UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to .
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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
incorporation or organization) Identification No.)
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 August 12, 1998: 5,245,351
Colorado Gaming & Entertainment Co.
Form 10-Q
Index
Page
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Part I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - as of June 30, 1998 and
December 31, 1997. 1
Consolidated Statements of Operations - for the three and
six months ended June 30, 1998 and 1997. 2
Consolidated Statements of Cash Flows - for the six months
ended June 30, 1998 and 1997. 3
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, 1998 December 31, 1997
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(unaudited)
ASSETS
Cash $ 5,255 $ 4,228
Accounts receivable, net 517 467
Inventories 123 114
Prepaid expenses 1,200 619
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Total current assets 7,095 5,428
Property, equipment and leasehold improvements, net 43,743 41,798
Excess reorganization value and goodwill, net 19,315 16,491
Other assets, net 1,074 962
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Total assets $71,227 $64,679
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable and credit facility 1,693 809
Accounts payable 878 1,118
Accrued interest 627 601
Accrued expenses 4,276 3,350
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Total current liabilities 7,474 5,878
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Senior secured notes payable 52,883 52,883
Other notes payable and credit facility, net of
current portion 4,225 670
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Total non-current liabilities 57,108 53,553
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Total liabilities 64,582 59,431
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Common stock, $.01 par value, 20 million shares
authorized, 5,245,351 and 5,236,091 issued and
outstanding, respectively 52 52
Additional paid-in capital 5,042 4,792
Retained earnings 1,551 404
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Total stockholders' equity 6,645 5,248
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Total liabilities and stockholders' equity $71,227 $64,679
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The Notes to Consolidated Financial Statements are an integral part of
these consolidated balance sheets.
-1-
Colorado Gaming & Entertainment Co.
Consolidated Statements of Operations
(In thousands, except per share data )
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Casino $14,330 $12,936 $27,730 $25,391
Food and beverage 1,014 760 1,960 1,594
Other 50 56 88 119
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Gross revenue 15,394 13,752 29,778 27,104
Less: promotional allowances (420) (360) (826) (740)
------- ------- ------- -------
Net revenue 14,974 13,392 28,952 26,364
Operating Expenses:
Casino 3,723 3,455 7,259 7,142
Gaming taxes 2,949 2,712 5,339 4,980
Food and beverage 1,239 777 2,229 1,629
General and administrative:
Casino 695 698 1,314 1,444
Corporate 609 662 1,337 1,413
Marketing 1,891 1,757 3,612 3,482
Depreciation and amortization 1,099 1,482 2,033 3,059
Pre-opening 276 -- 299 --
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Total operating expenses 12,481 11,543 23,422 23,149
Income from operations 2,493 1,849 5,530 3,215
Interest expense (1,777) (1,657) (3,479) (3,399)
Interest income 41 28 52 58
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Income (loss) before income tax provision 757 220 2,103 (126)
Income tax provision (376) (146) (956) (146)
------- ------- ------- -------
Net income (loss) $ 381 $ 74 $ 1,147 $ (272)
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per common share $ 0.07 $ 0.01 $ 0.22 $ (0.05)
------- ------- ------- -------
------- ------- ------- -------
The Notes to Consolidated Financial Statements are an integral part of
these consolidated financial statements.
-2-
Colorado Gaming & Entertainment Co.
Consolidated Statements of Cash Flows
(In thousands)
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
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(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,147 $ (272)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 2,033 3,059
Deferred income tax expense 956 146
Noncash compensation expense 250 81
(Gain)/loss on disposition of assets (42) 103
Change in working capital and other 17 432
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Net cash provided by operating activities 4,361 3,549
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for acquisitions and capital
improvements (7,771) (3,568)
Net change in restricted funds (1) 157
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Net cash used in investing activities (7,772) (3,411)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 5,766 1,000
Repayments of other notes payable, capital leases
and credit facility (1,328) (1,977)
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Net cash provided by (used in) financing activities 4,438 (977)
INCREASE (DECREASE) IN CASH 1,027 (839)
CASH, at beginning of period 4,228 5,758
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CASH, at end of period $ 5,255 $ 4,919
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The Notes to Consolidated Financial Statements are an integral part of
these consolidated statements.
-3-
COLORADO GAMING & ENTERTAINMENT CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 February 13, 1998, the Company purchased the assets comprising
Bullwhacker's 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 six month period ended June 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.
EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") effective December 15, 1997. This
pronouncement requires the presentation of the earnings per share ("EPS")
based on the weighted average number of common shares outstanding (referred
to as basic earnings per share) and earnings per share giving effect to all
dilutive potential common shares that were outstanding during the reporting
period (referred to as diluted earnings per share or earnings per share
assuming dilution).
The following data show the amounts used in computing earnings per share
and the effect on income and the weighted average number of shares of
dilutive potential common stock (in thousands).
-4-
Six Months Ended Year Ended
June 30, December 31,
1998 1997
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(unaudited)
Income available to common shareholders $1,147 $ 212
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Weighted average number of common
shares used in basic EPS 5,237,262 5,194,280
Effect of dilutive securities:
Management stock incentive plan 109,090 118,350
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5,346,352 5,312,630
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Diluted Earnings per Share $ 0.21 $0.04
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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 June 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. On June
25, 1998, the Company repaid the outstanding balance on the equipment
facility line from available cash. As of June 30, 1998, the Company had an
outstanding balance of approximately $4.9 million on the Bullpen Acquisition
Line and the Credit Facility in its entirety.
-5-
(3) TAXES
For the six months ended June 30, 1998, the Company recorded a $956,000
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.
The net deferred tax assets is comprised of the following (in thousands):
June 30, December 31,
1998 1997
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(Unaudited)
Current:
Accrued vacation & gaming liabilities $ 405 $ 261
Non-Current:
Difference in depreciable asset basis 232 456
Recognition of legal settlement 376 503
Impairment of assets 1,208 1,208
Net operating loss carryforwards 3,940 4,689
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Net deferred tax assets 6,161 7,117
Valuation allowance (6,161) (7,117)
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$ -- $ --
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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 $10.5
million, which expire beginning in 2008.
(4) COMMITMENT AND CONTINGENCIES
Effective August 22, 1997, the Company entered into an Agreement and
Plan of Merger, as amended as of October 21, 1997 (the "Merger Agreement"),
with Ladbroke Racing Corporation, a Delaware corporation ("LRC"), and CG&E
Acquisition Corp., a Delaware corporation ("Acquisition Sub"), pursuant to
which Acquisition Sub will be merged with and into the Company (the
"Merger"). Prior to the Merger and pursuant to the terms of the Merger
Agreement, LRC will assign all of its rights and obligations under the Merger
Agreement, including its interest in Acquisition Sub, to Ladbroke Gaming
Corporation, a Delaware corporation ("Ladbroke"), a wholly-owned subsidiary
of Ladbroke Group plc, the ultimate parent of LRC. As a result of the
assignment and the Merger, the Company will become a wholly-owned subsidiary
of Ladbroke. Pursuant to the Merger Agreement, holders of the Company's
common stock, $0.01 par value (the "Common Stock"), will be entitled to
receive $6.25 in cash for each share of Common Stock held by them immediately
prior to the Merger. On December 12, 1997, stockholders of the Company
approved and adopted the Merger Agreement. Pursuant to the terms of the
Merger Agreement, if the Merger has not been consummated on or before
September, 30 1998, which date may be extended by the mutual written consent
of LRC and the Company, either party has the right to terminate the Merger
Agreement and abandon the Merger. The Merger remains subject to approval by
the Colorado Limited Gaming Control Commission (the "Gaming Commission").
The Company has received indications that consideration of such approval be
placed on the agenda at the Gaming Commission's regularly scheduled meeting
to be held August 21, 1998, although there can be no assurance that such
matter will be placed on the agenda, or, if placed on the agenda, that such
matter will
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be approved. Closing of the merger will occur as soon as reasonably
practical after the receipt of the Gaming Commission's approval.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The discussion below and under Item 5 of Part II of this Report on Form
10-Q and elsewhere herein contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Such Section 21E provides certain "safe harbor" protections for
forward-looking statements in order to encourage companies to provide
prospective information about their businesses. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, competition, growth opportunities, source and uses of
capital, future development or expansion activities, and underlying
assumptions and other statements which are other than statements of
historical facts. Such statements may be identified by the use of
forward-looking terminology such as "might," "may," "would," "could,"
"expect," "anticipate," "estimate," "likely," "believe," or "continue" or the
negative thereof or other variations thereon or comparable terminology. Such
forward-looking statements involve a number of risks, uncertainties and other
factors that may significantly affect the Company's liquidity and results of
operations in the future and, accordingly, actual results may differ
materially from those expressed in any forward-looking statements.
The forward-looking statements set forth in this Report on Form 10-Q are
based upon various assumptions, many of which are based, in turn, upon
further assumptions, including, without limitation, management's examination
of historical operating trends, data contained in the Company's records, and
other data available from third parties. Although the Company believes that
such assumptions were reasonable when made, because such assumptions are
inherently subject to significant uncertainties and contingencies which are
difficult or impossible to predict and are beyond the Company's control,
there can be no assurance, and no representation or warranty is made, that
management's expectations, beliefs, or projections will result or be achieved
or accomplished. In addition to the other factors and matters discussed
elsewhere herein, factors that, in the view of the Company, could cause
actual results to differ materially from those discussed in the
forward-looking statements include: (i) leverage and debt service, (ii)
financing and refinancing efforts, (iii) competition, (iv) inclement weather,
(v) changes in general economic conditions in the Denver metropolitan area,
(vi) changes in state and local gaming laws, regulations or tax rates, (vii)
risks related to development and construction activities, (viii) changes in
management or control of the Company, (ix) significant changes in competitive
factors affecting the Company, (x) significant changes from expectations in
actual capital expenditures and operating expenses, and (xi) occurrences
affecting the Company's ability to obtain funds from operations, debt or
equity to finance needed capital expenditures and other investments.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1997
The Company's net revenue increased 12%, to $15.0 million for the second
quarter of 1998 from $13.4 million for the second quarter of 1997. The
increase in net revenue is due to strong second quarter results at
Bullwhackers Black Hawk, which posted a 22%, or $2.0 million increase, in net
revenue compared to the prior year second quarter. This increase resulted
primarily from the opening of the Bullpen, which commenced operations May 1,
1998, and from overall growth in the Black Hawk market in the second quarter
of 1998. The increase in net revenues in Bullwhackers Black Hawk were
somewhat offset by a decrease in net revenues of approximately 15%, or
$400,000, 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 Silver Hawk Saloon & Casino experienced a 3% overall decline in net
revenues from the prior year.
Expenses directly related to casino operations, including gaming taxes,
increased 8% to $6.7 million for the second quarter of 1998, as compared to
$6.1 million for the second quarter of 1997. The increase primarily relates
to additional expenses incurred as a result of operating the Bullpen for two
-8-
months. This increase is somewhat offset by the decrease in casino expenses
at Bullwhackers Central City 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 59% to $1.2 million for the second
quarter of 1998, as compared to $777,000 for the second quarter of 1997.
This increase in expense is a result of high food costs and additional
staffing for certain discounted food promotions which were offered, beginning
in January of the 1998 period.
Marketing expense increased 8% to $1.9 million for the second quarter of
1998, as compared to $1.8 million for the second quarter of 1997. Marketing
expense reflects a 28% increase in marketing expense at Bullwhackers Black
Hawk due to the addition of a bus program in the 1998 period, a higher level
of volume related cash back awards and increased marketing efforts related to
the opening of the Bullpen in May 1998.
Corporate expense decreased 8% to $609,000 for the second quarter of
1998, as compared to $662,000 for the second quarter of 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 $182,000 for the second quarter of 1998 (including $150,000
of non-cash charges) as compared to $65,000 (including a credit of $38,000 of
non-cash charges) in the second quarter of 1997. The decrease in corporate
expense is due to $90,000 of consulting fees incurred in the second quarter
of 1997 relating to a consulting agreement with a former executive, which
terminated in August 1997.
Depreciation and amortization expense decreased 26% to $1.1 million for
the second quarter of 1998, as compared to $1.5 million for the second
quarter of 1997. The decrease in depreciation and amortization charges is
due to a substantial amount of equipment at Bullwhackers Black Hawk and
Bullwhackers Central City becoming fully depreciated in 1997.
The Company incurred $276,000 in pre-opening expense for the three
months ended June 30, 1998 related to the Bullpen which commenced operations
May 1, 1998. The Company expenses pre-opening costs as incurred.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997
The Company's net revenue increased 10%, to $29.0 million for the six
months ended June 30, 1998 from $26.4 million for the six months ended June
30, 1997. The increase in net revenue is due to the strong results in 1998
at Bullwhackers Black Hawk, which posted a 20%, or $3.5 million, increase in
net revenue compared to the six months ended June 30, 1997. This increase
resulted primarily from the strong overall growth in the Black Hawk market
and the facility's ability to increase market share. Additionally, the
opening of the Bullpen in May contributed somewhat to this increase. The
increase in net revenues at Bullwhackers Black Hawk were somewhat offset by a
decrease in net revenues of approximately 15%, or $800,000, 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 3% overall decline in net revenues for the
first six months.
Expenses directly related to casino operations, including gaming taxes,
increased 4% to $12.6 million for the second quarter of 1998, as compared to
$12.1 million for the second quarter of 1997. Bullwhackers Black Hawk
incurred additional expenses as a result of operating the Bullpen for two
months in 1998. This increase was somewhat offset by the decrease in casino
expenses at Bullwhackers Central City as a result of a reduction of staffing
and other costs in relation to the decrease in net revenues in the 1998
period.
-9-
Food and beverage expense increased 37% to $2.2 million for the six
months ended June 30, 1998, as compared to $1.6 million for the six months
ended June 30, 1997. This increase in expense is a result of high food
costs and additional staffing for certain discounted food promotions which
were offered, beginning in January of the 1998 period.
Marketing expense increased 4% to $3.6 million for the six months ended
June 30, 1998, as compared to $3.5 million for the six months ended June 30,
1997. Marketing expense reflects a 25% increase in marketing expense at
Bullwhackers Black Hawk due to the addition of a bus program, a higher level
of volume related cash back awards and an increase in media buys in the 1998
period increased marketing efforts related to the opening of the Bullpen in
May. This increase was somewhat offset by a 16% 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 decreased 5% to $1.3 million for the six months ended
June 30, 1998, as compared to $1.4 million for the six months ended June 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 $405,000 (including $250,000 of non-cash expense)
compared to $250,000 (including $82,000 of non-cash expense) for the six
months ended June 30, 1998 and 1997, respectively. The decrease in corporate
expense relates to $145,000 of consulting fees incurred for the six months
ended June 30, 1997 relating to a consulting agreement with a former
executive, which terminated in August 1997.
Depreciation and amortization expense decreased 34% to $2.0 million for
the six months ended June 30, 1998, as compared to $3.1 million for the six
months ended June 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 six months
ended June 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 six months ended June 30, 1998, the Company recorded a $956,000
deferred income tax provision. The Company posted pre-tax income of $2.1
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.
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 June 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
-10-
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. On June 25, 1998,
the Company repaid the outstanding $685,000 balance on the equipment facility
line from available cash. As of June 30, 1998, the Company had an
outstanding balance of approximately $4.9 million on the Bullpen Acquisition
Line.
OTHER OPPORTUNITIES
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 intends to seek at a
minimum, reimbursement from the Government of its expenses incurred in such
development activities. Notwithstanding the foregoing, the cancellation of
this project will not have a material impact on the Company's revenue or
profits for the fiscal year 1998.
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 strong
revenue growth and substantial growth in operating income and net income at
its Black Hawk facility, where revenues increased 20%. The opening of a
major new competitor in the Black Hawk market in June of 1998 may impact the
Company's operating results for the remainder of 1998, and make it difficult
for the Company to replicate the strong 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. This additional capacity may dilute the Company's market share
of revenues and accordingly, may adversely impact the Company's operating
profits.
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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. Effective August 22, 1997, the Company entered into an
Agreement and Plan of Merger, as amended as of October 21, 1997 (the "Merger
Agreement"), with Ladbroke Racing Corporation, a Delaware corporation
("LRC"), and CG&E Acquisition Corp., a Delaware corporation ("Acquisition
Sub"), pursuant to which Acquisition Sub will be merged with and into the
Company (the "Merger"). Prior to the Merger and pursuant to the terms of the
Merger Agreement, LRC will assign all of its rights and obligations under the
Merger Agreement, including its interest in Acquisition Sub, to Ladbroke
Gaming Corporation, a Delaware corporation ("Ladbroke"), a wholly-owned
subsidiary of Ladbroke Group plc, the ultimate parent of LRC. As a result of
the assignment and the Merger, the Company will become a wholly-owned
subsidiary of Ladbroke. Pursuant to the Merger Agreement, holders of the
Company's common stock, $0.01 par value (the "Common Stock"), will be
entitled to receive $6.25 in cash for each share of Common Stock held by them
immediately prior to the Merger. On December 12, 1997, stockholders of the
Company approved and adopted the Merger Agreement. Pursuant to the terms of
the Merger Agreement, if the Merger has not been consummated on or before
September, 30 1998, which date may be extended by the mutual written consent
of LRC and the Company, either party has the right to terminate the Merger
Agreement and abandon the Merger. The Merger remains subject to approval by
the Colorado Limited Gaming Control Commission (the "Gaming Commission").
The Company has received indications that consideration of such approval be
placed on the agenda at the Gaming Commission's regularly scheduled meeting
to be held August 21, 1998, although there can be no assurance that such
matter will be placed on the agenda, or, if placed on the agenda, that such
matter will be approved. Closing of the merger will occur as soon as
reasonably practical after the receipt of the Gaming Commission's approval.
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B. COMPETITION. The Lodge Casino commenced operations in Black Hawk
on June 24, 1998. The Lodge Casino offers a 35,000 square foot casino, 250
parking spaces, approximately 800 slot machines and when fully developed, 55
hotel rooms. In addition, the Isle of Capri, which is owned by subsidiaries
of Casino America, 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 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 may have a material adverse effect on
the Company's results of operations. All of the additional gaming capacity
is planned in Black Hawk, due to its more convenient location as compared to
Central City. As the town of Black Hawk continues to expand, the Central City
market, particularly the casinos on Main Street, contract.
In addition, a number of other casino projects have been announced and
are in various planning stages, including a venture by Riviera Holdings,
Inc. to construct a large facility in Black Hawk. 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, 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.
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 12, 1998
/s/ Robert J. Stephens
-------------------------------------
Robert Stephens
Vice President of Finance & Treasurer
(Principal Financial Officer)
Date: August 12, 1998
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