<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 10-Q/A
Amendment No. 1 to Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 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)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
Number of shares of common stock outstanding at November 12, 1998: 1
<PAGE>
Colorado Gaming & Entertainment Co.
Form 10-Q/A
Index
Colorado Gaming & Entertainment Co. hereby amends its quarterly report on
form 10-Q for the quarterly period ended September 30, 1998, by adding
information relating to its Year 2000 Issues in its management discussion and
analysis section.
<TABLE>
<CAPTION>
Page
<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of September 30, 1998 and 1
December 31, 1997.
Consolidated Statements of Operations - for the three and nine
months ended September 30, 1998 and 1997. 2
Consolidated Statements of Cash Flows - for the nine months 3
ended September 30, 1998 and 1997.
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis 7-11
PART II OTHER INFORMATION 12-13
SIGNATURES 14
</TABLE>
<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Cash $ 6,612 $ 4,228
Accounts receivable, net 321 467
Inventories 222 114
Prepaid expenses 832 619
-------- --------
Total current assets 7,987 5,428
Property, equipment and leasehold improvements, net 43,547 41,798
Excess reorganization value and goodwill, net 19,315 16,491
Other assets, net 668 962
-------- --------
Total assets $ 71,517 $ 64,679
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable and credit facility 1,179 809
Accounts payable 936 1,118
Accrued interest 2,229 601
Accrued expenses 3,572 3,350
-------- --------
Total current liabilities 7,916 5,878
-------- --------
Senior secured notes payable 52,883 52,883
Other notes payable and credit facility, net of
current portion 4,309 670
-------- --------
Total non-current liabilities 57,192 53,553
-------- --------
Total liabilities 65,108 59,431
-------- --------
Common stock, no par value, 1 shares
issued and outstanding, respectively -- --
Common stock, $.01 par value, 20 million shares
authorized, 1 and 5,236,091 issued and
outstanding, respectively -- 52
Additional paid-in capital 5,583 4,792
Retained earnings 826 404
-------- --------
Total stockholders' equity 6,409 5,248
-------- --------
Total liabilities and stockholders' equity $ 71,517 $ 64,679
-------- --------
-------- --------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated balance sheets.
1
<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands, except per share data )
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------- ------------------- ------------------- ------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Casino $ 12,842 $ 13,442 $ 40,572 $ 38,833
Food and beverage 954 926 2,914 2,520
Other 79 76 167 195
-------- -------- -------- --------
Gross revenue 13,875 14,444 43,653 41,548
Less: promotional allowances (350) (354) (1,176) (1,094)
-------- -------- -------- --------
Net revenue 13,525 14,090 42,477 40,454
Operating Expenses:
Casino 3,993 3,536 11,252 10,684
Gaming taxes 1,584 2,973 6,923 7,953
Food and beverage 1,340 921 3,569 2,550
General and administrative:
Casino 605 742 1,919 2,186
Corporate 1,801 689 3,138 2,102
Marketing 2,076 1,829 5,688 5,311
Depreciation and amortization 1,121 976 3,154 4,035
Pre-opening -- -- 299 --
-------- -------- -------- --------
Total operating expenses 12,520 11,666 35,942 34,821
Income from operations 1,005 2,424 6,535 5,633
Interest expense (2,034) (1,691) (5,513) (5,090)
Interest income 16 5 68 68
-------- -------- -------- --------
Income (loss) before income tax provision (1,013) 735 1,090 611
Income tax provision 288 (372) (668) (518)
-------- -------- -------- --------
Net income (loss) $ (725) $ 366 $ 422 $ 93
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated financial statements.
2
<PAGE>
Colorado Gaming & Entertainment Co.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ -------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 422 $ 93
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,154 4,035
Deferred income tax expense 668 518
Noncash compensation expense 739 81
(Gain)/loss on disposition of assets (53) 88
Change in working capital and other 1,832 1,216
-------- --------
Net cash provided by operating activities 6,762 6,031
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for acquisitions and capital
improvements (8,486) (3,950)
Net change in restricted funds 100 156
-------- --------
Net cash used in investing activities (8,386) (3,794)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 5,766 1,000
Repayments of other notes payable, capital leases
and credit facility (1,758) (3,492)
-------- --------
Net cash provided by (used in) financing activities 4,008 (2,492)
INCREASE (DECREASE) IN CASH 2,384 (255)
CASH, at beginning of period 4,228 5,758
-------- --------
CASH, at end of period $ 6,612 $ 5,503
-------- --------
-------- --------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
3
<PAGE>
Colorado Gaming & Entertainment Co.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(1) ORGANIZATION AND BASIS OF PRESENTATION
Colorado Gaming & Entertainment Co. ("CG&E") and its subsidiaries
(collectively referred to as the "Company") was incorporated in August 1993
to develop, own and operate gaming and related entertainment facilities.
Three wholly-owned subsidiaries, BWBH, Inc., BWCC, Inc., and Silver Hawk
Casino, Inc., own and operate limited stakes gaming facilities in Colorado,
individually known as Bullwhackers Black Hawk, Bullwhackers Central City, and
the Silver Hawk Saloon & Casino, respectively. Millsite 27, Inc., also a
wholly-owned subsidiary of CG&E, owns a surface parking facility, used for
the benefit of Bullwhackers Black Hawk and the Silver Hawk Saloon & Casino.
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 ("Old Common Stock"), 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., 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 Old Common Stock was canceled and the Company
issued one common share, with no par value, for Ladbroke Gaming. Due to the
Company maintaining the existence of outstanding public held debt, which
maintains significant influence on the Company, the Company did not perform
push down accounting.
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.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements and related
notes of the Company have been prepared in accordance with generally accepted
accounting principles for interim financial reporting. In the opinion of
management, all adjustments considered necessary for fair presentation of
financial position, results of operations and cash flows have been included.
Operating results for the nine month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
1998 presentation. Such reclassifications had no impact on the Company's net
income.
4
<PAGE>
EARNINGS PER COMMON SHARE
Due to the merger with Ladbroke and related cancellation of the
pre-merger common shares, no earnings per common shares data is presented
because it is not comparable or relevant.
NEW ACCOUNTING PRONOUNCEMENTS
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.
(2) NOTES PAYABLE
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% (10.875% as of September 30, 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
September 30, 1998, the Company had an outstanding balance of approximately
$4.6 million on the Bullpen Acquisition Line and the Credit Facility in its
entirety.
(3) TAXES
For the nine months ended September 30, 1998, the Company recorded a
$668,000 deferred income tax provision. Such income tax expense triggered the
utilization of certain deferred tax assets available to the Company, and,
accordingly, no income tax is currently payable. The recognition of such
deferred tax assets was offset by a like reduction in the valuation
allowance, which was recorded as a reduction to excess reorganization value
in the accompanying consolidated balance sheets.
5
<PAGE>
The net deferred tax assets is comprised of the following (in thousands).
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C>
Current:
Accrued vacation & gaming liabilities $ 592 $ 261
Non-Current:
Difference in depreciable asset basis 500 456
Recognition of legal settlement 695 503
Impairment of assets 1,208 1,208
Net operating loss carryforwards 3,454 4,689
-------- --------
Net deferred tax assets 6,449 7,117
Valuation allowance (6,449) (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 net operating losses ("NOL's") totaling approximately $9.2
million, which expire beginning in 2008.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The discussion below and under Item 5 of Part II of this Report on Form
10-Q and elsewhere herein contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such Section 21E provides certain "safe harbor" protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, competition, growth opportunities, sources and uses of
capital, future development or expansion activities, and underlying
assumptions and other statements which are other than statements of
historical facts. Such statements may be identified by the use of
forward-looking terminology such as "might," "may," "would," "could,"
"expect," "anticipate," "estimate," "likely," "believe," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve a number of risks, uncertainties and other
factors that may significantly affect the Company`s liquidity and results of
operations in the future and, accordingly, actual results may differ
materially from those expressed in any forward-looking statements.
The forward-looking statements set forth in this Report on Form 10-Q are
based upon various assumptions, many of which are based, in turn, upon
further assumptions, including, without limitation, management's examination
of historical operating trends, data contained in the Company's records, and
other data available from third parties. Although the Company believes that
such assumptions were reasonable when made, because such assumptions are
inherently subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond the Company's control,
there can be no assurance, and no representation or warranty is made, that
management's expectations, beliefs, or projections will result or be achieved
or accomplished. In addition to the other factors and matters discussed
elsewhere herein, factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the
forward-looking statements include: (i) leverage and debt service, (ii)
financing and refinancing efforts, (iii) competition, (iv) inclement weather,
(v) changes in general economic conditions in the Denver metropolitan area,
(vi) changes in state and local gaming laws, regulations or tax rates, (vii)
risks related to development and construction activities, (viii) changes in
management or control of the Company, (ix) significant changes in competitive
factors affecting the Company, (x) significant changes from expectations in
actual capital expenditures and operating expenses, and (xi) occurrences
affecting the Company's ability to obtain funds from operations, debt or
equity to finance needed capital expenditures and other investments.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
The Company's net revenue decreased 4%, to $13.5 million for the third
quarter of 1998 from $14.1 million for the third quarter of 1997.
Bullwhackers Central City's net revenues decreased 23%, or $600,000 for the
period, as a result of the overall decline of the casinos located on Main
Street in the Central City market. This decline, which has been occurring for
the last several years, reflects Central City's weaker competitive position
compared to the Black Hawk market. The Silver Hawk Saloon & Casino's net
revenues decreased 20%, or $300,000, as a result of the increased competition
in Black Hawk that commenced operation in June of 1998. These decreases in
net revenues were somewhat offset by the increase in net revenues of
approximately 5%, or $400,000, at Bullwhackers Black Hawk. However, the
increased results primarily relate to the opening of the Bullpen, which
commenced operations May 1, 1998, and provided an additional 40% in capacity
of gaming devices. Given this increase in capacity, management is
disappointed with the results of operations at the Bullpen, which is
acheiving significantly lower win per unit than the remainder of Bullwhackers
Black Hawk. Management continues to address the lower then expected win per
unit at the Bullpen.
7
<PAGE>
Expenses directly related to casino operations, including gaming taxes,
decreased 17% to $5.5 million for the third quarter of 1998, as compared to
$6.5 million for the third quarter of 1997. The decrease primarily relates to
the change of the gaming tax year, which resulted in gaming revenues being
taxed a lower percentage in 1998 as compared to 1997, resulting in $1.2
million of tax savings in the 1998 period. In addition, the decrease in
casino expenses at Bullwhackers Central City and the Silver Hawk Saloon &
Casino were a result of reduced staffing and other costs in relation to the
decrease in net revenues in the 1998 period. These cost savings were offset
by the increased expenses at Bullwhackers Black Hawk as a result of increased
staffing from the addition of the Bullpen in the 1998 period and the overall
competitive environment in Black Hawk which has led to increased pressures on
labor costs.
Food and beverage expense increased 45% to $1.3 million for the third
quarter of 1998, as compared to $921,000 for the third quarter of 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,
and the additional costs of another food outlet as part of the Bullpen
expansion.
Marketing expense increased 14% to $2.1 million for the third quarter of
1998, as compared to $1.8 million for the third quarter of 1997. Marketing
expense reflects a 44% increase in marketing expense at Bullwhackers Black
Hawk due to increased marketing efforts to generate revenues in an
increasingly competitive market and start-up costs associated with a new
bussing program that began in August 1998. This increase is somewhat offset
by a 21% decrease in marketing expense at Bullwhackers Central City, as a
result of the volume decreases at that property (primarily lower bus subsidy
costs and cash back awards).
Corporate expense increased 161% to $1.8 million for the third quarter
of 1998, as compared to $689,000 for the third quarter of 1997. Included in
corporate expense is incentive compensation expense for senior management
based upon the Company's stock awards under the Management Incentive and
Non-Employee Director Stock Plan. The vesting of these incentives accelerated
upon the change of control related to the Ladbroke merger. These incentive
expenses totaled $489,000 for the third quarter of 1998. The Company also
incurred approximately $300,000 of other corporate costs relating to the
Ladbroke Merger in the third quarter of 1998.
Depreciation and amortization expense increased 15% to $1.1 million for
the third quarter of 1998, as compared to $976,000 for the third quarter of
1997. The increase in depreciation and amortization charges is due to the
addition of the Bullpen assets in 1998.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
The Company's net revenue increased 5% to $42.5 million for the nine
months ended September 30, 1998, as compared to $40.5 million for the nine
months ended September 30, 1997. The increase in net revenue is due to the
strong results acheived in the first half of 1998 at Bullwhackers Black Hawk,
which posted a 14%, or $3.9 million, increase in net revenue compared to the
nine months ended September 30, 1997. This increase resulted primarily from
the strong overall growth in the Black Hawk market and the Bullwhackers
facility's ability to increase market share, in the first six months of 1998.
Additionally, the opening of the Bullpen in May contributed to this increase.
However, the Bullpen provided an additional 40% in capacity of gaming devices
at Bullwhackers Black Hawk. Management is disappointed with the results of
operations at the Bullpen, which is acheiving significantly lower win per
unit than the remainder of Bullwhackers Black Hawk. The increase in net
revenues at Bullwhackers Black Hawk were somewhat offset by a decrease in net
revenues of approximately 17%, or $1.4 million, at Bullwhackers Central City
as a result of a continued overall decline of the casinos located on Main
Street in the Central City market. The Company's Silver Hawk Saloon & Casino
experienced a 9%, or $460,000, overall decline in net revenues for the first
six months. The majority of the Silver Hawk
8
<PAGE>
Saloon & Casino decline occurred in the third quarter, subsequent to the
opening of a major competitor in the Black Hawk market.
Expenses directly related to casino operations, including gaming taxes,
decreased 3% to $18.1 million for the nine months ended September 30, 1998,
as compared to $18.6 million for the nine months ended September 30, 1997.
The decrease relates to the change of the gaming tax year, which resulted in
gaming revenues being taxed a lower percentage in the third quarter of 1998
as compared to the third quarter of 1997, totaling $1.2 million in savings.
In addition, Bullwhackers Black Hawk incurred additional expenses as a result
of operating the Bullpen in the 1998 period. This increase was offset by the
decreases in casino expenses at Bullwhackers Central City and the Silver Hawk
Saloon & Casino as a result of a reduction of staffing and other costs in
relation to the decrease in net revenues in the 1998 period.
Food and beverage expense increased 40% to $3.6 million for the nine
months ended September 30, 1998, as compared to $2.6 million for the nine
months ended September 30, 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 the 1998 period
Marketing expense increased 7% to $5.7 million for the nine months ended
September 30, 1998, as compared to $5.3 million for the nine months ended
September 30, 1997. Marketing expense reflects a 34% increase in marketing
expense at Bullwhackers Black Hawk due to increased marketing and promotional
efforts related to the Bullpen, increased volume related costs for the first
half of the year and increased costs associated with the initiation a new
bussing program, which commenced in August 1998. This increase was somewhat
offset by a 18% decrease in marketing expense at Bullwhackers Central City,
as a result of the volume decreases at that property (primarily lower bus
subsidy costs and cash back awards).
Corporate expense increased 19% to $3.1 million for the nine months
ended September 30, 1998, as compared to $2.6 million for the nine months
ended September 30, 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, These incentive expenses totaled $910,000 (including
$739,000 of non-cash expense related to stock grants) compared to $250,000
(including $81,000 of non-cash expense) for the nine months ended September
30, 1998 and 1997, respectively. The Company also incurred approximately
$300,000 of other corporate costs relating to the Ladbroke merger for the
nine months ended September 30, 1998.
Depreciation and amortization expense decreased 22% to $3.1 million for
the nine months ended September 30, 1998, as compared to $4.0 million for the
nine months ended September 30, 1997. The decrease in depreciation and
amortization expense is due to a substantial amount of equipment at
Bullwhackers Black Hawk and Bullwhackers Central City becoming fully
depreciated in 1997.
The Company incurred $299,000 in pre-opening expense for the nine months
ended September 30, 1998 related to the Bullpen which commenced operations
May 1, 1998. The Company expenses pre-opening costs as incurred.
INCOME TAX CONSIDERATIONS
For the nine months ended September 30, 1998, the Company recorded a
$668,000 deferred income tax provision. The Company posted pre-tax income of
$1.1 million and such taxable income triggered the utilization of certain
deferred tax assets available to the Company (primarily net operating loss
carryforwards), and, accordingly, no income tax is currently payable. The
recognition of such deferred tax assets was offset by a like reduction in the
valuation allowance, which was recorded as a credit to excess reorganization
value in the accompanying consolidated balance sheets.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
DEBT
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% (10.875% as of September 30, 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
September 30, 1998, the Company had an outstanding balance of approximately
$4.6 million on the Bullpen Acquisition Line and the Credit Facility in its
entirety.
GENERAL
The Company believes that its Credit Facility and its operating cash
flows will provide sufficient liquidity and capital resources for the
Company's operations and debt service payments. However, there is no
assurance that the Company's estimate of its need for liquidity and capital
resources is accurate or that new business developments or other unforeseen
events will not occur which will increase those needs. Although no additional
financings are contemplated at this time, the Company may seek additional
debt or equity financing if necessary. There can be no assurance that
additional financing will be available, or if available, will be on terms
favorable to the Company. Additionally, debt or equity financing may require
consent from the Company's bondholders and the lender under the Credit
Facility.
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. However, the opening of a major new competitor in
the Black Hawk market in June 1998 has significantly impacted the Company's
operating results for the third quarter of 1998 and will likely continue to
negatively impact the operating results for remainder of 1998. Accordingly,
the Company does not anticipate it to be able to replicate the growth in
revenues and operating profits achieved in the first half of 1998.
Additionally, in late 1998 or early 1999 another large competitor is
scheduled to open a new casino in Black Hawk. It is likely that this
additional capacity will dilute the Company's market share of revenues and,
accordingly, may adversely impact the Company's operating profits. For
further discussions on the competitive outlook on the Black Hawk and Central
City market see Part II, Item 5.
YEAR 2000 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
10
<PAGE>
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 $70,000, which would include
replacing hardware systems and upgrading software. Estimates of external or
third-party Y2K expenses available at this time are not expected to be
material, however, the Company continues to review and monitor compliance.
The total cost of the Company's Y2K efforts are not expected to be material
with respect to the Company's operations, liquidity or capital resources.
Management does not believe the Company will have to modify or replace any
significant portions of its computer applications in order for the computer
systems to function properly with respect to the dates in the year 2000 and
thereafter. However, a "worst case" scenario may include the temporary
disruption of operations, including the inability to access the Company's
slot tracking system. A significant disruption may have a material adverse
impact upon the Company's operating results. The Company's contingency plan
includes the following:
- - regular back-up of all scientific and business related electronic data;
- - archival of critical business paperwork;
- - scheduling manufacturing campaigns not to extend or overlap the year 2000
time change; 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. The program minimizes, but
does not eliminate, the issues of external parties.
The costs of the project and estimated completion dates 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 and actual results
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, and similar uncertainties.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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., which complaint was
subsequently amended to add Ladbroke Racing Corporation as a defendant. The
complaint alleges causes of action against BWCC, Inc. for breach of contract,
breach of fiduciary duty, and breach of duty of good faith. The complaint
also alleges causes of action against the Company, Ladbroke Group plc and
Ladbroke Racing Corporation for tortious interference with contract and
tortious interference with prospective business opportunity. The Company and
BWCC, Inc. filed an answer to the complaint and a counterclaim against the
plaintiff for breach of certain contracts relating to transportation
services. The Company and BWCC, Inc. believe the complaint is without merit
and intend to vigorously defend themselves.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. The
Company's management believes that the ultimate resolution of currently
pending legal proceedings will not have a material adverse impact on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. LADBROKE. 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 ("Common Stock"), 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.,
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. The transaction was structured as a
statuatory merger pursuant to Section 251 of the Delaware Corporations Law.
The press release announcing the transaction is attached as Exhibit 99 and is
incorporated herein in its entirety.
B. COMPETITION. The Lodge Casino commenced operations in Black Hawk on
June 24, 1998. The Lodge Casino is a 35,000 square foot casino, with 55 hotel
rooms and approximately 800 slot machines, and will soon open a structured
parking garage with approximately 250 spaces. In addition, the Isle of Capri,
which is owned by subsidiaries of Isle of Capris Casinos Inc. and Nevada Gold
& Casinos, Inc., is under construction in Black Hawk and is expected to open
as early as late 1998. The Isle of Capri is expected to include a 55,000
square foot casino with 1,100 slot machines, 25 table games and 1,000 on-site
parking spaces. The Riveria Black Hawk Casino, which is owned by Riviera
Gaming Management, is also currently under construction of a 300,000 square
foot casino, including 1,000 slot machines, 14 table games and a 550 space
covered parking garage. This project is in Black Hawk and is currently
anticipating a opening in late 1999.
The additional gaming capacity in Black Hawk is likely to dilute
existing operators' win per unit and revenue, including the Company's.
Accordingly, such increase in capacity will likely have a material adverse
effect on the Company's results of operations, particularly at Bullwhackers
Black Hawk which accounts for approximately 74% of the Company's net
revenues. The new competition will also apply severe pressure to the results
produced by the Silver Hawk Saloon & Casino, which does not have the same
amenities to compete with the new competition. All of the additional gaming
capacity is
12
<PAGE>
planned in Black Hawk, due to its more convenient location as compared to
Central City. However, as the town of Black Hawk continues to expand, the
Central City market, particularly the casinos on Main Street, contract.
Therefore, it is likely that the new competition will continue to erode the
operating results at Bullwhackers Central City.
In addition, a number of other casino projects have been announced and
are in various planning stages. Additionally, Bullseye Gaming has announced
plans for the Black Hawk Brewery, which will offer 500 slot machines and 10
table games when open. Various other projects have been announced, proposed,
discussed or rumored for the Black Hawk market, including large projects
known as the "St. Moritz - Hyatt". While it is difficult to assess the
likelihood and the timing of these proposed projects being completed, it is
reasonably likely that at least some of the proposed competitive projects may
be completed and open to the public by late 1999 or early 2000. Therefore,
should several of the announced competitive projects open, it is likely that
the increased competition could adversely affect the Company's operations in
both Black Hawk and, to a greater extent, in Central City, and accordingly,
may have a material adverse effect on the Company's consolidated results of
operations and financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
Exhibit 99. Press Release dated August 24, 1998
(b) Reports on Form 8-K.
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Colorado Gaming & Entertainment Co. has duly caused this report to be signed
by the undersigned thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.
/s/ Richard J. Rabin
--------------------------------------
Richard J. Rabin
President and Chief Executive Officer
Date: November 12, 1998
/s/ Robert J. Stephens
--------------------------------------
Robert Stephens
Senior Vice President of Finance
(Principal Financial Officer)
Date: November 12, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 6,612
<SECURITIES> 0
<RECEIVABLES> 321
<ALLOWANCES> 0
<INVENTORY> 222
<CURRENT-ASSETS> 7,987
<PP&E> 65,416
<DEPRECIATION> 21,861
<TOTAL-ASSETS> 71,517
<CURRENT-LIABILITIES> 7,916
<BONDS> 52,883
0
0
<COMMON> 0
<OTHER-SE> 6,409
<TOTAL-LIABILITY-AND-EQUITY> 71,517
<SALES> 42,477
<TOTAL-REVENUES> 42,477
<CGS> 0
<TOTAL-COSTS> 35,942
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,513
<INCOME-PRETAX> 1,090
<INCOME-TAX> 668
<INCOME-CONTINUING> 422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 422
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
