UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1997
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)
ONE NORWEST CENTER, 1700 LINCOLN STREET, 49TH FLOOR, DENVER, COLORADO 80203
(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 August 13, 1997: 5,236,091
Colorado Gaming & Entertainment Co.
Form 10-Q
Index
Page
----
Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of June 30, 1997 and 1
December 31, 1996.
Consolidated Statements of Operations - for the three and six months 2
ended June 30, 1997, for the period June 7 through June 30,
1996, April 1 through June 6, 1996 and January 1 through
June 6, 1996.
Consolidated Statements of Cash Flows - for the six months ended 3
June 30, 1997, for the period June 7 through June 30, 1996
and January 1 through June 6, 1996.
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis 8-11
PART II OTHER INFORMATION 12-13
SIGNATURES 14
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, 1997 December 31, 1996
------------- -----------------
(unaudited)
ASSETS
Cash $ 4,919 $ 5,758
Accounts receivable, net 193 217
Inventories 100 106
Prepaid expenses 601 406
------- -------
Total current assets 5,813 6,487
Property, equipment and leasehold improvements, net 42,226 41,322
Excess reorganization value, net 17,598 18,256
Other assets, net 673 983
------- -------
Total assets $66,310 $67,048
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable and credit facility 1,436 1,959
Accounts payable 563 804
Accrued interest 569 542
Accrued expenses 4,128 3,483
------- -------
Total current liabilities 6,696 6,788
------- -------
Senior secured notes payable 52,883 52,883
Other notes payable and credit facility, net of current portion 2,053 2,508
------- -------
Total non-current liabilities 54,936 55,391
------- -------
Total liabilities 61,632 62,179
------- -------
Common stock, $.01 par value, 20 million shares
authorized, 5,236,091 and 5,138,888 issued and
outstanding, respectively 52 51
Additional paid-in capital 4,706 4,626
Retained earnings (deficit) (80) 192
------- -------
Total stockholders' equity 4,678 4,869
------- -------
Total liabilities and stockholders' equity $66,310 $67,048
------- -------
------- -------
The Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
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Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands, except per data share)
Three Months Six Months June 7, 1996 April 1, 1996 January 1, 1996
Ended Ended Through Through Through
June 30, 1997(a) June 30, 1997(a) June 30, 1996(a) June 6, 1996 June 6, 1996
---------------- ---------------- ---------------- ------------ ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Casino $ 12,936 $ 25,391 $ 3,100 $ 8,577 $ 19,126
Food and beverage 760 1,594 215 568 1,288
Other 56 119 7 13 32
---------- ---------- ---------- ---------- ----------
Gross revenue 13,752 27,104 3,322 9,158 20,446
Less: promotional allowances (360) (740) (77) (199) (464)
---------- ---------- ---------- ---------- ----------
Net revenue 13,392 26,364 3,245 8,959 19,982
Operating Expenses:
Casino 3,476 7,039 591 2,376 5,544
Gaming taxes 2,712 4,980 760 1,612 3,614
Food and beverage 777 1,629 200 565 1,299
General and administrative:
Casino 698 1,444 194 523 1,249
Corporate 662 1,413 147 387 902
Marketing 1,757 3,482 435 1,190 2,349
Depreciation and amortization 1,482 3,059 396 787 1,882
Pre-opening -- -- 341 47 47
Reorganization items -- -- -- 1,222 2,290
(Gain) Loss on disposition of assets (21) 103 -- 112 244
---------- ---------- ---------- ---------- ----------
Total operating expenses 11,543 23,149 3,064 8,821 19,420
Income from operations 1,849 3,215 181 138 562
Interest expense (1,657) (3,399) (403) (460) (579)
Interest income 28 58 11 43 66
---------- ---------- ---------- ---------- ----------
Income (loss) before income tax provision and
extraordinary gain 220 (126) (211) (279) 49
Income tax provision (146) (146) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) before extraordinary gain 74 (272) (211) (279) 49
Extraordinary gain from reorganization -- -- -- 164,358 164,358
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 74 $ (272) $ (211) $ 164,079 $ 164,407
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share (b) $ 0.01 $ (0.05) $ (0.04) N/A N/A
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
(a) Due to the Reorganization and implementation of fresh-start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company (period
starting June 7, 1996) are not comparable to those of the Predecessor Company.
See Notes to the Consolidated Financial Statements for additional information.
(b) The weighted average number of common shares outstanding and net income per
common share for the Predecessor Company have not been presented because, due to
the Reorganization and implementation of fresh-start accounting, they are not
comparable.
The Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
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Colorado Gaming & Entertainment Co.
Consolidated Cash Flows
(In thousands)
Six Months June 7, 1996 January 1, 1996
Ended Through Through
June 30, 1997 (a) June 30, 1996 (a) June 6, 1996
----------------- ----------------- ---------------
(Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (272) $ (211) $ 164,407
Adjustment to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,059 396 1,882
Deferred income tax expense 146 -- --
Noncash compensation expense 81 --
Extraordinary gain from reorganization -- -- (164,358)
Loss on disposition of assets 103 -- 244
Change in working capital and other 432 2,009 3,142
-------- -------- ----------
Net cash provided by operating activities 3,549 2,194 5,317
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for capital improvements (3,568) (2,090) (3,885)
Net change in restricted funds 157 (2) (507)
-------- -------- ----------
Net cash used in investing activities (3,411) (2,092) (4,392)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 1,000 -- 5,824
Repayments of other notes payable, capital leases
and credit facility (1,977) (1,801) (3,304)
-------- -------- ----------
Net cash (used in) provided by financing activities (977) (1,801) 2,520
(DECREASE) INCREASE IN CASH (839) (1,699) 3,445
CASH, at beginning of period 5,758 7,068 3,623
-------- -------- ----------
CASH, at end of period $ 4,919 $ 5,369 $ 7,068
-------- -------- ----------
-------- -------- ----------
(a) Due to the Reorganization and implementation of fresh-start accounting
pursuant to SOP 90-7, financial statements for the Reorganized Company
(period starting June 7, 1996) are not comparable to those of the Predecessor
Company. See Notes to the Consolidated Financial Statements for additional
information.
The Notes to Consolidated Financial Statements are an integral part of these
consolidated statements.
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COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION
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" for the period prior
to June 7, 1996), was incorporated in August 1993 to develop, own and operate
gaming and related entertainment facilities. Three wholly-owned subsidiaries,
BWBH, Inc., BWCC, Inc., and Silver Hawk Casino, Inc., own and operate limited
stakes gaming facilities in Colorado, 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 Casino. On June 7, 1996 (the "Effective Date"), CG&E and three
of its subsidiaries emerged from bankruptcy (the bankruptcy proceeding is
referred to as the "Reorganization").
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
extraordinary gain on extinguishment of debt and other pre-petition liabilities)
and the adjustment to record assets and liabilities at their fair values have
been reflected in the 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, which
have not been prepared on a comparable basis.
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 six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report in the
Form 10-K for the year ended December 31, 1996.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
1997 presentation. Such reclassifications had no impact on the Company's net
income.
(2) PROPERTY, EQUIPMENT & LEASEHOLD IMPROVEMENTS
On May 23, 1997 the Company completed the process of expanding its parking
lot, which provides capacity for approximately an additional 125 cars. In
total, the expanded parking lot accommodates approximately 500 cars. The
construction activity primarily consisted of additional excavation from the
Company's previous parking lot to the Company's property line. The total cost
of the excavation project was approximately $1.6 million. The Company also
constructed a new valet facility to
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increase customer convenience and to enhance access to the Kids Quest child
care facility. The valet facility cost approximately $250,000.
Pursuant to an agreement with Kids Quest, the Company also completed
construction of a facility for use by Kids Quest at an estimated cost of
approximately $1.4 million. As of June 30, 1997, the Company has paid $1.1
million of the total cost of this project. As of August 7, 1997, the Company
has paid substantially all of the total cost of the project. Kids Quest opened
for business on June 24, 1997.
(3) NOTES PAYABLE
SENIOR SECURED NOTES
The Senior Secured Notes (the "Notes") have an outstanding principal amount
of $52.9 million as of June 30, 1997. Interest on the Notes accrues at a rate
of 12% per annum, and is payable semi-annually. On June 1, 1997, the Company
paid $3.2 million of interest on the Notes in cash.
CREDIT FACILITY
On the Effective Date, 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, a $5 million equipment facility and a $5
million construction facility. All draws on the construction portion of the
facility must be made before September 30, 1997. The Company has no plans to
utilize the available proceeds under this portion of the facility and,
accordingly, such portion will expire on September 30, 1997. Under terms of the
Credit Facility borrowings accrue interest at prime plus 2.375% and the Company
is charged a 0.5% unused line fee and certain service fee charges. The
different sub-facilities have varying terms ranging from three to five years
from the time funds are borrowed, but in no event beyond June 7, 2001. On May
19, 1997, the Company borrowed an additional $1.0 million under the revolving
line of credit for construction costs on the parking lot expansion project
referred in Note 2 above. In addition, the Company made $391,000 of scheduled
principal and interest payments in the second quarter of 1997. As of June 30,
1997, the Company had an outstanding balance of approximately $800,000 on the
equipment facility line and $1.0 million on the revolving line of credit. In
July 1997, the Company repaid the outstanding balance of $1.0 million on the
revolving line of credit.
OTHER NOTES
The Company has two outstanding unsecured promissory notes payable to
Capital Associates International, Inc. ("CAI") in the remaining principal
amounts of $1.0 million and $670,000, both accruing interest at the rate of 9%
per annum. The first note is due in ten equal quarterly installments which
commenced in September 1996. The Company made a required principal and interest
payment of $183,000 on June 7, 1997. The second note is payable in four
quarterly installments of principal and interest, which commences in September
2000.
(4) EQUITY
The Management Stock Incentive and Non-Employee Director Stock Plan
provides for shares to be issued to certain management personnel and non-
employee directors annually, over the next three years based on the Company
meeting certain performance criteria for eligible management personnel and
automatically in a fixed amount for non-employee directors. For the performance
period ended June 7, 1997 such performance criteria were achieved and an
aggregate 97,203 shares were granted to the officers and directors. The Company
records the compensation expense for these grants in corporate general and
administrative expense in the accompanying consolidated statement of operations.
In the six months ended June 30, 1997, $81,000 of compensation expense was
recognized related to these grants.
-5-
(5) TAXES
For the six months ended June 30, 1997, the Company recorded a $146,000
deferred income tax provision. While the Company posted a pre-tax loss of
$126,000, the Company recognized depreciation charges totaling approximately
$511,000, related to the amortization of excess reorganization value, which is
not deductible for income tax purposes. 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 credit to excess reorganization value in the
accompanying consolidated balance sheet.
The net deferred tax asset as of June 30, 1997 and December 31, 1996 is
comprised of the following (in thousands):
June 30, December 31,
1997 1996
------- ------------
(Unaudited)
Current:
Accrued vacation & gaming liabilities $ 280 $ 458
Non-Current:
Difference in asset basis 716 458
Recognition of legal settlement 624 740
Impairment of assets 3,458 3,860
Net operating loss carryforwards 2,635 2,343
------- -------
Net deferred tax assets 7,713 7,859
Valuation allowance (7,713) (7,859)
------- -------
$ -- $ --
======= =======
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 $7.0 million, which
expire beginning in 2008. Utilization of NOL's generated prior to the Effective
Date are limited to approximately $520,000 annually. Utilization of any NOL's
generated subsequent to the Effective Date will be unlimited.
(6) SUBSEQUENT EVENT
On July 18, 1997, the Company entered into a letter of intent to be
acquired by a U.S. subsidiary of Ladbroke Group, PLC. Under the proposed terms
of the transaction, holders of the Company's common stock will be entitled to
receive $6.25 in cash for each share held. The proposed transaction remains
subject to a number of conditions, including completion of definitive
documentation and due diligence, and receipt of various regulatory approvals,
none of which can be assured. Closing is anticipated to occur in the fourth
quarter of 1997 or the first quarter of 1998.
-6-
(7) SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited)
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
which management believes is a key indicator of the Company's performance, for
the three and six months ended June 30, 1997 and 1996 (excluding any
reorganization and disposition of assets charges) are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------- ------- ------- -------
Net revenues $13,392 $12,204 $26,364 $23,227
Casino expenses 9,420 8,446 18,574 16,235
------- ------- ------- -------
Casino operating profit 3,972 3,758 7,790 6,992
Pre-opening (Silver Hawk) -- 388 -- 388
Corporate expenses 662 534 1,413 1,048
------- ------- ------- -------
EBITDA $ 3,310 $ 2,836 $ 6,377 $ 5,556
======= ======= ======= =======
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion below and under Item 5 of Part II of this Report on Form
10-Q contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, that involve risks,
uncertainties, and other factors which may cause the Company's actual
performance to be materially different from the projections expressed or
implied by such statements. Such factors include, among others, increased
competition, economic conditions in the greater Denver metropolitan area,
changes in gaming or liquor regulation or tax rates, inclement weather,
success of the Company's marketing initiatives and the number of visitors to
Black Hawk and Central City. Accordingly, the Company's operating results may
fluctuate from quarter to quarter and the results for any quarter may not be
indicative of results for future quarters.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1996
The Company's net revenue increased 10%, to $13.4 million for the second
quarter of 1997 from $12.2 million for the second quarter of 1996. The
increase in revenue is primarily due to the addition of the Silver Hawk
Casino, which was not operating until June 26, 1996 in the prior year period,
which generated an additional $1.7 million in revenues in the 1997 period.
Continued overall growth in the Black Hawk market contributed to a 1%
increase in revenues for the quarter compared to the second quarter of 1996
at Bullwhackers Black Hawk. However, the benefit to the Company's revenues in
Black Hawk were negatively affected by the business disruption as a result of
the construction activities for parking expansion, which commenced in late
January and was completed in late May. An overall decrease in the Central
City market combined with competitive pressures resulted in Bullwhackers
Central City posting a 13% decrease in revenue compared with the 1996 period.
Expenses directly related to casino operations, including casino
expense, gaming taxes and food and beverage expense increased 15% to $7.0
million for the second quarter of 1997, as compared to $6.1 million for the
second quarter of 1996. The increase primarily relates to such expenses
incurred by the Silver Hawk Casino operations, which totaled approximately
$900,000.
Marketing expense increased 8% to approximately $1.8 million for the
second quarter of 1997, as compared to $1.6 million for the second quarter of
1996. The increase is primarily due to the implementation of certain
cash-back promotions at Bullwhackers Central City as well as additional costs
associated with initial marketing efforts for the opening of Kids Quest and
the expansion of the Company's parking lot in Black Hawk.
Casino general and administrative expense decreased 3% to $698,000 in
the second quarter of 1997, as compared to $717,000 for the second quarter of
1996. The decrease primarily relates to a decrease in insurance costs in
1997. The Company has been able to maintain administrative costs, primarily
human resources, accounting, finance and insurance costs, at the same level
of the 1996 period even after accounting for the addition of the Silver Hawk
Casino.
Corporate expenses increased 24% to $662,000 for the second quarter of
1997, as compared to $534,000 for the second quarter of 1996. The increase
primarily relates to a charge of approximately $65,000 in the 1997 period
relating to compensation expense for senior management based upon
implementation of the Company's Cash Bonus Plan and the Management Incentive
and Non-Employee Director Stock Plan. In addition, the Company incurred
$50,000 relating to ta development opportunity in Canada and $60,000
relating to the proposed purchase agreement for the sale of the Company.
Depreciation and amortization expense increased 25% to $1.5 million for
the second quarter of 1997, as compared to $1.2 million for the second
quarter of 1996. The increased depreciation and amortization charges are due
to the increased basis of the Company's assets due to the adoption of
"fresh-
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start" accounting, primarily the amortization of excess reorganization
value, and depreciation charges related to the Silver Hawk Casino. The
Company anticipates depreciation and amortization charges to decrease for the
remainder of 1997 due to the casinos reaching their five year anniversary.
Income from operations increased to $1.8 million for the second quarter
of 1997, as compared to a $319,000 in the second quarter of 1996. The
increase in operating income is primarily attributable to approximately
$400,000 of additional operating income from the Silver Hawk Casino in 1997,
$388,000 of pre-opening expense in the 1996 period relating to the opening of
the Silver Hawk Casino, and $1.2 million in one-time reorganization charges
recorded in the 1996 period.
Interest expense was $1.7 million for the second quarter of 1997, as
compared to $863,000 for the second quarter of 1996. The increase in
interest expense is due to the fact that no interest was being charged on the
Company's pre-petition indebtedness while the Company was in bankruptcy.
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1996
The Company's net revenue increased 14%, to $26.4 million for the first
six months of 1997, from $23.2 million for the first six months of 1996. The
increase in revenue is primarily due to the addition of the Silver Hawk
Casino, which was not operating for most of the 1996 period and generated
$3.2 million of revenues in the 1997 period. Continued overall growth in the
Black Hawk market contributed to a 2% increase in revenues for 1997 compared
to 1996. However, the benefit to the Company's revenues in Black Hawk were
negatively affected by the business disruption as a result of the
construction related to the Company's parking expansion, which commenced in
late January and was completed in late May. A decrease in the Central City
market combined with competitive pressures resulted in Bullwhackers Central
City posting a 6% decrease in revenue.
Expenses directly related to casino operations, including casino
expense, gaming taxes and food and beverage expense increased 13% to $13.6
million for the first six months of 1997, as compared to $12.0 million for
the first six months of 1996. The increase primarily relates to expenses
incurred by the Silver Hawk Casino operations of approximately $1.7 million.
Marketing expense increased 25% to $3.5 million for the first six months
of 1997, as compared to $2.8 million for the first six months of 1996. The
increase is primarily due to the implementation of an additional customer
busing program and certain cash-back promotions in an effort to sustain
business levels at Bullwhackers Central City.
Casino general and administrative expense remained constant at $1.4
million in 1997 as compared to 1996. The Company has been able to hold
administrative costs, primarily human resources, accounting, finance and
insurance costs, at the same level as the 1996 period even after accounting
for the addition of the Silver Hawk Casino.
Corporate expenses increased 35% to $1.4 million for the first six
months of 1997, as compared to $1.0 million for the first six months of 1996.
The increase primarily relates to a charge of approximately $250,000 relating
to compensation expense for senior management based upon implementation of
the Company's Cash Bonus Plan and the Management Incentive and Non-Employee
Director Stock Plan in the 1997 period. In addition, the Company incurred
$50,000 relating to a development opportunity in Canada and $60,000 relating
to the proposed purchase agreement of the sale of the Company. The Company
anticipates corporate charges to decrease for the remainder of 1997.
Depreciation and amortization expense increased 35% to $3.1 million for
the first six months of 1997, as compared to $2.3 million for the first six
months of 1996. The increased depreciation and amortization charges are due
to the increased basis of the Company's fixed and intangible assets due to
the adoption of "fresh-start" accounting, primarily the amortization of
excess reorganization value, and
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depreciation charges related to the Silver Hawk Casino. The Company
anticipates depreciation and amortization charges to decrease for the
remainder of 1997.
Income from operations increased to $3.2 million for the first six
months of 1997, as compared to $743,000 for the first six months of 1996.
The increase in operating income is primarily attributable to approximately
$900,000 of additional operating income from the Silver Hawk Casino in 1997,
$388,000 of pre-opening expense relating to the opening of the Silver Hawk
Casino and $2.3 million in one-time reorganization charges in the 1996 period.
Interest expense was $3.4 million for the first six months of 1997, as
compared to $982,000 for the first six months of 1996. The increase in
interest expense is due to the fact that no interest was being charged on the
Company's pre-petition indebtedness while the Company was in bankruptcy. The
Company was in bankruptcy through June 6, 1996 of the prior period.
INCOME TAX CONSIDERATIONS
For the six months ended June 30, 1997, the Company recorded a $146,000
deferred income tax provision. While the Company posted a pre-tax loss of
$126,000, the Company recognized depreciation charges totaling approximately
$511,000, related to the amortization of excess reorganization value, which
is not deductible for income tax purposes. 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 credit to excess reorganization value in
the accompanying consolidated balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
DEBT
On the Effective Date, 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, a $5
million equipment facility and a $5 million construction facility. All draws
on the construction portion of the facility must be made before September 30,
1997. The Company has no plans to utilize the available proceeds under this
portion of the facility and, accordingly, such portion will expire on
September 30, 1997. Under terms of the Credit Facility borrowings accrue
interest at prime plus 2.375% and the Company is charged a 0.5% unused line
fee and certain service fee charges. The different sub-facilities have
varying terms ranging from three to five years from the time funds are
borrowed, but in no event beyond June 7, 2001. On May 19, 1997, the Company
borrowed an additional $1.0 million under the revolving line of credit for
construction costs on the parking lot expansion project. In addition, the
Company made $391,000 of scheduled principal and interest payments in the
second quarter of 1997. As of June 30, 1997, the Company had an outstanding
balance of approximately $800,000 on the equipment facility line and $1.0
million on the revolving line of credit. In July 1997, the Company repaid
the outstanding balance of $1.0 million on the revolving line of credit.
The Senior Secured Notes ("Notes") have an outstanding principal amount
of $52.9 million as of June 30, 1997. Interest on the Notes accrues at a
rate of 12% per annum, and is payable semi-annually. On June 1, 1997, the
Company paid $3.2 million of interest on the Notes in cash.
EXPANSION AND CONSTRUCTION
On May 23, 1997 the Company completed the process of expanding its
parking lot, which provides capacity for approximately an additional 120
cars. In total, the improved parking lot can accommodate approximately 500
cars. The construction activity primarily consisted of additional excavation
from the Company's current parking lot to the Company's property line. The
total cost of the
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project was approximately $1.6 million. The Company also constructed a new
valet facility to increase customer convenience and to enhance access to the
Kids Quest child care facility. The valet facility cost approximately
$250,000, which was paid through available cash flow and borrowings from the
credit facility as of June 30, 1997.
The Company also completed construction of a facility for use by Kids
Quest at an estimated cost of approximately $1.4 million. As of June 30,
1997, the Company had paid $1.1 million of the total cost of this project.
As of August 7, 1997, the Company has paid substantially all of the total
cost of the project.
In total, these construction projects aggregated approximately $3.3
million of capital expenditures, all of which was funded with cash flow from
operations, and the $1.0 million borrowing from the revolving portion of the
Credit Facility. In July, the $1.0 million was repaid with cash flow from
operations.
OTHER OPPORTUNITIES
The Company responded to a Request for Proposal ("RFP") issued by the
government of Ontario, Canada, to develop and operate charity gaming clubs in
Ontario. In responding to the RFP, the Company entered into a venture known
as Diamond Gaming of Ontario ("Diamond Gaming") through a newly formed
subsidiary of the Company (45% owner of Diamond Gaming), a subsidiary of
Ogden Corporation (45% owner) and Diamond Gaming Services, Inc. (10% owner)
to apply for several locations. The government have revised its tentative
timetable such that applicants expect to be short-listed in early August. In
addition to being selected by the Ontario government, the proposed venture is
subject to a number of contingencies, including completion of required
financing, completion of definitive documentation and obtaining approval of
certain of the Company's lenders. If Diamond Gaming is selected to develop
and operate several charitable gaming clubs, Diamond Gaming intends to
finance the project with 30% equity and 70% non-recourse debt. As to the
equity, the Company's share is currently anticipated to be approximately $2.5
million, which it intends to fund from cash flow from operations or
borrowings under the revolving portion of the Credit Facility. The ability
of the Company to make its equity contribution is subject to receiving a
consent from its bondholders with regard to restricted investments. As of
June 30, 1997 the Company has incurred approximately $50,000 in connection
with this project, which is reflected as corporate expense in the
accompanying consolidated statement of operations.
NEGATIVE WORKING CAPITAL
As of June 30, 1997, the Company's current liabilities exceeded its
current assets, resulting in negative working capital. Since the Company
emerged from bankruptcy on June 7, 1996, the Company has used cash generated
from operations to pay down debt under the Credit Facility ahead of schedule
and to pay construction costs for its parking lot expansion and Kids Quest.
Management believes this strategy maximizes the return on its excess cash.
Additionally, should the Company have additional working capital needs, it is
able to borrow up to $3.5 million under the revolving portion of the Credit
Facility, on which $1.0 million of funds were drawn in the second quarter of
1997 and were subsequently repaid early in the third quarter.
The Company believes that its Credit Facility and its operating cash
flows will provide sufficient liquidity and capital resources for the
Company's operations. However, there is no assurance 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company which, if
determined adversely, would have a material adverse effect on the Company's
consolidated results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were approved by the Company's stockholders at the
Company's 1997 Annual Meeting of Stockholders held June 26, 1997:
1. Election of Directors
Shares Voted For Shares Withheld
---------------- ---------------
Stephen J. Szapor, Jr. 3,767,462 0
Franklin S. Wimer 3,767,462 0
Steve Leonard 3,767,462 0
Phillip J. DiBerardino 3,767,462 0
Mark Van Hartesvel 3,767,462 0
2. Ratification of the appointment of Arthur Andersen LLP as
independent accountants.
3,767,462 Shares Voted For 0 Shares Voted Against 0 Shares Abstained
ITEM 5. OTHER INFORMATION
A. COMPETITION. Various published reports detailing additional gaming
projects have been announced for the town of Black Hawk. The majority of
these projects are along the southern end of Black Hawk at the first major
intersection off State Highway 119, providing these projects with the initial
opportunity to capture visitors to Black Hawk from the Denver metropolitan
area. In contrast, Bullwhackers Black Hawk and the Silver Hawk Casino are
located at the northern end of Black Hawk at the second major intersection
off State Highway 119. In addition, the Colorado Department of
Transportation has begun construction on a third major intersection off
State Highway 119 between the two current intersections. This additional
intersection will, when completed, provide the casinos south of Bullwhackers
Black Hawk and the Silver Hawk Casino with another opportunity to capture
visitors to Black Hawk from the Denver metropolitan area, thereby potentially
reducing traffic flow and customer visits to Bullwhackers Black Hawk and
Silver Hawk.
Currently, there is only one major project under construction in Black
Hawk, which is a joint venture between Black Hawk Gaming & Development Co.,
50% owner and operator of the Gilpin Hotel Casino, and Jacobs Entertainment,
for a new 35,000 square foot casino, with 52 hotel rooms, 250 parking spaces
and approximately 750-1,000 slot machines. It is currently anticipated that
this project will be open during the fall of 1998. In Central City, Harvey's
Wagon Wheel, currently the largest casino in Central City, opened its new
parking garage during June of 1997. The new gaming capacity being developed
may dilute existing operators' win per unit and revenue, including the
Company's. Accordingly, such increase in capacity may have a material adverse
effect on the Company's results of operations.
In addition, a number of other casino projects have been announced and
are in various planning stages, including a significant project announced by
Casino America, Inc., and a joint venture between
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Riviera Holdings, Inc. and Eagle Gaming to construct what would be the
largest facility in Black Hawk. Additionally, Bullseye Gaming currently
expects to commence construction in the late summer of 1997 of the Black Hawk
Brewery, which will offer 500 slot machines and 10 table games when open.
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 mid to late 1999. In addition, as the town of Black Hawk has expanded,
both in terms of gaming device capacity and market share, the Central City
market has contracted. Therefore, should several of the announced
competitive projects open, the increased competition may adversely affect the
Company's operations in both Black Hawk and, to a greater extent, in Central
City, and, accordingly, may have a material adverse effect on the Company's
consolidated results of operations and financial position.
B. COLORADO DEPARTMENT OF TRANSPORTATION. The Colorado Department of
Transportation ("CDOT") intends to complete significant improvements to State
Highway 119, currently the only access route to the casinos, over the course
of the next 6-12 months. While such improvements will be desirable,
significant construction disruption may occur which could substantially
reduce the amount of traffic on State Highway 119. Any significant
construction disruption to State Highway 119 could have a material adverse
impact on the Black Hawk and Central City markets in general, and the
Company's results of operations. In addition, CDOT intends to construct
significant improvements at the intersection of State Highway 119 and 279,
the intersection from which cars enter directly into the Company's parking
lot. Any significant construction disruption at such intersection may have a
material adverse impact on the results of operations.
C. VIDEO LOTTERY LEGISLATION. The Colorado Legislature recently
passed House Bill 1351, which bill would authorize at a minimum of 500 video
lottery terminals at the six horse and dog tracks located in Colorado, as
well as at the existing casinos. However the Governor of Colorado vetoed
such legislation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None
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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/ Stephen J. Szapor, Jr.
-----------------------------------------------
Stephen J. Szapor, Jr.
President and Chief Executive Officer
Date: August 7, 1997
/s/ Robert J. Stephens
-----------------------------------------------
Robert Stephens
Vice President of Finance & Treasurer
(Principal Financial Officer)
Date: August 7, 1997
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