Consolidated Financial Statements. Due to the
Reorganization, comparisons of periods prior to and after June 6, 1997 may be
of limited use in determining operating or other financial trends in the
Company's business. This data should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this Form 10-K.
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT SHARE DATA
Years Ended December 31,
------------------------
Jan. 1,1996
through
1994 1995 June 6, 1996
-------- ------------ ------------
<S> <C> <C><C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 45,474 $47,428 $19,982
Operating Expenses:
Impairment of assets and
predevelopment expense............... 10,804 11,347 --
Reorganization items................. - 17,910 2,290
Other operating expenses............. 47,631 44,807 17,130
Income (loss) from operations........... (12,961) (26,636) 562
Interest expense........................ 18,822 18,664 579
Extraordinary gain from reorganization.. -- -- 164,358
Equity loss in unconsolidated
subsidiary........................... (2,324) (70,277) --
-------- --------- ---------
Net income (loss)....................... $(32,331) $(115,216) $164,407
-------- --------- ---------
-------- --------- ---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
June 7, 1996 Year Ended Year Ended
through December 31, December 31,
December 31, 1996 1997 1998
----------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................... $30,680 $52,132 $53,693
Operating Expenses:
Impairment of Central City assets... -- -- 4,316
Reorganization items................ 308 75 --
Other operating expenses............ 26,402 44,421 47,382
Income from operations................. 3,970 7,636 1,995
Interest expense....................... 3,867 6,780 7,341
------- ------- -------
Net income (loss)...................... $ 192 $ 212 $(5,258)
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 7,977 $ 3,623 $ 5,758 $ 4,228 $ 4,022
Total assets .......................... 141,093 37,680 67,048 64,679 64,872
Long-term debt (excluding current
portion)............................... 155,675 -- 55,391 53,553 57,880
Liabilities subject to compromise...... -- 186,460 -- -- --
Total stockholders' equity (deficit)... (36,824) (153,137) 4,869 5,248 729
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included in this Annual Report on Form 10-K
constitute forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, enacted pursuant to the
Private Securities Litigation Reform Act of 1995. 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, 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-K
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, 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) significant changes in competitive
factors affecting the Company, (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 from expectations in actual
capital expenditures and operating expenses and (x) occurrences affecting the
Company's ability to obtain funds from operations, to finance needed capital
expenditures and other investments.
OVERVIEW
Colorado Gaming & Entertainment Co. ("CG&E" or the "Company"),
formally known as Hemmeter Enterprises, Inc. (referred to as the "Predecessor
Company" for the period prior to June 7, 1996), develops, owns and operates
gaming and related entertainment facilities. The Company owns and operates,
through wholly-owned subsidiaries, BWBH, Inc. ("BWBH" or "Bullwhackers Black
Hawk") and Silver Hawk Casino, Inc. (the " Silver Hawk Casino") in the
historic mining towns of Black Hawk, Colorado. In addition, until March 1999,
through another wholly-owned subsidiary BWCC, Inc. ("BWCC" or "Bullwhackers
Central City"), the Company operated a casino in the adjacent historical
mining town of Central City. In addition, through a wholly-owned subsidiary,
Millsite 27 Inc. ("MS27"), the Company owns a parking lot with a capacity of
approximately 500 cars, which is located directly between, and is used by,
Bullwhackers Black Hawk and the Silver Hawk Casino. 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,
from Pioneer Associates Limited Liability Company for approximately $5.5
million. Additionally, the Company incurred approximately $2.0 million to
equip and renovate the Bullpen. The Company removed the common wall
separating Bullwhackers Black Hawk from the Bullpen and the combined casino
operates as a single casino under one gaming license and one liquor license.
On May 1, 1998, the Company commenced operations at the Bullpen.
On August 21, 1998, Ladbroke Gaming Corporation ("Ladbroke Gaming"),
a subsidiary of Ladbroke Group plc., acquired beneficial ownership of 100% of
the issued and outstanding shares of common stock, $0.01 par value, of the
Company for $6.25 per share in cash pursuant to the terms of an Agreement and
Plan of Merger, dated as of August 22, 1997, by and among CG&E Acquisition
Corp., a subsidiary of Ladbroke Racing Corporation and the
13
<PAGE>
Company, as amended and assigned to Ladbroke Gaming. In association with the
acquisition, on August 21, 1998 the Company's outstanding common stock was
canceled and the Company issued one common share, with no par value, to
Ladbroke Gaming. Due to the existence of outstanding public debt, the Company
did not perform push-down accounting based on the acquisition value.
RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997.
The Company's net revenue increased 3%, to $53.7 million in 1998,
from $52.1 million in 1997. The increase in net revenue is attributable to a
12%, or a $4.3 million, increase at Bullwhackers Black Hawk. The increase in
net revenue is due to the strong results achieved in the first half of 1998
at Bullwhackers Black Hawk, as a result of the strong overall growth in the
Black Hawk market and Bullwhackers Black Hawk's ability to increase its
market share. Additionally, the opening of the Bullpen expansion in May 1998
contributed to the increase in 1998. The majority of the year over year
increases in revenue were generated in the first six months of 1998. Given
that the Bullpen provided an additional 40% increase in gaming device
capacity at Bullwhackers Black Hawk and resulted in little increases in
revenue over the prior year period for the second half of the year,
management is disappointed with the results at the Bullpen expansion.
Management believes the opening of a large competitor in June of 1998
contributed to the disappointing performance of the Bullpen in the second
half of 1998. Additionally, another large competitor opened at the end of
December 1998. The two competitors provide an additional 35% in gaming device
capacity in the Black Hawk market. Accordingly, Bullwhackers Black Hawk's
lower revenue results in the second half of 1998 will, in management's
belief, likely continue or deteriorate further in 1999. For further
discussion of competition in the Black Hawk and Central City market and
management's plans to address the situation, see the COMPETITIVE OUTLOOK
discussion elsewhere in Management's Discussion and Analysis.
The increase in revenues at Bullwhackers Black Hawk was somewhat
offset by a 13%, or $800,000, decrease in net revenues at the Silver Hawk
Casino in 1998. The majority of the decrease at the Silver Hawk Casino
occurred in the last six months of 1998, subsequent to the opening of two
major competitors in the Black Hawk market. In addition, Bullwhackers Central
City revenue decreased 19%, or $1.9 million, in 1998 as compared to 1997, as
a result of the overall decline of the casinos located on Main Street in
Central City, suffering further competitive pressures as a result of the new
properties which commenced operations in Black Hawk.
For the last several years, Bullwhackers Central City operated in an
environment of declining revenue levels, and has generated limited operating
profits. In an effort to address the situation over the last several years'
management has cut operating expenses and periodically reduced the number of
slot machines from 534 in 1994 to approximately 320 by the end of 1998.
Additionally, the revenue declines in the third and fourth quarters of 1998
were progressively worse. Generally, management's efforts were successful in
maintaining some profitability in the face of year over year revenue
declines. Given the significant expansion of new properties in the Black Hawk
market, and other projects, which are expected to open in Black Hawk at the
end of 1999, management believes these expansions will put further pressure
on the Central City market and, specifically, Bullwhackers Central City.
Accordingly, management determined that generating operating profits at
Bullwhackers Central City in 1999 and beyond was unlikely. Additionally,
efforts to manage, staff, market, and maintain the slot product necessary to
offer a competitive operation in Central City would divert management's time,
attention and resources from its core and more successful property,
Bullwhackers Black Hawk. Given these factors, in February 1999, the Company
announced that Bullwhackers Central City would cease operations on March 31,
1999. Subsequently, on March 10, 1999, the Company closed Bullwhackers
Central City due to lack of business. The Company recorded a $4.3 million
write down of this property as of December 31, 1998. All value related to
Central City assets other than the certain gaming and other equipment that
has value in the Company's other operations has been written-off from the
Company's consolidated balance sheets.
Expenses directly related to casino operations, including casino
labor expense and gaming taxes, increased 4% to $24.1 million in 1998, as
compared to $23.2 million in 1997. The increase in casino expenses is due to
increased staffing and other costs associated with the addition of the
Bullpen expansion in the 1998 period and from the overall competitive
environment in the Black Hawk and Central City market which has led to
increasing labor costs. Increased casino expense at Bullwhackers Black Hawk
was somewhat offset by a decrease in casino expenses at both Bullwhackers
Central City and Silver Hawk Casino, as a result of reduced staffing and
other costs in relation
14
<PAGE>
to the decrease in business volumes.
Marketing expense increased 12% to $7.7 million in 1998, as compared
to $6.9 million in 1997. Marketing expense reflects a 43% increase in
marketing expense at Bullwhackers Black Hawk due to increased efforts to
generate revenues in an increasingly competitive market and due to costs
associated with a new busing program that began in August 1998. This increase
is somewhat offset by a 19% decrease in marketing expense at Bullwhackers
Central City, as a result of lower business volumes at the property
(primarily certain cash-back promotions and busing program costs).
Food and beverage expense increased 42% to $4.8 million in 1998 as
compared to $3.4 million in 1997. This increase in expense is a result of
higher food costs and additional staffing for certain discounted food
promotions, which were offered in the 1998 period. Additionally, expenses
increased as a result of operating an additional food outlet as part of the
Bullpen expansion, beginning in May of 1998.
Casino general and administrative expenses decreased 3% to $2.8
million in 1998, as compared to $2.9 million in 1999. The decrease is
primarily due to decreases in casino general and administrative expenses at
both Bullwhackers Central City and Silver Hawk Casino, as a result of reduced
staffing and other costs in relation to the decrease in business volumes.
Corporate expense increased 8% to $3.3 million in 1998, as compared
to $3.0 million in 1997. Included in corporate expense is incentive
compensation expense for senior management based upon the Company's Cash
Bonus Plan and stock awards under the Management Incentive and Non-Employee
Director Stock Plan. The incentive compensation expenses totaled $910,000
(including $739,000 of non-cash expense related to stock grants) compared to
$336,000 (including $166,000 of non-cash expense related to stock grants) for
the years ended 1998 and 1997, respectively. The Company also incurred
approximately $300,000 and $750,000 of other corporate expense relating to
the Ladbroke merger for the years ended 1998 and 1997, respectively.
Depreciation and amortization expense decreased 14% to $4.3 million
in 1998 as compared to $5.0 million in 1997. The decreased depreciation and
amortization charges are a direct result of a large amount of equipment at
Bullwhackers Black Hawk and Bullwhackers Central City becoming fully
depreciated in mid 1997.
The Company incurred $299,000 in pre-opening expense in 1998 related
to the opening of the Bullpen, which commenced operation May 1, 1998.
Interest expense increased 8% to $7.3 million in 1998, as compared
to $6.8 million in 1997. The increase in interest expense is due to the
increased debt balance outstanding during 1998 as a result of borrowing to
fund the Bullpen purchase and renovation.
FOR THE YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996.
The Company's net revenue increased 3%, to $52.1 million in 1997,
from $50.7 million in 1996. The increase in revenue is primarily attributable
to a full year of operations of the Silver Hawk Casino in 1997, which did not
commence operations until June 26, 1996, and generated an incremental $2.4
million in net revenue in 1997. Bullwhackers Black Hawk produced a 1%
increase in revenues in 1997. However, Bullwhackers Black Hawk's operating
results were negatively affected in 1997 by severe weather in the fourth
quarter and an abnormally low hold percentage on the Company's slot machines
during November and December 1997. In addition, construction activities
related to the Company's parking expansion and Kids Quest during the first
five months of 1997 negatively effected revenues during that period.
Additionally, the revenue growth at the Silver Hawk Casino and Bullwhackers
Black Hawk was partially offset by a 13% revenue decrease at Bullwhackers
Central City due to the overall decline of the Main Street casinos in the
Central City market. The Central City market, which was down approximately 2%
for the year, continues to struggle to compete with Black Hawk, which offers
better access, parking convenience and superior properties. Additionally
Bullwhackers Central City has not been able to compete effectively with
Central City's largest casino, which offers substantially more amenities such
as on-site parking and hotel rooms, including the opening of a major parking
expansion in June 1997. Bullwhackers Central City revenue declines
accelerated in the second half of 1997, subsequent to the opening of a
competitor's expanded parking facilities.
15
<PAGE>
Expenses directly related to casino operations, including casino
labor expense, gaming taxes and food and beverage expense increased 5% to
$26.6 million in 1997, as compared to $25.3 million in 1996. The increase is
due to a full year of operations of the Silver Hawk Casino in 1997 and an
increase in the gaming taxes on revenues over $10 million from 18% to 20%.
Marketing expense increased 8% to $6.9 million in 1997, as compared
to $6.4 million in 1996. This increase is primarily due to certain cash-back
promotions and busing programs in an effort to sustain business levels at
Bullwhackers Central City. Additionally, a full year of marketing and
promotions expenses for the Silver Hawk Casino accounted for an incremental
$200,000 of marketing expense in 1997.
Casino general and administrative expenses increased 2% to $2.9
million in 1997, as compared to $2.8 million in 1996. The slight increase
primarily relates to a full year of additional administrative expenses for
the Silver Hawk Casino.
Corporate expense increased 7% to $3.0 million in 1997, as compared
to $2.8 million in 1996. The increase primarily relates to $750,000 of legal,
financial advisory and other fees incurred relating to the Merger. Absent
these one-time transaction costs, corporate expense would have decreased 19.7%
from the prior period.
Depreciation and amortization decreased 15% to $5.0 million in 1997
as compared to $5.9 million in 1996. The decreased depreciation and
amortization charges are a direct result of a substantial amount of equipment
at Bullwhackers Black Hawk and Bullwhackers Central City becoming fully
depreciated in 1997, which accounted for $1.4 million of lower depreciation
charges in 1997. This decrease is somewhat offset by increased depreciation
and amortization charges of $500,000 due to the increased basis of the
Company's assets, from the adoption of "fresh-start" accounting on June 7,
1996 and depreciation and amortization charges related to a full year of
operations of the Silver Hawk Casino.
The Company incurred no pre-opening expense in 1997 as compared to
$362,000 in pre-opening expense in 1996 related to the opening of the Silver
Hawk Casino.
Reorganization and other impairment charges totaled $75,000 in 1997,
as compared to $2.6 million in 1996. Reorganization expenses are costs
directly related to the Reorganization and consisted primarily of
professional fees in the 1997 and 1996 periods.
Interest expense increased 55% to $6.8 million in 1997, as compared
to $4.4 million in 1996. The increase in interest expense is primarily due to
the Company not recording any interest expense during the Reorganization
period (January 1 through June 6, 1996) on its debt obligations in default.
LIQUIDITY AND CAPITAL RESOURCES
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 sub-facilities,
including a $3.5 million revolving line of credit and a $5.0 million
equipment facility. Under terms of the Credit Facility, borrowings accrue
interest at prime plus 2.375% (10.125% as of December 31, 1998). The
different sub-facilities have varying terms ranging from three to five years
from the time funds are borrowed, but the entire facility matures on June 7,
2001, with two one-year extension options. On February 13, 1998, the Company
entered into an amendment to the Credit Facility converting the expired $5.0
million construction line into a new line which provided up to $5.0 million
(the "Bullpen Acquisition Line") to purchase and perform tenant improvements
on the Bullpen. The Bullpen Acquisition Line amortizes over 60 months,
commencing on June 1, 1998 and is payable in full on June 6, 2001. As of
December 31, 1998, the Company had an outstanding balance of approximately
$4.4 million on the Bullpen Acquisition Line and $5.5 million on the Credit
Facility in its entirety. On January 23, 1998 the Company received bondholder
consent to allow Ladbroke, or its assignee, to act as the senior bank lender
pursuant to the bond indenture. Subsequent to year-end, Ladstock Holding
Company ("Ladstock"), an affiliate of the Company's parent, paid the
outstanding balances on the Credit Facility and was assigned the Credit
Facility. Accordingly, Ladstock is now the Company's senior lender on terms
identical to the Credit Facility.
16
<PAGE>
The Company's outstanding 12% Senior Secured Pay-In-Kind Notes (the
"Notes") have an outstanding principal amount of $52.7 million as of December
31, 1998. The Company retired $145,000 of Notes in the fourth quarter of 1998
pursuant to a mandatory repurchase offer upon a change of control, relating
to the Ladbroke acquisition of all common shares of the Company. Interest on
the Notes accrues at a rate of 12% per annum and is payable semi-annually in
June and December. The Notes mature in June 2003. The Notes are redeemable
prior to maturity, in whole or part, at the election of the Company on or
after June 1, 2000, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest to the
redemption date, if redeemed during the 12-month period beginning on the June
1st in the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
- ---- ----------------
<S> <C>
2000 104%
2001 103%
2002 102%
2003 100%
</TABLE>
In September 1997, the Ontario Gaming Control Commission announced
that Diamond Gaming of Ontario Inc., a partnership between the Company, a
subsidiary of Ogden Corporation and Diamond Gaming Services Inc., was the
successful bidder to develop and operate charitable gaming clubs in the
cities of Kingston and Belleville, Ontario. On June 26, 1998, the Government
of the Province of Ontario advised the partnership that the Government
canceled the charity casino initiative. Accordingly, the Company and its
partners ceased all activity with respect to the development of charity
casinos in Kingston and Belleville. The partnership is seeking at a minimum,
reimbursement from the Government of its expenses incurred in such
development activities. The Ontario Government has expressed a desire to
reimburse the successful bidders a reimbursement of cost incurred on the
project. Over the last several months the partnership has submitted project
costs detail to the governmental authorities and been negotiating a
settlement agreement. While an executed agreement has not been finalized, the
Company has every indication that the agreement will be finalized shortly.
Accordingly, the Company anticipates a reimbursement of approximately
$400,000 in 1999, for its share of the partnership costs. Such reimbursement
is roughly equivalent to the direct costs incurred by the Company relating to
this project in 1997 and 1998 and is reflected as a receivable in the
Company's consolidated balance sheet.
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 informational
technology department and progress is reported periodically to management.
Since 1997, the Company has been reviewing all internal, external and third
party informational 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. The Company estimates it will complete external and third party
evaluations by the second quarter of 1999. 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 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. 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 $90,000, 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
17
<PAGE>
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 Company's Y2K-related costs are not expected to be material to
the Company's consolidated results of operations. The Company will continue
to evaluate all IT systems for Y2K compliance throughout 1999.
There is still uncertainty around the scope of the Y2K issue. At
this time the Company cannot quantify the potential impact of potential Y2K
failures. The Company's Y2K program and contingency plans are being developed
to address issues within the Company's control and to reduce the level of the
Company's uncertainty about its Year 2000 issues. The program and
contingency/plans minimizes, but does not eliminate, the issues of external
parties.
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 event 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
Through the first six months of 1998, the Company experienced
revenue growth and substantial growth in operating income and net income at
Bullwhackers Black Hawk, which generated the majority of the Company's
operating profits. However, the opening of two major new competitors in the
Black Hawk market in June and December 1998 has significantly impacted the
Company's operating results for the last six months of 1998 and will likely
continue to negatively impact the operating results in 1999. Accordingly, the
Company does not anticipate to be able to replicate the growth in revenues
and operating profits achieved in 1997 and the first half of 1998. Rather, in
the second half of 1998, the Company experienced a substantial decrease in
operating income compared to the 1997 period. The Company's operating margins
have deteriorated due to declining revenue levels and increasing operating
and marketing costs. Additionally, in late 1999 two additional large
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 1999 and beyond. Furthermore, should the operating trends and
results experienced in the third and fourth quarters of 1998 continue or
worsen, the Company will not be able to generate cash flow from operations to
meet minimum debt service requirements in 1999. Accordingly, the Company
would be reliant on its Credit Facility to meet such debt service
requirements.
Given the deteriorating financial results in the second half of
1998, management has devised various plans and operating strategies to
improve the Company's performance. The operating plan includes a) closing
Bullwhackers Central City and focusing all of its efforts 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) renovating and upgrading the interior finish at Bullwhackers
Black Hawk, e) implementing training programs to position the property on the
basis of service excellence, f) reconfiguring or eliminating inefficient bus
programs, and g) substantially reducing the
18
<PAGE>
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 late 1999, as scheduled.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which
requires disclosure of material risks as defined by Item 305, related to
market risk sensitive financial instruments. As defined, the Company
currently has market risk sensitive instruments related to interest rates. As
disclosed in Note 4 of the consolidated financial statements, the Company has
outstanding long-term debt of $57.8 million at December 31, 1998. The Company
currently has an average maturity of three years for long-term debt, $52.7
million of which is at a fixed rate of 12%, $670,000 of which is at a fixed
rate of 9% and $4.5 million of which is at a rate averaging 10.125% for the
year ended December 31, 1998.
The Company does not have significant exposure to changing interest
rates on long-term debt because interest rates for the majority of the debt is
fixed. The Company has not undertaken any additional actions to cover interest
rate market risk and is not a party to any other interest rate market risk
management activities.
A hypothetical 10% change in market interest rates over the next
year would not impact the Company's earnings or cash flows as the interest
rate on the majority of the long-term debt is fixed. A 10% change in market
interest rates would have a material effect (likely increasing or decreasing
the fair value by approximately 50%) on the fair value of the Company's
publicly traded long-term debt due to the volume outstanding at December 31,
1998.
The Company does not purchase or hold any derivative financial
instruments for trading purposes.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes required by Item 8
are attached at the end of this Annual Report on Form 10-K and are included
herein by this reference. An index to these Consolidated Financial Statements
and Notes is also included in Item 14(a) of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On December 18, 1998, the Board of Directors of the Company accepted
and approved the replacement of Arthur Andersen LLP with Ernst & Young LLP as
the Company's independent certified public accountants for the fiscal year
ended December 31, 1998.
In connection with its audits for the two most recent fiscal year
and through December 18, 1998, there were no disagreements with Arthur
Andersen LLP on any matter of accounting principle or practice, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Arthur Andersen LLP, would have caused it
to make reference to the subject matter of the disagreement in connection
with its report on the financial statements of the Company for such period.
The reports of Arthur Andersen LLP on the consolidated financial
statements of the Company for the years ended December 31, 1996 and 1997
contained no adverse opinion or disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles.
During the two most recent fiscal years and through December 18,
1998, the Company has not consulted with Ernst & Young LLP regarding (i) the
application of accounting principles to the specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered in
the Company's consolidated financial statements or (ii) any matter that was
either the subject matter of a disagreement or a reportable event (as
described in Item 304(a)(1) of Regulation S-K).
The Company has requested that Arthur Andersen LLP furnish it with a
letter addressed to the Securities and Exchange Commissions stating whether
it agrees with the statements made in Item 4(a) above and, if not, stating
the respects in which it does not agree. A copy of such letter is filed as
exhibit 16.1 to Form 8-K as filed on December 18, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors is composed of five members prior to the
Merger and three members subsequent to the Merger. The following sets forth
certain information with respect to the directors and executive officers of
the Company, including with respect to each individual, his age, position
with the Company and his term as a director with the Company:
JOHN R. LONG has served as Chairman of the Board of Directors of the
Company since August 1998 and Chief Executive Officer beginning in January
1999. Mr. Long has served as President and Chief Operating Officer of
Ladbroke Racing Corporation since December 1992. Ladbroke Racing Corporation
is an affiliate of the Company's parent and sole stockholder.
19
<PAGE>
RICHARD S. RABIN has served as President and Chief Operating Officer
of the Company since January 1999. Mr. Rabin served as Senior Vice President
of Operations of the Company since March 1996 through December 1998 and
served as an interim director from the Effective Date through October 1996.
Mr. Rabin served as Vice President, Finance & Administration of the Company
from August 1995 until March 1996. From 1994 until joining the Company, he
served as Chief Financial Officer of a riverboat gaming facility operated by
Sahara Gaming Corporation in Missouri and then as General Manager of a gaming
facility operated by Sahara Gaming Corporation in Nevada. From 1991 to 1994,
Mr. Rabin was Chief Financial Officer and Vice President and, beginning in
1993, also General Manager, of the Glory Hole Saloon and Gambling Hall in
Central City, Colorado. From 1985 until 1991, Mr. Rabin served in various
positions in the gaming industry in Reno, Nevada. Mr. Rabin holds a key
license from the Gaming Commission and is a Certified Public Accountant.
ROBERT J. STEPHENS has served as Vice President of Finance since
September 1996. He served as Controller, Chief Accounting Officer and
Treasurer of the Company from August 1995 until September 1996. Previously,
Mr. Stephens served in various finance and accounting positions since joining
the Company in May 1994. From 1990 to 1994 Mr. Stephens was associated with
Arthur Andersen LLP. Mr. Stephens holds a key license from the Gaming
Commission and is a Certified Public Accountant.
GEORGE P. HARBISON has served on the Board of Directors of the
Company since August 1998. Mr. Harbison has served as Vice President and
Chief Financial Officer of Ladbroke Racing Corporation since November 1994,
and has held several other positions within Ladbroke since March 1991.
Ladbroke Racing Corporation is an affiliate of the Company's parent and sole
stockholder.
The business and affairs of the Company are managed under the
direction of the Board of Directors. The Board has responsibility for
establishing broad corporate policies and for the overall performance of the
Company rather than day-to-day operating details. Members of the Board of
Directors are kept informed of the Company's business by various reports and
documents sent to them periodically, as well as by reports presented at
meetings of the Board and its committees by officers and employees of the
Company.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table provides information concerning compensation
paid to the Company's Chief Executive Officer and the three other executive
officers serving as such at year-end 1998 whose total annual compensation
exceeded $100,000 for services rendered by such persons in all positions with
the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS
------
Restricted
Name and Principal Stock All Other
Position Year Salary Bonus(1) Awards Compensation(2)
- ------------------ ---- ------ -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Stephen J. Szapor, Jr. (3) 1998 $315,360 $ 49,231 $ 750,000 $5,000
President and
Chief Executive Officer 1997 306,456 47,201 68,233 4,750
1996 300,000 236,386 243,054 4,327
Alan L. Mayer (3) 1998 136,654 32,987 289,350 3,490
Senior Vice President, Chief
Legal Officer and Secretary 1997 132,800 31,465 83,622 4,750
1996 127,696 125,354 0 3,192
Richard Rabin 1998 137,747 32,987 289,350 3,417
Senior Vice President
of Operations 1997 132,800 31,465 83,622 4,750
1996 115,231 117,354 0 577
Robert J. Stephens 1998 85,655 16,770 115,742 2,529
Vice President
of Finance 1997 81,723 17,307 33,449 3,637
1996 70,769 68,816 0 1,192
</TABLE>
(1) Amounts for 1997 reflect bonuses awarded in 1997 for services rendered
in 1997. Amounts for 1996 reflect bonuses awarded for services rendered
in 1995 and 1996 during the Company's reorganization which resulted in
the Company's emergence from bankruptcy on June 7, 1996 (the
"Reorganization") plus bonuses earned in 1996 and paid in 1997 pursuant
to the Company's Management Cash Bonus Plan.
(2) Amounts reported reflect Company contributions for the benefit of the
named executives to the Company's 401(k) defined contribution plan.
(3) Mr. Szapor resigned from the Company in January 1999, and Mr. Mayer
resigned from the Company in February 1999. Mr. Rabin was then named
President of the Company, following Mr. Szapor's resignation.
The Company has no outstanding stock options, stock appreciation
rights or similar underlying securities nor any option or long-term
performance incentive plan.
EMPLOYMENT AGREEMENTS
The Company is a party to the following employment agreements with
Mr. Rabin and Mr. Stephens.
The Company's employment agreement with Richard Rabin provides that
he will serve as the Company's Senior Vice President of Operations. Upon the
resignation of Mr. Szapor, Mr. Rabin was named the President of the Company.
Mr. Rabin's employment agreement is for an initial term of three years, and
renews thereafter for successive one-year terms unless terminated by each of
the respective parties. This employment agreement also provides that in the
event of termination by the Company without cause or by Mr. Rabin for good
reason (as defined in his employment agreement), he will receive a payment
equal to his base salary then in effect for the then remaining period of his
employment agreement. The initial term of Mr. Rabin's employment agreement
expires on June 7, 1999. Effective as of March 24, 1997, the Company entered
into an employment agreement with Robert J. Stephens, the Company's Vice
21
<PAGE>
President of Finance. Such agreement is substantially similar to that of Mr.
Rabin except that Mr. Stephen's initial term of the agreement expires on
June 7, 1999, and renews thereafter for successive one-year terms unless
terminated by Mr. Stephens or the Company.
In general, base salaries for executive officers are determined by a
subjective assessment of the executive officer's responsibilities and
position with the Company and the performance of the executive officer. Base
salaries are reviewed annually and from time to time and are adjusted
appropriately. Minimum base salaries and other terms of employment for Mr.
Rabin and Mr. Stephens are governed by their respective employment agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, the Company paid $250,000 to Unirock Management Company, a
merchant banking firm controlled by the Chairman of the Board of Directors
for the Company prior to the Merger. Unirock Management Company provided
financial advisory services to the Company related to the Merger. The Company
believes that this transaction is on terms at least as favorable as would
have been obtained from non-related parties.
Subsequent to year-end, Ladstock Holding Company ("Ladstock"), an
affiliate of the Company's parent, paid 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 which
terms are identical to the Credit Facility.
In February 1999, Ladstock purchased the outstanding note from CAI,
accordingly, this note is currently an obligation to an affiliate Company,
Ladstock.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (a)(2) Financial Statements and Financial Statement
Schedules
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants .................................24
Consolidated Balance Sheets ...............................................26
Consolidated Statements of Operations .....................................27
Consolidated Statements of Stockholders' Equity ...........................28
Consolidated Statements of Cash Flows .....................................29
Notes to Consolidated Financial Statements ................................31
</TABLE>
All other schedules are omitted because the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Financial
Statements and Notes thereto.
(a)(3) Exhibits
See Index to Exhibits on page 42, which is incorporated herein
by reference.
(b) Reports on Form 8-K
1. On December 17, 1998, the Company filed a Current Report on
Form 8-K. The date of report (date of the earliest event
reported) was December 17, 1998. The Company reported under
Item 5 that Mr. Szapor Jr., President and Chief Executive
Officer and a member of the Board of Directors, submitted his
resignation from all such positions to be effective as of
January 8, 1999.
2. On December 18, 1998, the Company filed a Current Report on
Form 8-K. The date of report (date of the earliest event
reported) was December 18, 1998. The Company reported under
Item 4 that Arthur Andersen LLP was dismissed as the
independent accountant effective as of December 18, 1998 and
replaced by Ernst & Young LLP.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Colorado Gaming & Entertainment Co.
We have audited the accompanying consolidated balance sheet of Colorado
Gaming & Entertainment Co. (formerly Hemmeter Enterprises, Inc.) and
subsidiaries (the "Company") as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. 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 audit.
We conducted our audit 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 audit provides 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, 1998, and the results
of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Denver, Colorado
February 11, 1999. Ernst & Young LLP
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Colorado Gaming & Entertainment Co.
We have audited the accompanying consolidated balance sheet of Colorado
Gaming & Entertainment Co. (formerly Hemmeter Enterprises, Inc.) and
subsidiaries (the "Company") as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the years ended December 31, 1997, the period from June 7, 1996 through
December 31, 1996 and the period from January 1, 1996 through June 6, 1996.
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, 1997, and the results
of their operations and their cash flows for the years ended December 31,
1997, the period from June 7, 1996 through December 31, 1996 and the period
from January 1, 1996 through June 6, 1996, in conformity with generally
accepted accounting principles.
Denver, Colorado
March 13, 1998. Arthur Andersen LLP
25
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 4,022 $ 4,228
Accounts receivable, net................................. 607 467
Inventories.............................................. 188 114
Prepaid expenses......................................... 765 619
------- -------
Total current assets............................... 5,582 5,428
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net........... 38,950 41,798
EXCESS REORGANIZATION VALUE AND GOODWILL, net (Note 2)........ 19,699 16,491
OTHER ASSETS, net of accumulated amortization of $306 and 641 962
$501, respectively............................... ------- -------
$64,872 $64,679
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 718 $ 1,118
Accrued expenses (Note 2)................................ 4,545 3,951
Current portion of credit facility....................... 1,000 108
Current portion of other notes payable and capital leases -- 701
------- -------
Total current liabilities.......................... 6,263 5,878
------- -------
NOTES PAYABLE, net of current portion:
Senior secured notes payable............................. 52,738 52,883
Credit facility.......................................... 4,472 --
Other notes payable and capital leases................... 670 670
------- -------
57,880 53,553
------- -------
Total liabilities.................................. 64,143 59,431
------- -------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares
authorized, 100 shares issued and
outstanding at December 31, 1998.................... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,236,091 shares issued and
outstanding at December 31, 1997 ................... -- 52
Additional paid-in capital............................... 5,583 4,792
Retained earnings (deficit).............................. (4,854) 404
------- -------
Total stockholders' equity......................... 729 5,248
------- -------
$ 64,872 $64,679
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
26
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
January 1,
Year Ended Year Ended June 7, 1996 1996
December 31, December 31, through December through June
1998 1997 31, 1996(a) 6, 1996
----------- ----------- ---------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Casino ................................. $ 51,244 $ 50,049 $ 29,398 $ 19,126
Food and beverage ...................... 3,718 3,270 1,998 1,288
Other .................................. 241 274 117 32
--------- --------- --------- ---------
Gross revenues ......................... 55,203 53,593 31,513 20,446
Less: promotional allowances ......... (1,510) (1,461) (833) (464)
--------- --------- --------- ---------
Net revenues ........................... 53,693 52,132 30,680 19,982
OPERATING EXPENSES:
Casino ................................. 15,034 14,060 7,884 5,788
Gaming taxes and device fees ........... 9,061 9,146 4,564 3,614
Food and beverage ...................... 4,831 3,409 2,111 1,299
General and administrative:
Casino .............................. 2,842 2,869 1,557 1,249
Corporate ........................... 3,268 3,021 1,926 902
Marketing .............................. 7,732 6,891 4,001 2,349
Depreciation and amortization .......... 4,315 5,025 4,044 1,882
Pre-opening (Note 2) ................... 299 -- 315 47
Impairment of Central City assets ...... 4,316
Reorganization items (Note 1) .......... -- 75 308 2,290
--------- --------- --------- ---------
Total operating expenses ............... 51,698 44,496 26,710 19,420
INCOME FROM OPERATIONS 1,995 7,636 3,970 562
Interest expense ....................... (7,341) (6,780) (3,867) (579)
Interest income ........................ 88 98 89 66
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME
TAX PROVISION ............................ (5,258) 954 192 49
Provision for income taxes ............. -- (742) -- --
--------- --------- --------- ---------
Net income (loss) before extraordinary
gain .............................. (5,258) 212 192 49
Extraordinary gain from reorganization
items ............................. -- -- -- 164,358
--------- --------- --------- ---------
NET INCOME (LOSS) ........................... $ (5,258) $ 212 $ 192 $ 164,407
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 statements.
27
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(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, 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
Restricted stock grants to officers and directors .... 97,203 1 -- 166 -- 167
Net Income ............................................ -- -- -- -- 212 212
----------- ----- ------- --------- --------- ---------
BALANCES, December 31, 1997 ........................... 5,236,091 52 -- 4,792 404 5,248
Restricted stock grants to officers and directors .... 276,631 -- -- 739 -- 739
Cancellation of common stock .......................... (5,512,622) (52) -- 52 -- --
Net Loss .............................................. -- -- -- -- (5,258) (5,258)
----------- ----- ------- --------- --------- ---------
BALANCES, December 31, 1998 ........................... 100 $ -- $ -- $5,583 $ (4,854) $ 729
----------- ----- ------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
28
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended June 7, 1996 January1, 1996
December 31, December 31, through December through June 6,
1998 1997 31, 1996(a) 1996
----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (5,258) $ 212 $ 192 $ 164,407
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................ 4,315 5,025 4,044 1,882
Loss (gain) on retirements of property and equipment ..... (49) 82 150 244
Noncash compensation ..................................... 739 167 514 --
Deferred income taxes .................................... -- 742 -- --
Noncash interest expense ................................. 160 101 3,443 495
Write-down of Central City assets ........................ 4,316 -- -- --
Extraordinary gain from reorganization ................... -- -- -- (164,358)
Change in working capital and other ...................... 50 (334) (3,111) 822
Noncash reorganization items ............................. -- -- -- 1,825
--------- --------- ---------- ---------
Net cash provided by operating activities ................ 4,273 5,995 5,232 5,317
--------- --------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, equipment and leasehold
improvements .......................................... (9,097) (4,608) (3,224) (3,885)
Net restricted funds (placed in) disbursed from .......... 100 162 244 (507)
escrow
Investment in unconsolidated subsidiaries ................ -- (92) -- --
--------- --------- ---------- ---------
Net cash used in investing activities .................... (8,997) (4,538) (2,980) (4,392)
--------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing ............................. 6,767 1,000 2,392 5,824
Payment of debt placement costs, net of accrued
Liabilities ........................................... -- -- (445) --
Repayments of debt financing ............................. (2,249) (3,987) (5,509) (3,304)
--------- --------- ---------- ---------
Net cash provided by (used in) financing activities ...... 4,518 (2,987) (3,562) 2,520
--------- --------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................... (206) (1,530) (1,310) 3,445
CASH AND CASH EQUIVALENTS, at beginning of period ..... 4,228 5,758 7,068 3,623
--------- --------- ---------- ---------
CASH AND CASH EQUIVALENTS, at end of period............ $ 4,022 $ 4,228 $ 5,758 $ 7,068
--------- --------- ---------- ---------
--------- --------- ---------- ---------
</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.
29
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended June 7, 1996 January1, 1996
December 31, December 31, through December through June 6,
1998 1997 31, 1996(a) 1996
----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 7,177 $ 6,721 $ 1,020 $ 19
--------- --------- ---------- ---------
---------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of senior secured notes payable and other
notes payable pursuant to the Reorganization .......... $ -- $ -- $ 52,300 $ --
--------- --------- ---------- ---------
---------
Issuance of notes payable for accrued interest
obligations ........................................... $ -- $ -- $ 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.
30
<PAGE>
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION
ORGANIZATION
Colorado Gaming & Entertainment Co. ("CG&E") and its subsidiaries
(collectively referred to as the "Company"), formerly known as Hemmeter
Enterprises, Inc. (referred to as the "Predecessor Company" or "HEI" for
periods 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"). The Company purchased the Silver Hawk
Casino in April 1996 for $2.7 million and commenced operations on June 26,
1996. Millsite 27, Inc., also a wholly-owned subsidiary, owns a parking lot,
with a capacity of approximately 500 cars, which is directly between, and is
used by BWBH, Inc. and Silver Hawk Casino, Inc.
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, from Pioneer Associates Limited
Liability Company for approximately $5.5 million. The Company recorded
approximately $4.2 million of excess acquisition cost over the fair value of
the assets acquired to goodwill, which will be amortized over approximately
23 years. Additionally, the Company incurred approximately $2.0 million to
equip and renovate the Bullpen. The Company removed the common wall
separating Bullwhackers Black Hawk from the Bullpen and the combined casino
operates as a single casino under one gaming license and one liquor license.
On May 1, 1998, the Company commenced operations at the Bullpen.
On August 21, 1998, Ladbroke Gaming Corporation ("Ladbroke Gaming")
acquired beneficial ownership of 100% of the issued and outstanding shares of
common stock, $0.01 par value of the Company for $6.25 per share in cash
pursuant to the terms of an Agreement and Plan of Merger, dated as of August
22, 1997, by and among CG&E Acquisition Corp., Ladbroke Racing Corporation
("Ladbroke Racing") and the Company, as amended by a first Amendment to
Agreement and Plan of Merger dated as of October 21, 1997 and assigned to
Ladbroke Gaming pursuant to an Assignment of Agreement and Plan dated as of
March 18, 1998. In association with the merger, on August 21, 1998 the
Company's outstanding common stock was canceled and the Company issued one
hundred common shares, with $0.01 par value, to Ladbroke Gaming. Due to the
existence of outstanding public debt and existing covenants, this debt
continues to exert influences on the Company, therefore the Company did not
perform push-down accounting based on the acquisition value.
REORGANIZATION
As a result of the financial difficulties of a riverboat gaming
project undertaken in 1995 by Grand Palais Riverboat, Inc. ("GPRI"), a
wholly-owned subsidiary of the Predecessor Company, the Predecessor Company,
BWBH, BWCC and MS27 sought protection under Chapter 11 of the United States
Bankruptcy Code on November 7, 1995 (the " Reorganization"). The First
Amended Joint Plan of Reorganization of the Predecessor Company, BWBH, BWCC
and MS27 was confirmed on April 8, 1996 and became effective on June 7, 1996
(the "Effective Date"). As a result, among other things, the Company
significantly reduced its consolidated debt, issued new shares of common
stock and sold GPRI.
FRESH START REPORTING
In accordance with AICPA Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7"), the Company was required to adopt "fresh-start" accounting on the
Effective Date. The adjustments to reflect the consummation of the
Reorganization (including the gain on
31
<PAGE>
extinguishment of debt and other pre-petition liabilities) and the adjustment
to record assets and liabilities at their fair values have been reflected in
the consolidated financial statements. Accordingly, a vertical black line is
shown in the consolidated financial statements to separate
post-Reorganization operations from those prior to June 7, 1996. 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.
(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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash in banks, currency located
in the casinos' vaults, coins located in the gaming device hoppers and other
cash used in daily operations. Included in cash and cash equivalents at
December 31, 1998 and 1997 is restricted cash totaling $507,000 and $525,000,
respectively, which represents the portion of cash that is required to be
maintained by the Colorado Casinos based on regulations promulgated by the
Colorado Limited Gaming Control 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.
CAPITALIZED INTEREST
Interest cost associated with major construction projects is
capitalized. When no debt is incurred specifically for a project, interest is
capitalized on amounts expended on the project using the weighted-average
cost of the Company's outstanding borrowings. Interest capitalized during the
year ended December 31, 1997 totaled $62,000.
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
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, while costs of normal repairs and maintenance are charged to
expense as incurred.
32
<PAGE>
EXCESS REORGANIZATION VALUE
The excess of the reorganization value over the fair market value of
the net assets as of the Effective Date is reported as excess reorganization
value in the accompanying consolidated balance sheet. Excess reorganization
value is amortized on a straight-line basis over 18.5 years. Accumulated
amortization of excess reorganization value was $2.5 million and $1.6 million
at December 31, 1998 and 1997, respectively. The Company continually
evaluates current events and circumstances in order to determine whether the
recorded value has been impaired.
ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Gaming taxes payable.......... $ 494 $ 456
Accrued payroll and
related expenses........... 985 1,065
Accrued interest.............. 662 601
Accrued gaming liabilities.... 798 672
Other accruals................ 1,606 1,157
------ ------
$4,545 $3,951
------ ------
------ ------
</TABLE>
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 amounts wagered by customers, less awards or winnings paid out to
customers. 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.
PRE-OPENING EXPENSES
The Company expenses pre-opening costs as incurred. Pre-opening
costs consist of expenditures incurred prior to the opening of the casino to
prepare the casino for business and include labor costs, certain consulting,
marketing and other direct costs. The Company incurred $299,000 in
pre-opening expense for the year-ended December 31, 1998 related to the
Bullpen, which commenced operations May 1, 1998. The $362,000 reflected in
the 1996 period relates to pre-opening costs for the Silver Hawk Casino,
which opened on June 26, 1996.
REORGANIZATION ITEMS
Reorganization items consist of expenses and other costs directly
related to the Reorganization of the Company and are included in the
consolidated statements of operations. The Company incurred $75,000, $308,000
and $2.3 million relating to professional fees for the Reorganization of the
Company for the year ended December 31, 1997, the period June 7, 1996 through
December 31, 1996 and the period January 1, 1996 through June 6, 1996,
respectively.
33
<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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133 "
Accounting for Derivative Instruments and Hedging Activities" effective for
fiscal years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. It also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria
are met. Management believes that the impact of SFAS No. 133 will not have a
material impact on the financial statements.
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities". This statement is effective
for financial statements for the fiscal years beginning after December 31,
1998. In general, SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of SOP
98-5 should be reported as the cumulative effect of a change in accounting
principle. Management believes that the adoption of SOP 98-5 will not have a
material impact on the financial statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
the current year presentation. These reclassifications had no effect on the
Company's net income.
(3) PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consisted of the
following (in thousands).
<TABLE>
<CAPTION>
December 31,
1998 1997
------ ------
<S> <C> <C>
Land and improvements........... $11,849 $13,997
Building and improvements....... 3,995 7,010
Leasehold improvements.......... 22,584 20,778
Gaming equipment, furniture
and fixtures................. 15,380 20,611
------- -------
53,808 62,396
Less: accumulated
depreciation.................... (14,858) (20,598)
------- -------
$38,950 $41,798
------- -------
</TABLE>
34
<PAGE>
Depreciation and amortization are computed using the straight-line method
over the following useful lives:
<TABLE>
<CAPTION>
Useful Lives
------------
<S> <C>
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
</TABLE>
On March 10, 1999, the Company closed Bullwhackers central City due
to declining business volumes and a lack of profitability. The Company
wrote-off primarily all of its book value of fixed assets at Bullwhackers
Central City as of year-end December 31, 1998, resulting in a $4.3 million
loss. Management believes that these assets after closing of Bullwhackers
Central City will have no value to the Company and will not have any material
salvage value.
(4) NEW VENUE PROJECTS
In September 1997, the Ontario Gaming Control Commission announced
that Diamond Gaming of Ontario Inc., a partnership between the Company, a
subsidiary of Ogden Corporation and Diamond Gaming Services Inc., was the
successful bidder to develop and operate charitable gaming clubs in the
cities of Kingston and Belleville, Ontario. On June 26, 1998, the Government
of the Province of Ontario advised the partnership that the Government
canceled the charity casino initiative. Accordingly, the Company and its
partners ceased all activity with respect to the development of charity
casinos in Kingston and Belleville. The partnership is seeking at a minimum,
reimbursement from the Ontario Government of its expenses incurred in such
development activities. The Ontario Government has expressed a desire to
reimburse the successful bidders for their costs incurred on the project.
Over the last several months the partnership has submitted project costs
detail to the governmental authorities and been negotiating a settlement
agreement. While an executed agreement has not been finalized, the Company
has every indication that the agreement will be finalized shortly.
Accordingly, the Company anticipates a reimbursement of approximately
$400,000 in 1999, for its share of the partnership costs. This amount is
reflected as a receivable in the Company's consolidated balance sheet.
(5) NOTES PAYABLE
Notes payable consisted of the following (in thousands).
<TABLE>
<CAPTION>
December 31,
1998 1997
------ ------
<S> <C> <C>
Senior Secured Pay-In-Kind Notes ... $ 52,738 $ 52,883
Credit facility...................... 5,472 108
Other................................ 670 1,371
-------- --------
58,880 54,362
Less: current portion............... 1,000 809
-------- --------
$ 57,880 $ 53,553
-------- --------
</TABLE>
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 sub-facilities,
including a $3.5 million revolving line of credit and a $5.0 million
equipment facility. Under terms of the Credit Facility, borrowings accrue
interest at prime plus 2.375% (10.125% as of December 31, 1998). The
different sub-facilities have varying
35
<PAGE>
terms ranging from three to five years from the time funds are borrowed, but
the entire facility matures on June 7, 2001 with two one-year extension
options. On February 13, 1998, the Company entered into an amendment to the
Credit Facility converting the expired $5.0 million construction line into a
new line which provided up to $5.0 million (the "Bullpen Acquisition Line")
to purchase and perform tenant improvements on the Bullpen. The Bullpen
Acquisition Line amortizes over 60 months, commencing on June 1, 1998, and is
payable in full on June 6, 2001. As of December 31, 1998, the Company had an
outstanding balance of approximately $4.4 million on the Bullpen Acquisition
Line and $5.5 million on the entire 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 carrying
amount of the Credit Facility is a reasonable estimate of fair value, as
terms of the line reflect current rates. On January 23, 1998 the Company
received bondholder consent to allow Ladbroke, or its assignee, to act as the
senior bank lender pursuant to the bond indenture. Subsequent to year-end,
Ladstock Holding Company ("Ladstock"), an affiliate of the Company's parent,
paid 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 which terms are identical to the Credit Facility.
SENIOR SECURED PAY-IN-KIND NOTES
Pursuant to the Reorganization on June 6, 1996, senior creditors
received a new issue of Senior Secured Pay-In-Kind Notes ( the "Notes")
having an aggregate principal amount of $50 million, due 2003. The Company's
Notes have an outstanding principal amount of $52.7 million as of December
31, 1998. The Company retired $145,000 of Notes in the fourth quarter of 1998
pursuant to a mandatory repurchase offer upon a change of control, relating
to the Ladbroke acquisition of all common shares of the Company. 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
December 31, 1998, the fair value of the Notes is approximately $56.4
million, which are based on quoted market prices (107%). The Notes are
redeemable prior to maturity, in whole or part, at the election of the
Company on or after June 1, 2000, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest to the redemption date, if redeemed during the 12-month period
beginning on the June 1st in the years indicated below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2000 104%
2001 103%
2002 102%
2003 100%
</TABLE>
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 was paid in full
with its final quarterly payment paid in December 1998. The second note in
the amount of $3 million is payable in 20 quarterly installments of principal
and interest (at 9% per annum). The $3 million note was reduced by $2.3
million in funds received by CAI in respect of its claims filed in the
Reorganization. Accordingly, the outstanding balance on the $3 million note
is approximately $670,000, plus accrued interest, as of December 31, 1998. In
February 1999, Ladstock purchased the outstanding note from CAI, accordingly,
this note is currently an obligation to an affiliate Company, Ladstock. The
Company considers the estimated fair value of such notes to be the same as
its carrying value.
36
<PAGE>
Aggregate annual maturities of long-term debt, are as follows:
<TABLE>
<S> <C>
1999 1,000
2000 1,376
2001 3,766
2002 --
2003 52,738
Thereafter --
--------
Total $ 58,880
--------
--------
</TABLE>
(6) STOCKHOLDER'S EQUITY
The Company had 5 million shares of common stock of CG&E which were
issued and outstanding as of December 31, 1997. In 1998, 1997 and 1996,
276,631, 97,203 and 138,888 shares were issued to executive management and
directors pursuant to the Management Stock Incentive Plan (the "Stock Plan").
The Company recognized compensation expense totaling $739,000, $167,000 and
$514,000 related to these stock grants in 1998, 1997 and 1996, respectively.
The Stock Plan provided for shares to be granted to certain management
individuals upon the change of control, as defined by the Stock Plan. In
association with the merger with Ladbroke, on August 21, 1998 the Company's
outstanding common stock was canceled and the Company issued one hundred
common shares, with $0.01 par value, to Ladbroke Gaming.
(7) INCOME TAXES
For the years ended December 31, 1998 and 1997 the Company recorded
no tax provision and a $342,000 deferred tax provision, respectively. A
reconciliation of income tax expense to the statutory federal tax rate of 34%
is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Statutory Rate...................... (34.0%) 34.0%
Effects of:
State Taxes......................... (3.3%) 3.3%
Amortization of Excess
Reorganization Value.............. 6.7% 40.5%
Change in Valuation Allowance....... 30.6% --
----- ----
Effective Tax Rate.................. 0.00% 77.8%
----- ----
</TABLE>
The components of the deferred tax asset as of December 31, 1998 and
1997 are as follows.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT:
Accrued vacation, gaming liabilities
and incentive compensation........ $ 230 $ 261
NON-CURRENT:
Difference in asset basis........... 626 456
Recognition of legal settlement 246 503
Impairment of assets.............. 2,827 1,208
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
Net operating loss carryforwards.... 4,813 4,689
-------- -------
Gross deferred tax asset............ 8,742 7,117
Valuation allowance................. (8,742) (7,117)
-------- -------
$ -- $ --
-------- -------
-------- -------
</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 NOL's totaling approximately $12.8 million, which expire
beginning in 2008. Pursuant to the Reorganization, the old shares of common
stock were canceled and newly authorized common stock was issued to the
Company's senior secured creditors, effecting an ownership change as defined
in section 382 of the Internal Revenue Code. The effect of this ownership
change limits the utilization of NOL's generated prior to the Effective Date
to approximately $520,000 annually. NOL's generated subsequently to the
Effective Date, totaling approximately $6.6 million. However, all NOL's are
subject to additional limitations by the change in ownership resulting from
the Ladbroke acquisition, effective August 21, 1998.
(8) LEASES
OPERATING LEASES
The Company leases real property, on which Bullwhackers Black Hawk
and the Bullpen was constructed. The Bullwhackers Black Hawk land lease is
for a period through 2014 and requires an annual base rent of $150,000
payable quarterly through 1999 and the quarterly amount increases $15,000
every four years. The land lease also requires monthly payments of additional
rent equal to 1.52% of net revenues, as defined. 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, which totals $5.9 million on that date.
On February 11, 1998, the Company entered into three ground lease
agreements for the real property underlying the Bullpen. The terms of the
first lease requires a monthly $35,000 base rent payment and additional rent
equal to 40% of Net Win (as defined) of the gaming operations conducted on
the premises through September 2022, with an option to extend the lease term
to July 2024. The terms of the second lease requires a $22,500 monthly lease
payment through July 2024. This lease contains a purchase option for $1.2
million expiring in March 2001. The terms of the third lease requires monthly
rent between $12,500 to $16,500 per month, based on a range of Average Daily
Proceeds (as defined) from all gaming devices conducted on the premises,
which monthly rent escalates throughout the term of the lease, through July
2024.
Total base rent plus additional rent pursuant to the land lease
agreements for the three years ended December 31, 1998,1997 and 1996 was $1.8
million, $1.1 million and $1.1 million, respectively. Future annual base
rental payments for the land leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31 (in thousands):
<S> <C>
1999........................ $ 1,560
2000........................ 1,620
2001........................ 1,620
2002........................ 1,550
2003........................ 1,500
Thereafter.................. 24,645
-------
Total...................... $32,495
-------
-------
</TABLE>
In March 1997, the Company relocated its corporate offices to
Lakewood, Colorado pursuant to a new
38
<PAGE>
$10,000 a month lease, which expires April 2002.
(9) RELATED PARTY TRANSACTIONS
DUE FROM AFFILIATES
In 1997, the Company paid $250,000 to Unirock Management Company, a
merchant banking firm controlled by the Chairman of the Board of Directors
for the Company prior to the Merger. Unirock Management Company provided
financial advisory services to the Company related to the Merger. The Company
believes that this transaction is on terms at least as favorable as would
have been obtained from non-related parties.
(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. Bullwhackers Black Hawk and Bullwhackers
Central City operate under separate current annual gaming licenses which
expire in December 1999, whereas the Silver Hawk Casino license expires in
June 1999. 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 gaming tax
rate revision, which became effective July 1, 1998, 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:
<TABLE>
<CAPTION>
Annual Tax Rate from Annual Tax Rate from Annual Tax Rate from
Annual Gross Proceeds 10/94 thru 9/96 10/96 thru 6/98 7/98 thru 6/99
--------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
First $2 million ................ 2% 2% 2%
Next $2 million ................. 8% 4% 4%
Next $1 million ................. 15% 14% 14%
Next $5 million ................. 18% 18% 18%
Proceeds over $10 million ....... 18% 20% 20%
</TABLE>
Additionally, the city and state levy device fees ranging from $75
to $1,265 per device per annum. For the years ended December 31, 1998, 1997
and 1996 the Company recorded $9.1 million, $9.1 million and $8.2 million,
respectively, in total gaming taxes and device fees. Effective in 1998, the
Gaming Commission changed the gaming tax year from October 1 through
September 30 to July 1 through June 30. Accordingly, the new tax rate for the
gaming tax year 1999-2000 will be set by the Gaming Commission in June,
effective as of July 1, 1999. While it is difficult to speculate on how the
Gaming Commission may adjust the tax rates, if at all, any material increase
in the tax rates could have a material adverse effect on the Company's
consolidated results of operations and financial position.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with five executives
of the Company. These employment agreements are each for initial term of
three years, and renew thereafter for successive one year terms unless
terminated by each of the respective parties. Subsequent to year-end, Mr.
Szapor, the Company's President and CEO and Mr. Mayer, the Company's Senior
Vice President, Chief Legal Officer and Secretary, have resigned
39
<PAGE>
from the Company, therefore terminating their contracts.
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.
In 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 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 settlement is for
$300,000, which is accrued for in the Company's consolidated balance sheet.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. The
Company's management believes that the ultimate resolution of currently
pending legal proceedings will not have a material adverse impact on the
Company's financial position or results of operations.
(11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly information:
<TABLE>
<CAPTION>
1998 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 13,978 $ 14,974 $ 13,525 $ 11,216
Operating Income (Loss) 3,037 2,493 1,005 (4,540)
Net Income (Loss) 766 381 (725) (5,680)
<CAPTION>
1997 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ----------- ----------- ----------- -----------
Net Revenues $ 12,973 $ 13,392 $ 14,090 $ 11,677
Operating Income 1,368 1,849 2,424 1,995
Net Income (Loss) (346) 74 366 118
</TABLE>
The Company reflected the loss from the closure of Bullwhackers Central City
of $4.3 million in operating expenses during the fourth quarter of 1998.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.
By: /s/ John Long
-----------------------
John Long
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ John Long Chief Executive Officer, March 30, 1999
- ------------------------ Director, Chairman of Board
John Long (Principal Executive Officer)
/s/ Richard Rabin President and Chief March 30, 1999
- ------------------------ Operating Officer
Richard Rabin
/s/ Robert J. Stephens Senior Vice President of Finance March 30, 1999
- ------------------------ (Principal Financial and
Robert J. Stephens Accounting Officer)
/s/ George Harbison Director March 30, 1999
- ------------------------
George Harbison
41
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger dated as of August 22, 1997 by and among
the Company, Ladbroke Racing Corporation ("Ladbroke") and CG&E
Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed August 27, 1997).
2.2 Stock Option Agreement dated as of August 22, 1997 by and between the
Company and Ladbroke (incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed August 27, 1997).
2.3 First Amendment to Agreement and Plan of Merger dated as of October 21,
1997, among the Company, Ladbroke and CG&E Acquisition Corp. (incorporated
by reference to Exhibit 2.5 to the Company's 10-K filed March 25, 1998).
2.4 Asset Purchase Agreement, dated December 10, 1997, by and between CG&E
and Pioneer Associates Limited Liability Company ("Pioneer") (incorporated
by reference to Exhibit 2.6 to the Company's 10-K filed March 25, 1998).
3.1 Amended and Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated By laws of the Company.*
4.1 Indenture between the Company and Fleet National Bank, as Trustee.*
4.2 Specimen Certificate of Common Stock.*
4.3 Form of Note.*
4.4 First Supplemental Indenture date as of January 23, 1998 by and between
the Company and State Street Bank and Trust Company, as successor in
interest to Fleet National Bank, as Trustee (incorporated by reference
to Exhibit 4.5 to the Company's 10-K filed March 25, 1998).
10.1 Loan and Security Agreement, dated as of November 1, 1995 by and
between BWBH, Inc., BWCC, Inc. and Millsite 27, Inc. and Foothill
Capital Corporation.*
10.2 Amendment Number One to Loan and Security Agreement, dated as of
December 4, 1995.*
10.3 Amendment Number Two to Loan and Security Agreement, dated as of
January 24, 1996.*
10.4 Letter Agreement, dated as of December 18, 1995, from BWBH, Inc., BWCC,
Inc. and Millsite 27, Inc. to Foothill Credit Corporation.*
10.5 Security Agreement, dated as of November 1, 1995, between the Company
and Foothill Credit Corporation.*
10.6 Trademark Security Agreement, dated as of November 1, 1995, between the
Company and Foothill Credit Corporation.*
10.7 Continuing Guaranty, dated as of November 1, 1995 by the Company and
Foothill Credit Corporation.*
10.8 Amended and Restated Loan and Security Agreement, dated as of June 4,
1996 between Foothill Capital Corporation, BWBH, Inc., BWCC, Inc.,
Millsite 27, Inc. and Silver Hawk Casino, Inc.*
</TABLE>
42
<PAGE>
<TABLE>
<S> <C>
10.9 Lease Agreement, dated October 25, 1991 by and among Jerry L. Brown and
Harold Gene Reagin and HP Black Hawk, L.P.*
10.10 Option to Purchase dated October 28, 1991 by and among Jerry L. Brown
and Harold Gene Reagin and HP Black Hawk, L.P.*
10.11 Sublease Agreement by and between Marsh & McLennan, Incorporated and
the Company.*
10.12 Amendment to Sublease Agreement, dated as of January 18, 1996 by and
between Marsh & McLennan, Incorporated and the Company.*
10.13 Guaranty, dated as of January 18, 1996, by BWBH, Inc., BWCC, Inc. and
Millsite 27, Inc.*
10.14 Agreement for Sale of Real Estate, dated October 20, 1995, by and
between Millsite 20 Limited Liability Company, Iron City Limited
Liability Company and the Company.*
10.15 First Amendment to Agreement for Sale of Real Estate, dated
December 21, 1995 by and between Millsite 20 Limited Liability Company, Iron
City Limited Liability Company and the Company.*
10.16 Letter dated February 28, 1996 from the United States Environmental
Protection Agency.*
10.17 Subdivision Agreement dated February 28, 1996 by and among the City of
Black Hawk, the Black Hawk/Central City Sanitation District,
Millsite 27, Inc. and Millsite 20 Limited Liability Company.*
10.18 State of Colorado, Department of Revenue, Limited Gaming License issued
to Bullwhackers Black Hawk Casino.*
10.19 State of Colorado, Department of Revenue, Alcoholic Beverage License
issued to BWBH, Inc.*
10.20 City of Black Hawk, Retail Liquor License with Extended Hours issued to
BWBH, Inc.*
10.21 State of Colorado, Department of Revenue, Limited Gaming License issued
to Bullwhackers Central City Casino.*
10.22 State of Colorado, Department of Revenue, Alcoholic Beverage License
issued to BWCC, Inc.*
10.23 City of Central City, Retail Liquor License issued to BWCC, Inc.*
10.24 City of Central City, Extended Hours License issued to BWCC, Inc.*
10.25 Colorado Gaming & Entertainment Co. Management Stock Incentive Plan.*+
10.26 Colorado Gaming & Entertainment Co. Management Cash Bonus Plan.*+
10.27 Employment Agreement between the Company and Stephen J. Szapor, Jr.*+
10.28 Employment Agreement between the Company and Alan L. Mayer.*+
10.29 Employment Agreement between the Company and Richard Rabin.*+
10.30 Employment Agreement between the Company and Robert Stephens .+
</TABLE>
43
<PAGE>
<TABLE>
<S> <C>
10.31 Employment Agreement between the Company and Jack Breslin.+
10.32 Second Amendment to Loan and Security Agreement by and among the BWBH,
Inc., BWCC, Inc. and Silver Hawk Casino, Inc., and Foothill Capital
Corporation dated February 9, 1998 (incorporated by reference to
Exhibit 10.34 to the Company's 10-K filed March 25, 1998).
10.33 Amendment to Lease Agreement, dated February 27, 1998 by and among
Jerry L. Brown and Harold Gene Reagin and HP Black Hawk, L.P.
(incorporated by reference to Exhibit 10.35 to the Company's 10-K
filed March 25, 1998).
10.34 Lease Acknowledgment, Assumption and Modification Agreement, dated
February 11, 1998 by and among Pioneer, BWBH, Inc. and Edward E. Smith
and Shirley J. Smith (incorporated by reference to Exhibit 10.36 to
the Company's 10-K filed March 25, 1998).
10.35 Lease Acknowledgment, Assumption and Modification Agreement, dated
February 11, 1998 by and among Pioneer, BWBH, Inc. and KDL, Inc.
("KDL") (incorporated by reference to Exhibit 10.37 to the
Company's 10-K filed March 25, 1998).
10.36 Lease Acknowledgment, Assumption and Modification Agreement, dated
February 11, 1998 by and among Pioneer, BWBH, Inc., KDL and Elizabeth
Branecki (incorporated by reference to Exhibit 10.38 to the
Company's 10-K filed March 25, 1998).
10.37 Loan Purchase Agreement, dated February1, 1999 by and among Foothill
Capital Corporation and Ladstock Holding Corporation.
10.29 First Amendment to Employment Agreement between the Company and
Stephen J. Szapor, Jr.*+
21.1 List of Subsidiaries.*
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as
amended of Fleet National Bank, as Trustee under the Indenture.*
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the same exhibit number in the Company's
Registration Statement on Form 10, with the exception of exhibit 25.1
was previously referenced as 99.1 (File No. 0 - 28068).
+ Indicates management contract or compensatory plan, contract or
arrangement.
44
<PAGE>
LOAN PURCHASE AGREEMENT
This Loan Purchase Agreement ("Agreement") dated as of February 1, 1998,
is entered into by and among FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), LADSTOCK HOLDING CORPORATION, a Delaware
corporation ("Buyer"), and BWBH, INC., a Delaware corporation ("BWBH"), BWCC,
INC., a Delaware corporation ("BWCC"), MILLSITE 27, INC., a Delaware
corporation ("M27"), and SILVER HAWK CASINO, INC., a Delaware corporation,
("SHCI"): collectively and individually, "Borrowers").
1. RECITALS.
1.1 On or about June 7, 1996, Foothill, on the one hand, and
Borrowers, on the other hand, entered into that certain Amended and Restated
Loan and Security Agreement whereby Foothill agreed to loan, on a revolving
basis, up to a maximum amount of Twelve Million Five Hundred Thousand Dollars
($12,500,000); and
1.2 On or about June 7, 1996, Foothill and Borrowers entered into
that certain letter agreement which served as a first amendment to the
Amended and Restated Loan and Security Agreement ("First Amendment"); and
1.3 On or about February 9, 1998, Foothill and Borrowers entered
into that certain Second Amendment to Amended and Restated Loan and Security
Agreement ("Second Amendment": the Amended and Restated Loan Agreement, as
amended by the First Amendment and the Second Amendment is hereinafter
referred to as the "Loan Agreement"); and
1.4 The Obligations (as defined in the Loan Agreement: Capitalized
terms not otherwise defined herein have the meaning in the Loan Agreement)
were secured by the Collateral;
1.5 Pursuant to the Second Amendment, the definition of Collateral
was expanded to include all of the assets of the Bullpen casino; and
1.6 On or about August 21, 1998, all of the issued and outstanding
stock of Borrowers was acquired by Ladbrook Gaming Corporation, an affiliate
of Buyer, and Buyer has elected to finance the obligations of Borrowers from
its own funds; and
1
<PAGE>
1.7 Borrowers and Buyer approached Foothill and inquired as to
whether Foothill was willing to sell the Obligations, and all evidences of
same and Collateral securing same, to Buyer, to which, on the terms and
conditions set forth herein, it has agreed.
2. ASSIGNMENT OF LOAN AGREEMENT AND DEEDS OF TRUST. Upon and subject to
the satisfaction of all of the terms and conditions set forth in this
Agreement, Foothill hereby agrees to grant, assign and transfer to Buyer,
without recourse, and without representation or warranty, express or implied,
all of Foothill's right, title, interest, obligations and privileges under
the Loan Agreement and the money to become lendable thereunder and due
thereon with interest, and all of Foothill's right, title and interest under
the Collateral and the Loan Documents, and all rights accrued or to accrue
thereunder.
3. PURCHASE PRICE. The purchase price for the assignment of the Loan
Agreement and the Collateral (the "Purchase Price") shall be computed as
follows:
3.1 The outstanding Obligations owing to Foothill from Borrowers at
the time the Purchase Price is received by Foothill; PLUS
3.2 An amount equal to the Early Termination Premium, computed at
the time the Purchase Price is received by Foothill; PLUS
3.3 The sum of $25,000 representing an estimation of the attorney's
fees and other associated transactional costs incurred by Foothill in
assigning the Loan to Buyer.
4. METHOD OF PAYMENT OF PURCHASE PRICE. Buyer shall wire transfer the
Purchase Price to Foothill on or before February 19, 1999 (the "Closing") in
accordance with the following wire instructions:
The Chase Manhattan Bank
New York, New York
ABA: #021000021
Credit: Foothill Capital Corporation
Account: 323-266193
Re: Colorado Gaming & Entertainment, Co.
5. DELIVERY OF FOOTHILL DOCUMENTS. Within two (2) business days of the
Closing, Foothill shall deliver to Buyer, at the address set forth in
Section 11.1 hereof,
2
<PAGE>
fully-executed and, where applicable, acknowledged originals of the documents
set forth on Exhibit "A" attached hereto and incorporated by reference
hereby, and assignments of same to Buyer.
6. CLOSING COSTS. The costs incidental to the Closing shall be paid as
follows:
(a) Buyer shall pay the cost of obtaining any Indorsements or new
Title Insurance Policies, should it elect to obtain them.
(b) Buyer shall pay both its and Foothill's legal fees and other
incidental expenses incurred in connection with the transaction
contemplated by this Agreement.
A portion of the Purchase Price includes an estimated $25,000 in
attorney's fees for Foothill's counsel and other closing transactional costs.
Should Foothill's attorney's fees and other closing transactional costs be
less than that amount, Foothill shall refund within ninety (90) days any
amounts in excess of the actual fees. Should Foothill's counsel's fees and
other closing transactional costs exceed the sum of $25,000, Buyer shall
promptly pay the same upon invoicing by Foothill.
7. CONDITIONS TO FOOTHILL'S OBLIGATIONS. Foothill's obligations under
this Agreement shall be conditioned upon Foothill receiving the Purchase
Price on or before the Closing Date.
8. RELEASE.
8.1 Effective as of date of execution hereof and also as of the
Closing, Borrower each for itself and their shareholders, affiliates, agents,
principals, officers, directors and employees hereby release, discharge, and
acquit Foothill and its shareholders, subsidiaries, parent companies,
affiliates, agents, principals, officers, counsel, employees, consultants and
their respective successors and assigns, from any and all causes of action,
actions, judgments, liens, obligations, indebtedness, damages, losses,
claims, liabilities, and demands of any kind, nature and character
whatsoever, whether known or unknown, and whether anticipated or
unanticipated, directly or indirectly arising out of the lending
relationship and the Loan. This is intended as a full release, and no causes
of action, actions, judgements, liens, obligations, indebtedness, damages,
losses, claims, liabilities, and demands of any kind, nature and character
3
<PAGE>
whatsoever, whether known or unknown, and whether anticipated or
unanticipated, directly or indirectly, is reserved or retained by any of the
signatories hereto.
8.2 Borrowers each for itself and their shareholders, affiliates,
agents, principals, officers, directors and employees, hereby waive and
relinquish all rights and benefits under Section 1542 of the Civil Code of
California, which reads as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
9. INDEMNITY.
9.1 INDEMNITY PROVISIONS. Borrowers and Buyer (individually and
collectively, jointly and severally, "Indemnitor") will defend, indemnify and
hold harmless Foothill, and each and all of its respective predecessors,
successors, servants, agents, employees, attorneys, directors, officers,
shareholders, partners, owners, representatives, assigns and companies,
(hereinafter collectively called "Indemnitees") and each of them against any
and all claims against Indemnitees (including all demands, actions, suits,
causes of action, obligations, controversies, debts, costs, expenses,
accounts, damages, judgments, and all out of pocket losses and/or liabilities
of any character whatsoever) brought by Borrowers, affiliates of Borrowers,
shareholders of Borrowers, or creditors of Borrowers arising out of or in any
way related to the Loan and the lending relationship. Said indemnification
shall include, but shall not be limited to, sums paid or liabilities incurred
in defense or settlement of, and expenses paid or incurred in connection
with, any and all claims, demands, agreements, contracts, actions, suits,
causes of action, arbitrations, obligations, controversies, debts, costs,
expenses, accounts, damages, judgments, losses and liabilities of any
character whatsoever paid or incurred by Indemnitees or asserted against
Indemnitees, including without limitation any and all costs or expenses
incurred by Indemnitees in enforcing the terms hereof, in procuring or
attempting to procure any release from liability, or in recovering or
attempting to recover any losses or any expenses paid or incurred as
aforesaid.
4
<PAGE>
9.2 NOTICE OF INDEMNITOR. The indemnification of Indemnitees by
Indemnitor shall be contingent upon notice to Indemnitor by or on behalf of
Indemnitees of any claim or action which may result in liability to
Indemnitor through such indemnification and an opportunity accorded Indemnitor
to defend against such claim or action.
9.3 INDEMNITOR'S DUTY TO DEFEND. Indemnitor agrees to defend
Indemnitees against any claims brought, or actions filed, against Indemnitees
with respect to the subject of the indemnity contained herein, whether such
claims or actions are rightfully or wrongfully brought or filed. In the event
that claims should be brought or actions filed with respect to the subject of
indemnity herein, Indemnitor agrees that Indemnitees may employ attorneys of
their own selection, but to be paid for by Indemnitor, to appear and defend
the claim or action on behalf of Indemnitees.
9.4 ENFORCEMENT RIGHTS OF INDEMNITEES. Upon failure of Indemnitor
within ten (10) days of entry of Final Judgement or Award against
Indemnitees, or the settlement by Indemnitees of any matter indemnified
against herein, to pay said Judgement, Award or Settlement, Indemnitees may,
but need not, pay such Judgment, Award or Settlement and make demand upon
Indemnitor for payment of same plus interest at the rate of Ten Percent (10%)
per annum, or the maximum interest rate allowed by law, whichever is less, on
the amount from the date paid, plus their actual attorneys' fees and costs.
Any such failure to satisfy in full any Final Judgment or Award against
Indemnitees, or to pay any settlement of a claim indemnified hereunder, shall
be an event of default.
10. REPRESENTATIONS AND WARRANTIES.
10.1 Foothill makes no warranty or representation, express or implied,
concerning any facts material or immaterial, concerning the status and
enforceability of the Loan Agreement or rights to the Collateral, and that the
assignment is an "as is, where is".
10.2 Foothill represents and warrants to Buyer that it owns the Loan
Documents and has not sold, assigned, or encumbered them to or in favor of
any third party, and the execution of this Agreement has been duly authorized
and is within its corporate powers.
10.3 Buyer represents and warrants that it is solely relying on its
own investigations with respect to all matters and facts concerning or
surrounding the Loan Agreement and
5
<PAGE>
rights with respect to the Collateral and its own discussions and
investigations with Borrowers.
The above representations and warranties shall be true as of the Closing and
shall survive the Closing.
11. MISCELLANEOUS.
11.1 NOTICES. All notices, approvals, disapprovals or elections
required or permitted to be given under this Agreement shall be in writing
and shall be delivered personally or mailed, certified or registered mail,
return receipt requested, or telefaxed, to the parties at the following
addresses and/or fax numbers:
If to Foothill: Foothill Capital Corporation
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90017
Attention: Ms. Teresa Bolick
(310) 996-7162
If to Buyer: Ladstock Holding Corporation
3260 Blume Drive
Plaza II, Suite 500
Richmond, California 94806
Attn: John J. Ford, Esq.
(510) 243-9734
Personally delivered notices shall be deemed given upon actual personal
delivery to the intended recipient. Mailed notices shall be deemed given upon
the earlier of three (3) business days after deposit into the United States
mail, registered or certified, with postage fully prepaid, or the date of
actual receipt as evidenced by the return receipt. Telefaxed notices shall be
deemed given upon telecommunication to the recipient at the number set forth
above.
11.2 NON-ASSIGNABILITY. Buyer shall not assign its rights or
obligations under this Agreement.
11.3 GOVERNING LAW. This Agreement shall be deemed to have been made
in the State of California and the validity, enforceability, construction,
interpretation and enforcement of this Letter Agreement and the rights of the
parties hereto shall be determined under, governed by and construed in
accordance with the laws of the State of California, without regard to the
principles of conflicts of law.
6
<PAGE>
11.4 VENUE. Buyer and Foothill agree that all actions or proceedings
arising in connection with this Letter Agreement shall be tried and litigated
only in the state and federal court located in the County of Los Angeles,
State of California or, at the sole election of Foothill, in any other court
in which Foothill shall initiate legal or equitable proceedings and which has
subject matter jurisdiction over the matter in controversy.
11.5 WAIVER OF TRIAL BY JURY. BUYER AND FOOTHILL HEREBY EXPRESSLY
WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, CAUSE OF
ACTION OR PROCEEDING ARISING UNDER OR WITH RESPECT TO OR IN ANY WAY RELATED
TO THIS LETTER AGREEMENT. BUYER OR FOOTHILL MAY FILE AN ORIGINAL COUNTERPART
OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT
OF THE OTHER PARTY HERETO TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
11.6 ATTORNEYS' FEES. In the event of any action between Foothill and
Buyer for enforcement of any of the terms or conditions of this Agreement,
the prevailing party in such action shall be entitled to recover its
reasonable costs and expenses, including without limitation court costs and
attorneys' fees (including, without limitation, costs and fees pursuant to
11 U.S.C.), as awarded by a court of competent jurisdiction.
11.7 COUNTERPART EXECUTION. Delivery of any executed counterpart of
this Letter Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Letter Agreement. Any
party delivering an executed counterpart of this Letter Agreement by
telefacsimile also shall deliver a manually executed counterpart of this
Letter Agreement but the failure to deliver a manually executed counterpart
shall not affect the validity, enforceability, and binding effect of the
Letter Agreement.
11.8 ENTIRE AGREEMENT. This Agreement, together with the documents
described and referred to herein, contains all of the agreements of Foothill
and Buyer with regard to the transactions contemplated hereby, and supersedes
all prior agreements, understandings and negotiations, whether written or
oral.
11.9 AMENDMENT. This Agreement shall not be modified or amended
except by an instrument in writing duly executed by both Foothill and Buyer.
7
<PAGE>
11.10 HEADINGS. The paragraph headings and captions in this Agreement
are for convenience only and shall not limit or define the contents of this
Agreement.
11.11 TIME. Time is of the essence of this Agreement, it being
understood that the time for performance of each obligation, including
without limitation the Closing Deadline, has been the subject of negotiation
by the parties.
11.12 ADVICE OF COUNSEL. BUYER AND FOOTHILL HEREBY ACKNOWLEDGE AND
REPRESENT THAT THEY HAVE ENTERED INTO THIS LETTER AGREEMENT AFTER SEEKING AND
OBTAINING THE ADVICE OF THEIR COUNSEL, AFTER REPRESENTATION BY SUCH COUNSEL
REGARDING THIS LETTER AGREEMENT, INCLUDING THE IMPLICATIONS OF THE
REQUIREMENTS FOR THE WAIVERS AND RELEASES CALLED FOR HEREIN, THAT SUCH
COUNSEL HAS FULLY EXPLAINED TO BUYER AND FOOTHILL THE LEGAL EFFECTS OF THIS
LETTER AGREEMENT, INCLUDING THE LEGAL EFFECT OF SUCH REQUIRED WAIVERS AND
RELEASES, AND THAT BUYER AND FOOTHILL ARE FULLY AWARE OF ITS CONTENT AND
EFFECT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
"Foothill"
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
----------------------------
Teresa Bolick,
Vice President
"Buyer"
----------------------------,
a __________ corporation
By
----------------------------
Print Name:
-----------------
By
----------------------------
Print Name:
-----------------
8
<PAGE>
"Borrowers"
BWBH, INC.,
a Delaware corporation
By /s/ Robert Stephens
------------------------------------
Print Name: Robert Stephens, VP
-------------------------
By /s/ Alan Mayer
------------------------------------
Print Name: Alan Mayer, VP
-------------------------
BWCC, INC.,
a Delaware corporation
By /s/ Robert Stephens
------------------------------------
Print Name: Robert Stephens, VP
-------------------------
By /s/ Alan Mayer
------------------------------------
Print Name: Alan Mayer, VP
-------------------------
MILLSITE 27, INC.,
a Delaware corporation
By /s/ Robert Stephens
------------------------------------
Print Name: Robert Stephens, VP
-------------------------
By /s/ Alan Mayer
------------------------------------
Print Name: Alan Mayer, VP
-------------------------
9
<PAGE>
SILVER HAWK CASINO, INC.,
a Delaware corporation
By /s/ Robert Stephens
------------------------------------
Print Name: Robert Stephens, VP
-------------------------
By /s/ Alan Mayer
------------------------------------
Print Name: Alan Mayer, VP
-------------------------
10
<PAGE>
EXHIBIT "A"
List of Loan Documents Assigned
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000918390
<NAME> COLORADO GAMING & ENTERTAINMENT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1998
<CASH> 4,022
<SECURITIES> 0
<RECEIVABLES> 607
<ALLOWANCES> 0
<INVENTORY> 188
<CURRENT-ASSETS> 5,582
<PP&E> 53,806
<DEPRECIATION> 14,858
<TOTAL-ASSETS> 64,872
<CURRENT-LIABILITIES> 6,263
<BONDS> 52,738
0
0
<COMMON> 0
<OTHER-SE> 729
<TOTAL-LIABILITY-AND-EQUITY> 64,872
<SALES> 3,718
<TOTAL-REVENUES> 53,693
<CGS> 4,831
<TOTAL-COSTS> 39,500
<OTHER-EXPENSES> 11,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,341
<INCOME-PRETAX> (5,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,258)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
