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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ___________ to ____________.
Commission file number 0-28068
COLORADO GAMING & ENTERTAINMENT CO.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 84-1242693
incorporation or organization) (I.R.S. Employer 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 13, 1999: 100
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, 1999 and 1
December 31, 1998
Consolidated Statements of Operations - for the three and six 2
months ended June 30, 1999 and 1998.
Consolidated Statements of Cash Flows - for the six months 3
ended June 30, 1999 and 1998.
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis 6-11
PART II OTHER INFORMATION 12-13
SIGNATURES 14
Colorado Gaming & Entertainment Co.
Consolidated Balance Sheets
(In thousands, except share amounts)
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
ASSETS
Cash $ 4,059 $ 4,022
Accounts receivable, net 262 507
Inventories 47 188
Prepaid expenses 408 765
---------------- --------------
Total current assets 4,776 5,582
Property, equipment and leasehold improvements, net 38,563 38,950
Excess reorganization value and goodwill, net 19,122 19,699
Other assets, net 598 641
---------------- --------------
Total assets $ 63,059 $ 64,872
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of credit facility $ 1,000 $ 1,000
Accounts payable 226 718
Accrued interest 967 662
Accrued expenses 3,167 3,883
---------------- --------------
Total current liabilities 5,360 6,263
---------------- --------------
---------------- --------------
Senior secured notes payable 52,738 52,738
Related notes payable and credit facility, net of
current portion 8,503 5,142
---------------- --------------
Total non-current liabilities 61,241 57,880
---------------- --------------
Total liabilities 66,601 64,143
---------------- --------------
Common stock, $.01 par value, 20 million shares
authorized, 100 issued and outstanding, respectively -- --
Additional paid-in capital 5,583 5,583
Retained deficit (9,125) (4,854)
---------------- --------------
Total stockholders' equity (deficit) (3,542) 729
---------------- --------------
Total liabilities and stockholders' equity
(deficit) $ 63,059 $ 64,872
---------------- --------------
---------------- --------------
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)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- ----------------- ------------------- --------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:
Casino $ 9,802 $ 14,330 $ 19,671 $ 27,730
Food and beverage 549 1,014 1,140 1,960
Other 34 50 42 88
---------------- ----------------- ------------------- --------------------
Gross revenue 10,385 15,394 20,853 29,778
Less: promotional allowances (304) (420) (591) (826)
---------------- ----------------- ------------------- --------------------
Net revenue 10,081 14,974 20,262 28,952
Operating Expenses:
Casino 3,326 3,723 7,098 7,259
Gaming taxes 1,899 2,949 4,000 5,339
Food and beverage 777 1,239 1,591 2,229
General and administrative:
Casino 907 695 1,730 1,314
Corporate 503 609 753 1,337
Marketing 1,732 1,891 3,575 3,612
Depreciation and amortization 1,145 1,099 2,245 2,033
Pre-opening -- 276 -- 299
---------------- ----------------- ------------------- --------------------
Total operating expenses 10,289 12,481 20,992 23,422
Income (loss) from operations (208) 2,493 (730) 5,530
Interest expense, net (1,751) (1,736) (3,541) (3,427)
---------------- ----------------- ------------------- --------------------
Income (loss) before income tax provision (1,959) 757 (4,271) 2,103
Income tax provision -- (376) -- (956)
---------------- ----------------- ------------------- --------------------
Net income (loss) $ (1,959) $ 381 $ (4,271) $ 1,147
---------------- ----------------- ------------------- --------------------
---------------- ----------------- ------------------- --------------------
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, 1999 June 30, 1998
----------------- ----------------
(Unaudited) (Unaudited)
MC
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,271) $ 1,147
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 2,245 2,033
Deferred income tax expense -- 956
Noncash compensation expense -- 250
Loss (gain) on disposition of assets 50 (42)
Change in working capital and other 12 17
-------------- -------------
Net cash provided by (used in) operating (1,964) 4,361
activities
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for acquisitions and
capital improvements (1,361) (3,568)
Net change in restricted funds -- 157
-------------- -------------
Net cash used in investing activities (1,361) (3,411)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Proceeds from credit facility 3,500 1,000
Repayments of other notes payable and credit
facility (138) (1,977)
-------------- -------------
Net cash provided by (used in) financing 3,362 (977)
activities
INCREASE (DECREASE) IN CASH 37 (839)
CASH, at beginning of period 4,022 4,228
-------------- -------------
CASH, at end of period $ 4,059 $ 5,255
-------------- -------------
-------------- -------------
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, 1999
(1) ORGANIZATION AND BASIS OF PRESENTATION
Colorado Gaming & Entertainment Co. and its subsidiaries
(collectively referred to as "CG&E" or the "Company"), a wholly-owned
subsidiary of Ladbroke Group plc, was incorporated in August 1993 to develop,
own and operate gaming and related entertainment facilities. The Company owns
and operates, through wholly-owned subsidiaries, BWBH, Inc. ("Bullwhackers
Black Hawk") and Silver Hawk Casino, Inc. (the "Silver Hawk Casino") in the
historic mining towns of Black Hawk, Colorado. On February 13, 1998, the
Company purchased the assets comprising Bullwhackers' Bullpen Sports Casino
(the "Bullpen"), a 260 slot machine expansion to Bullwhackers Black Hawk, and
commenced operations on May 1, 1998. Millsite 27, Inc., also a wholly-owned
subsidiary, owns a parking lot, with a capacity of approximately 500 cars,
directly between, and is used by, Bullwhackers Black Hawk and the Silver Hawk
Casino. Until March 1999, through another wholly-owned subsidiary, BWCC, Inc.
("Bullwhackers Central City"), the Company operated a casino in the adjacent
historical mining town of Central City. On March 10, 1999, the Company closed
Bullwhackers Central City due to declining business volumes and a lack of
profitability. On May 1, 1999, the Company spun the Bullpen off to its own
separate gaming license, which will provide an approximately $700,000 of
gaming tax savings annually.
INTERIM REPORTING
The accompanying unaudited consolidated financial statements and
related notes of the Company have been prepared in accordance with generally
accepted accounting principles for interim financial reporting. In the
opinion of management, all adjustments considered necessary for fair
presentation of financial position, results of operations and cash flows have
been included. Operating results for the six month period ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with
the 1999 presentation. Such reclassifications had no impact on the Company's
net income.
(2) NOTES PAYABLE
CREDIT FACILITY
On June 7, 1996, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation.
Under terms of the Credit Facility, borrowings accrue interest at prime plus
2.375% (10.125% as of June 30, 1999). The Credit Facility matures on June 7,
2001. On February 1, 1999, Ladstock Holding Corporation ("Ladstock"), an
affiliate of the Company's parent, purchased the outstanding balances of the
Credit Facility and the senior lender assigned the Credit Facility to
Ladstock. Accordingly, Ladstock is now the Company's senior lender on terms
that are at this time identical to the Credit Facility. On June 7, 1999, the
Company borrowed an additional $3.0 million on the Credit Facility to pay the
debt service on the Senior Secured Pay-In-Kind Notes (the "Notes"). As of
June 30, 1999, the Company had an outstanding balance of approximately $8.9
million
4
on the Credit Facility.
OTHER NOTES
As of December 31, 1998 the Company had an outstanding unsecured
promissory note to Capital Associates International, Inc. ("CAI") in
principal amount of $670,000, accruing interest at the rate of 9% per annum.
In February 1999, Ladstock purchased the outstanding note from CAI,
accordingly, this note is currently an obligation to an affiliate company,
Ladstock.
(3) TAXES
For the six months ended June 30, 1999, the Company recorded no
deferred income tax expense or benefit.
The net deferred tax assets is comprised of the following (in
thousands):
June 30,
1999 December 31,
(unaudited) 1998
-------------- -------------
Current:
Accrued vacation & gaming liabilities $ 257 $ 230
Non-Current:
Difference in depreciable asset basis 896 626
Recognition of legal settlement 246 246
Impairment of assets 2,827 2,827
Net operating loss carryforwards 6,025 4,813
-------------- -------------
Net deferred tax assets 10,251 8,742
Valuation allowance (10,251) (8,742)
-------------- -------------
$ -- $ --
-------------- -------------
-------------- -------------
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 $16.1
million, which expire beginning in 2008.
5
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, 1999 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1998
The Company's net revenue decreased $4.9 million or 33%, from $15.0
million for the second quarter of 1998 to $10.1 million for the second
quarter of 1999. The negative results were largely affected by the addition
of two large competitors that entered the Black Hawk market in the second
half of 1998. The two new competitors provide an additional 35% increase in
gaming device capacity in the Black Hawk market. Bullwhackers Black Hawk's
net revenues, including the Bullpen, were $2.5 million, or 22%, less than the
second quarter of 1998. Given the fact that the Bullpen expansion provides an
additional 40% increase in gaming device capacity at Bullwhackers Black Hawk,
subsequent to the opening of the Bullpen in May 1998, and net revenues were
substantially lower in the second quarter of 1999 as compared to the second
quarter of 1998, management is disappointed in the results of the Bullpen
expansion. Additionally, management believes that the increased competition
will continue to negatively affect Bullwhackers Black Hawk's net revenues.
Bullwhackers Central City's was closed on March 10, 1999 due to the
continual decline of the Main Street casinos in the Central City market net
revenues as a result of suffering further competitive
6
pressures as a result of the new properties, which commenced operations in
Black Hawk within the last year. Bullwhackers Central City produced
approximately $2.3 million of net revenues in the second quarter of 1998 as
compared to nil for the second quarter of 1999.
The Silver Hawk Casino net revenues also decreased, by $200,000, or
1%, in the second quarter of 1999 as compared to the second quarter of 1998.
The decrease in the Silver Hawk Casino was also affected by the increased
competition, however, net revenues have stabilized at the current time due to
an implementation of a new busing program, which commenced operations in
mid-February of 1999. In addition, the Silver Hawk revenues have benefited
from transferring some of Bullwhackers Central City customers.
For further discussion of competition in the Black Hawk market, see
the COMPETITIVE OUTLOOK discussion elsewhere in Management's Discussion and
Analysis.
Expenses directly related to casino operations, including gaming
taxes, decreased $1.4 million, or 22%, to $5.2 million for the second quarter
of 1999, as compared to $6.7 million for the second quarter of 1998. The
decrease is primarily due to the elimination of casino expenses at
Bullwhackers Central City of $1.1 million due to the closing of the facility.
The decrease in casino expenses is also due to a $200,000 tax savings
Bullwhackers Black Hawk, including the Bullpen, was able to save by spinning
the Bullpen off to its own separate gaming license.
Food and beverage expense decreased 37% to $777,000 for the second
quarter of 1999, as compared to $1.2 million for the second quarter of 1998.
This decrease in expense is a result of the elimination of certain discounted
food offerings to entice gaming patrons, which were offered in 1998, and to a
lesser extent the closing of Bullwhackers Central City and the Bullpen's
restaurant in January and February of 1999, respectively.
Marketing expense decreased 8%, or $200,000, to $1.7 million for
the second quarter of 1999, as compared to $1.9 million for the second
quarter of 1998. With the closing of the property, Bullwhackers Central City
marketing expense was $600,000 lower in the second quarter of 1999 as
compared to the second quarter of 1998. This decrease is somewhat offset by a
increase in marketing expense at both Bullwhackers Black Hawk and the Silver
Hawk due to increased efforts to generate revenues in an increasingly
competitive market and due to costs associated with the two busing programs.
Corporate expenses decreased $106,000, or 17%, to $503,000 for the
second quarter of 1999, as compared to $609,000 for the second quarter of
1998. The higher expenses in the prior year period were due to certain
incentive compensation expenses totaling $180,000, which ceased upon the
Ladbroke merger. In addition, the decrease in corporate expense is due to the
restructuring of the corporate function, including the resignation of the
former President and Chief Legal Officer, resulting in approximately $115,000
less in payroll expense in the 1999 quarter. However, included in the second
quarter of 1999 corporate expense is approximately $320,000 of severance pay
related to the resignation of the President and the Senior Vice President of
Finance. See Part II, Item 5-b for further discussions relating to their
resignations.
Depreciation and amortization expense increased 4% to $1.1 million
for the second quarter of 1999, as compared to $1.0 million for the second
quarter of 1998. The slight increase in depreciation and amortization charges
is due to additional depreciation and amortization charges relating to the
purchase of the assets comprising the Bullpen, which assets were placed into
operations in May of 1998.
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AS COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1998
The Company's net revenue decreased $8.7 million or 30%, from $29.0
million for the second quarter of 1998 to $20.3 million for the second
quarter of 1999. The negative results were largely affected by the addition
of two new large competitors that entered the Black Hawk market in the second
7
half of 1998. The two new competitors provide an additional 35% increase in
gaming device capacity in the Black Hawk market. Bullwhackers Black Hawk's
net revenues, including the Bullpen, were $4.4 million, or 21%, less than the
first six months of 1998. Given the fact that Bullpen expansion provides an
additional 40% increase in gaming device capacity at Bullwhackers Black Hawk
and net revenues were still substantially lower in the 1999 period as
compared to the 1998 period, management is disappointed in the results of the
Bullpen expansion. Additionally, management believes that the increased
competition will continue to negatively affect Bullwhackers Black Hawk's net
revenues.
Bullwhackers Central City's net revenues decreased $3.6 million, or
80%, in the first six months of 1999 as compared to the first six months of
1998. The decrease in net revenues is a result of suffering further
competitive pressures as a result of the new properties in Black Hawk within
the last year, and, therefore the property closed on March 10, 1999.
The Silver Hawk Casino net revenues also decreased, by $680,000, or
21%, in the first six months of 1999 as compared to the first six months of
1998. The decrease in the Silver Hawk Casino was also affected by the
increased competition, however, net revenues have stabilized at the current
time due to an implementation of a new bussing program which commenced
operations in mid-February of 1999. In addition, the Silver Hawk revenues
have benefited from transferring some of Bullwhackers Central City customers.
Expenses directly related to casino operations, including gaming
taxes, decreased $1.5 million, or 12%, to $11.1 million for the first six
months of 1999, as compared to $12.6 million for the first six months of
1998. The decrease is primarily due to a reduction of casino expenses at
Bullwhackers Central City of $1.3 million due to the closing of the facility
in March of 1999. The Silver Hawk Casino expenses also decreased by
approximately $160,000 in the first six months of 1999 as compared to the
first six months of 1998 as a result of reduced staffing and other costs in
relation to the decrease in business volumes. Decreased casino expense at
both Bullwhackers Central City and Silver Hawk Casino were somewhat offset by
a increase in casino expenses at Bullwhackers Black Hawk due to increased
staffing and other costs associated with the addition of the Bullpen
expansion and from the overall competitive environment in the Black Hawk
market, which has led to increasing labor costs. However, included in the
Bullwhackers Black Hawk's, including the Bullpen, casino expense was a
$200,000 tax savings from Bullwhackers Black Hawk spinning the Bullpen off to
its own separate license in May 1999.
Food and beverage expense decreased 29% to $1.6 million for the
first six months of 1999, as compared to $2.2 million for the first six
months of 1998. This decrease in expense is a result of the elimination of
certain discounted food offerings to entice gaming patrons, which were
offered in 1998, and to a lesser extent the closing of Central City and the
Bullpen's restaurant in January and February of 1999, respectively.
Marketing expense decreased 1% to $3.5 million for the first six
months of 1999, as compared to $3.6 million for the first six months of 1998.
With the closing to the property in March, Bullwhackers Central City
marketing expense was $835,000 lower in the first six months of 1999 as
compared to the first six months of 1998. This decrease is somewhat offset by
a increase in marketing expense at both Bullwhackers Black Hawk and the
Silver Hawk due to increased efforts to generate revenues in an increasingly
competitive market and due to costs associated with the two bussing programs.
Corporate expenses decreased 44% to $753,000 for the first six
months of 1999, as compared to $1.3 million for the first six months of 1998.
The higher expenses in the prior year period were due to certain incentive
compensation expenses totaling $420,000, which ceased upon the Ladbroke
merger. In addition, the decrease in corporate expense is due to the
restructuring of the corporate function, including the resignation of the
former President and Chief Legal Officer, resulting in $190,000 less in
payroll expense in the 1999 period. Included in the first six months of 1999
corporate expense is approximately
8
$320,000 of severance pay related to the resignation of the current President
and the Senior Vice President of Finance. Management expects these corporate
expenses to continue to decrease.
Depreciation and amortization expense increased 10% to $2.2 million
for the first six months of 1999, as compared to $2.0 million for the first
six months of 1998. The increase in depreciation and amortization charges is
due to additional depreciation and amortization charges relating to the
purchase of the assets comprising the Bullpen.
LIQUIDITY AND CAPITAL RESOURCES
DEBT
On June 7, 1996, the Company entered into a $12.5 million revolving
credit facility (the "Credit Facility") with Foothill Capital Corporation.
Under terms of the Credit Facility, borrowings accrue interest at prime plus
2.375% (10.125% as of June 30, 1999). The Credit Facility matures on June 7,
2001. On February 1, 1999, Ladstock Holding Corporation ("Ladstock"), an
affiliate of the Company's parent, purchased the outstanding balances of the
Credit Facility and the senior lender assigned the Credit Facility to
Ladstock. Accordingly, Ladstock is now the Company's senior lender on terms
that are at this time identical to the Credit Facility. On June 7, 1999, the
Company borrowed an additional $3.0 million on the Credit Facility to pay the
debt service on the Senior Secured Notes Payable. As of June 30, 1999, the
Company had an outstanding balance of approximately $8.9 million on the
Credit Facility.
Y2K ISSUES
Until recently, most computer programs were written to store only
two digits of date-related information in order to more efficiently handle
and store data. Computer programs which are date-sensitive may recognize a
date using "00" as the year 1900 rather than the year 2000, which could
result in major computer system or program failures or miscalculations or
equipment malfunctions. This is referred to as the "Year 2000" issue ("Y2K").
The Company recognizes that the impact of the Y2K issue extends beyond
traditional computer hardware and software to equipment used in operations,
such as the Company's slot tracking system, as well as to third parties. The
Y2K issue is being addressed within the Company by its information technology
department and progress is reported periodically to management. Since 1997,
the Company has been reviewing all internal, external and third party
information technology ("IT") systems related to its business. The Company
has completed an internal IT evaluation with satisfactory results and is
currently reviewing external and third party IT systems for Y2K compliance.
External and third party evaluations include requiring compliance
certificates from vendors, suppliers and significant businesses related to
the Company. The Company estimates it will complete external and third party
evaluations by the third 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 $200,000, which would include replacing hardware systems and
upgrading software. Current estimates of the Company's expenses for
addressing external or third party Y2K issues are not expected to be
material; however, the Company continues to review and monitor compliance.
The total cost of the Company's Y2K efforts are not expected to be material
with respect to the Company's operations, liquidity or capital resources.
Management does not believe the Company will have to modify or replace any
significant portions of its computer applications in order for the computer
systems to function properly with respect to the dates in the year 2000 and
thereafter. However, a "worst case" scenario may include the temporary
disruption of operations, including the inability to access the Company's
slot tracking system.
9
A significant disruption may have a material adverse impact upon the
Company's operating results. The Company's contingency plan includes the
following:
- Regular back up of all scientific and business related electronic
data;
- Archival of critical business paperwork; and,
- Upgrading security systems to be Y2K compliant (included in above
dollar amount).
The Company's Y2K related costs are not expected to be material to
the Company's consolidated results of operations. The Company will continue
to evaluate all IT systems for Y2K compliance throughout 1999.
There is still uncertainty around the scope of the Y2K issue. At
this time the Company cannot quantify the potential impact of potential Y2K
failures. The Company's Y2K program and contingency plans are being developed
to address issues within the Company's control and to reduce the level of the
Company's uncertainty about its Year 2000 issues. The program and contingency
plans minimizes, but does not eliminate, the issues of external parties.
The costs of the project, estimated completion dates, worst case
scenario and other forward looking statements above are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantees that these estimates will be achieved or that events will occur as
projected and actual results and events could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, the success of the Company's suppliers and other external parties with
which the Company interacts in addressing their Year 2000 issues, and similar
uncertainties.
COMPETITIVE OUTLOOK
For the six months ended June 30, 1999, the Company's operating
loss was $730,000 compared to operating income of $5.5 million in the six
months ended June 30, 1998. Cash flow from operations for the six months
ended June 30, 1999, was a negative $2.0 million compared to a positive cash
flow of $4.4 million in the prior year period. These results illustrate the
deterioration in the Company's operating results and cash flows which have
been occurring since the third quarter of 1998. The opening of two major
competitors in the Black Hawk market in June and December 1998 has
significantly impacted the Company's operating results for the rolling twelve
months ended June 30, 1999 and will likely continue to negatively impact the
operating results for the remaining quarters of 1999 and the year 2000. The
Company's operating margins have deteriorated due to declining revenue levels
and increasing operating and marketing costs. Additionally, in late 1999 or
early 2000, two additional competitors are scheduled to open casinos in Black
Hawk. It is likely that this additional capacity will continue to dilute the
Company's market share of revenues and, accordingly, may adversely impact the
Company's operating profits in 1999 and beyond. Furthermore, should the
operating trends and results experienced continue or worsen, the Company will
not be able to generate enough cash flow from operations to meet minimum debt
service requirements in 1999 or 2000. Accordingly, the Company would be
reliant on its Credit Facility to meet such debt service requirements.
However pursuant to the Credit Facility, only $3.6 million of the unused
balance on the Credit Facility exist as of June 30,1999.
Given the deteriorating financial results, management has devised
various plans and operating strategies intended to improve the Company's
performance, some of which were implemented during the first or second
quarter of 1999. The operating plan includes a) closing Bullwhackers Central
City, and focusing all of its efforts and managerial resources on its Black
Hawk properties, b) reconfiguring the Bullpen expansion to improve the
overall layout and efficiency of Bullwhackers Black Hawk, c)
10
eliminating discounted food offerings as an enticement for gaming patrons, d)
implementing training programs to position the property on the basis of
service excellence, and e) substantially reducing the Company's corporate
expense. While management believes this is a viable operating plan, there is
no assurance that such initiatives will be effective in improving the
Company's financial performance. Additionally, the competitive environment in
Black Hawk may become increasingly severe, particularly if two new projects
currently under construction commence operations in late 1999 or early 2000,
as scheduled. However, the initial steps of the plan that have been completed
or that are in place, have helped the Company increase its operating income
$500,000 in the second quarter of 1999 as compared to the first quarter of
1999.
11
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, BWCC, Inc. signed a non-binding memorandum of
understanding ("MOU") with Gold Coin, Inc., a wholly-owned subsidiary of Lady
Luck Gaming Corporation, to explore the possibility of physically combining
Bullwhackers Central City with the adjacent casino operated as Lady Luck Gold
Coin Gambling Hall & Saloon and owned by Gold Coin, Inc. The prospective
transaction was subject to a number of contingencies, including the execution
and delivery of definitive agreements setting forth the final agreed upon
terms and conditions of the transaction. While the parties continued to
negotiate over unresolved issues contained in the drafts of the definitive
agreements, market conditions and other events affecting the Central City
market continued to change and decline significantly. Despite continued
efforts to satisfactorily resolve the open issues in light of the foregoing,
no final, definitive agreements were executed and delivered, and the
prospective transaction was never consummated.
In March 1998, Lady Luck Central City, Inc., formerly known as Gold
Coin, Inc., filed a complaint in the District Court for the County of
Jefferson, State of Colorado, Case No. 98 CV 672, captioned as LADY LUCK
CENTRAL CITY, INC. V. BWCC, INC., D/B/A BULLWHACKERS CENTRAL CITY, COLORADO
GAMING & ENTERTAINMENT, CO., AND LADBROKE GROUP PLC. In 1999, the Company
negotiated and paid a Settlement Agreement in order to avoid further
expenses, inconvenience, and other distraction of litigation. Both parties
agreed to fully dismiss and release each other from all claims.
The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. The
Company's management believes that the ultimate resolution of currently
pending legal proceedings will not have a material adverse impact on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
A. COMPETITION. Competition in the Black Hawk and Central City
gaming market, which forms the primary gaming market in Colorado, is intense.
The Company believes that its primary competition are other casinos operating
in Black Hawk and Central City. Experienced, nationally recognized casino
operators from other areas of the country have entered, or have recently
announced plans to enter, the Colorado gaming market, including Harvey's,
Isle of Capri, Riviera Holdings, Inc., Hyatt, Anchor Gaming and Fitzgerald's,
many of which have substantially greater financial and marketing resources
than the Company. Because Colorado does not limit the total number of gaming
licenses available for issuance in Colorado and there are no minimum facility
size requirements, the Company expects the number of gaming facilities and
gaming devices to continue to increase in Black Hawk.
In June 1998, a joint venture between Black Hawk Gaming &
Development Co., the owner and operator of the Gilpin Hotel Casino, and
Jacobs Entertainment commenced casino operations of a property named "The
Lodge", which is a 35,000 square foot casino, 500 covered parking spaces and
approximately 800 slot machines. In December 1998, the Isle of Capri Black
Hawk, which is owned by subsidiaries of Isle of Capri, Inc. and Nevada Gold &
Casinos, Inc., commenced operations. The Isle of Capri Black Hawk is a 55,000
square foot casino with 1,100 slot machines, 14 table games, three restaurant
offerings and 1,000 on-site covered parking spaces. The new gaming capacity
(a 35% increase over prior year) that entered the Black Hawk market in the
second half of 1998 may dilute existing operators' win per unit and revenue,
including the Company's. Such increase in capacity has had a material adverse
affect on the Company's results of operations. Management believes the new
properties adversely affected the
12
Company's revenues and operating results in 1998 and 1999, and will continue
to affect the Company's performance in 1999 and 2000.
In addition, a number of other casino projects have begun
construction in Black Hawk. Riviera Holdings, Inc. commenced construction of
a casino scheduled to open in late 1999 or early 2000, which is expected to
include 1,000 slot machines and a 500 space covered parking garage.
Additionally, Bullseye Gaming has commenced construction of the Black Hawk
Brewery Casino and is scheduled to open in late 1999 or early2000, which will
offer 600 slot machines and 500 parking spaces. Fitzgeralds has also
announced an expected expansion of approximately 50% of their current gaming
area as well as 70-80 hotel rooms. Various other projects have been
announced, proposed, discussed or rumored for the Black Hawk market,
including large projects known as "Country World" and the "St. Moritz -
Hyatt". The new capacity, actual and proposed, have all been announced for
the town of Black Hawk. The majority of these projects are along the southern
end of Black Hawk at the first two major intersections of State Highway 119,
providing these projects with the initial opportunity to capture visitors to
Black Hawk from the Denver metropolitan area. In contrast, Bullwhackers Black
Hawk and the Silver Hawk Casino are located at the northern end of Black Hawk
at the third major intersection off State Highway 119. The projects currently
under construction and, or the announced projects may have a material adverse
impact of the Company's results from operations.
B. MANAGEMENT. On July 8, 1999, in connection with a restructuring
of the Colorado operations of Colorado Gaming & Entertainment Co., Mr.
Richard Rabin, President, Chief Operating Officer and a member of the Board
of Directors of the Company, and Mr. Robert Stephens, Senior Vice President
of Finance and a member of the Board of Directors of the Company, each
submitted his resignation from all such positions to be effective as of
August 6, 1999. The Company considers their resignations to be amicable.
As a result of the restructuring, the positions of President and
Senior Vice President of Finance will be eliminated. Mr. George Harbison has
been announced to be the Company's President and Chief Financial Officer
effective August 6, 1999. It is currently anticipated that the new directors
to replace Messrs. Rabin and Stephens will be appointed in the near term.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Colorado Gaming & Entertainment Co. has duly caused this report to be signed by
the undersigned thereunto duly authorized.
COLORADO GAMING & ENTERTAINMENT CO.
/s/ George Harbison
--------------------------------------
George Harbison
President and Chief Financial Officer
(Principal Financial Officer)
Date: August 13 1999
14