COLORADO CASINO RESORTS INC
Company Description
Item 1. Business
General
Colorado Casino Resorts, Inc. (the "Company" or "CCRI"), a Texas
corporation, is a Colorado-based casino and hotel development company which
presently owns and operates casino and hotel/casino properties in Southern
Colorado.
Reorganization and Merger. The current structure of the Company is the
result of a reorganization and merger effected by Airline of the Virgin Islands,
Inc. (originally incorporated under the laws of the Virgin Islands on March 25,
1982 and reincorporated in the state of Texas on March 15, 1993) and Lyric
Development Company, Inc. ("Lyric"). On January 14, 1994, the Company completed
a reorganization with Lyric whereby the Company issued additional shares of
common stock to the shareholders of Lyric in exchange for 100% of the
outstanding common stock of Lyric. The Company's early operations had been
devoted primarily to acquiring land in Cripple Creek, Colorado, for future
development, identifying acquisition candidates, obtaining financing, raising
capital, and initial land development planning. On March 15, 1995, effective
with the merger of Creeker's, Inc., an on-going casino operation, the Company
ceased to be a development stage company. The merger was accounted for as a
pooling of interests. On March 29, 1995, the Company began trading in the NASDAQ
SmallCap Market under the symbol: CCRI.
Casino Properties. Presently, the Company owns and operates Creeker's
Casino ("Creeker's"), and the Double Eagle Hotel & Casino (the "Double Eagle")
through its two wholly-owned subsidiaries, Creeker's, Inc. and Double Eagle
Resorts, Inc., respectively. Both properties are located in Cripple Creek,
Colorado, with the Double Eagle being the largest hotel/casino in the state of
Colorado. Combined, Creeker's and the Double Eagle account for the Company a
total of 980 slot, keno, and video poker machines, seven blackjack tables, four
bars, two restaurants, a gift shop and a hotel with 158 rooms and suites.
Creeker's Casino. Creeker's Casino, resembling a Victorian-style historic
structure of the late 1800's, is located at the corner of 3rd Street and Bennett
Avenue in the center of town. Creeker's offers its customers a friendly,
"down-to-earth" atmosphere in which to enjoy gaming activities. Within its
19,000-square foot casino, it offers 246 slot machines, two blackjack tables,
two bars, a restaurant featuring buffet-style meals, and entertainment areas.
Creeker's currently employs approximately 90 people and is open seven days a
week from 8:00 a.m. to 2:00 a.m., as limited by Colorado gaming regulations.
The Double Eagle Hotel & Casino. Through the new Double Eagle Hotel &
Casino, the Company established the first major hotel and casino serving the
greater Colorado Springs area with a growing population base, approaching one
million. Unlike existing gaming facilities in the Cripple Creek area, which
offer limited or no overnight accommodations, inconvenient parking and few
non-gaming amenities, the Double Eagle features 158 hotel rooms and suites, a
400-space parking lot with free valet parking and shuttle transportation, and a
45,000- square foot casino offering 746 slot machines and five blackjack tables.
The facility also includes a 100-seat restaurant, Lombard's, two bars and a gift
shop.
The Double Eagle Hotel & Casino was designed to be a modern, state-of-
the-art hotel and casino with the grandeur of Las Vegas in mind. This facility
employs the latest in lodging and gaming network systems for reservations and
hotel guest check-in, player tracking, inter-linked voice and data
communications, and computerized ventilation and environment controls. The
exterior of the building is designed to be reminiscent of the historic
structures which adorned the city of Cripple Creek during the pre-World War I
era while the interior is themed to present the glamour and splendor of the
"Roaring 20's." With its simulated stained glass barrel ceiling, elegant winding
staircases, and colorful three-dimensional casino signs, the Double Eagle offers
its guests a unique and unforgettable gaming experience. Located on southwest
corner of Bennett Avenue and 5th Street, where Route 67 and Bennett Avenue
intersect, the Double Eagle provides superior access and visibility to motorists
entering and exiting the City of Cripple Creek. It currently employs
approximately 272 people and is open seven days a week. Its casino is limited to
open, by law, from 8:00 a.m. to 2:00 a.m. while its hotel is open 24 hours.
Business and Marketing Strategy
The Company's business strategy is to offer casino gaming and a full range
of amenities in a friendly atmosphere that caters to middle and upper-middle
income customers. Incorporating the distinction between Creeker's Casino and the
Double Eagle Hotel & Casino in its marketing efforts, management believes it is
able to increase gaming activity at its respective casinos by attracting
customers from two market segments.
Creeker's targets middle to upper-income customers from the greater
Colorado Springs area and surrounding communities who prefer to make day trips
to Cripple Creek. Because of its smaller size and "down-to- earth" atmosphere,
Creeker's appeals to many customers who enjoy a cozier environment and the
personal touch offered by its friendly employees. Free pizza and a hearty buffet
served in its restaurant further heightens Creeker's attractiveness to this
market segment.
The Double Eagle appeals to higher income patrons because of its "Las-
Vegas" style casino atmosphere, upscale hotel and restaurant facilities and a
variety of special events. With the largest number of rooms and elegant suites
in Cripple Creek, free valet parking under a covered car port, and an exciting
and lively atmosphere, the Double Eagle attracts customers who enjoy spending
multiple days of gaming within a facility which offers the hospitality and
convenience of first-class accommodations. In addition, the Company anticipates
that the planned convention facilities at the Double Eagle will attract new
players by capturing meeting and small convention business for the Double Eagle.
Effective Marketing and Promotion. The Company's marketing strategy has
been to aggressively promote its two properties to customers in the identified
market segments. Through the use of radio and print advertising, promotional
coupons and special events designed uniquely to address each market segment,
management attracts players to its respective properties. Promotional
allowances, such as complimentary rooms, food, beverage and entertainment are
used at both casinos to reward and retain its customers. Specifically, Creeker's
promotes coupons for free bus transportation, discounts on buffet meals, and
cash and prize give-aways while the Double Eagle offers discounted and
complimentary hotel rooms, complimentary dinners at Lombard's Restaurant, and
cash sweepstakes to attract respective customers.
The implementation of the "Winners Circle" slot club at both Creeker's and
the Double Eagle, and the use of a player tracking system which monitors the
wagering of its customers, provides the Company with an important tool for
understanding its customer base. Information from the computerized tracking
system assists management to plan and direct marketing efforts to its customers
in both market segments.
Emphasis on Slot Play. Responding to the increased popularity of slot
machines over the past several years and recognizing that most revenues are
generated by slot machines in a limited stakes market, the Company has focused
its gaming mix toward slot, keno, and video poker machines. At Creeker's,
management chose to increase the number of slot machines to 234, while limiting
the number of table games to two blackjack tables. The same philosophy was
implemented at the Double Eagle which has 746 slot machines and five blackjack
tables.
As members of the Winners Circle, patrons are encouraged to insert their
frequent player card into slot, keno, and video poker machines while playing in
the casino to earn points. Using the tracking system to track wagering,
management rewards members of the Winners Circle based on their point totals
with various cash and gift prizes. During fiscal year 1996, Creeker's signed up
11,000 members to the Winners Circle while the Double Eagle welcomed 14,000 new
members to the "club" during the two months its casino was in operation during
the fiscal year.
The Cripple Creek Market
A small mountain town located approximately 45 miles southwest of Colorado
Springs on the western boundary of Pikes Peak, Cripple Creek is a historic
mining town originally founded in the late 1800's following a large gold strike.
Primarily a tourist town, its traffic is heaviest in the summer months and
decreases to a low point in the winter months.
Cripple Creek is one of three Colorado historical cities where casino
gaming is legal, the others being Black Hawk and Central City. Cripple Creek
operated approximately 35% of the gaming devices and generated 25% of the gaming
revenues for these three cities during the calendar year ended December 31,
1996.
The tables below set forth information obtained from the Colorado Division
of Gaming regarding gaming revenue by market from calendar year 1993 through
1996.
Gaming Revenue by Market
================================================================================
($ in Thousands) 1993 1994 %Change 1995 %Change 1996 % Change
--------------------------------------------------------------------------------
Cripple Creek $ 68,736 $ 82,280 19.7% $ 94,029 14.3 $102,873 9.4%
Central City $ 78,964 $ 69,702 (11.7%) $ 94,468 35.5% $ 88,870 (5.9%)
Black Hawk .. $112,140 $173,703 54.9% $195,856 12.8% $219,911 12.3%
Gaming in Colorado is "limited stakes," which restricts any single bet to a
maximum of $5.00. While this limits the revenue potential of table games,
management believes that slot machine play, which accounts for over 94% of total
gaming revenues, is currently impacted only marginally by the $5.00 limitation.
Management's belief is also based upon the fact that a majority of the slot
machines of Creeker's Casino and all of the slot machines of the Double Eagle
are equipped with embedded bill validators which accept bill denominations of up
to $100.
Although there are currently 26 casinos in Cripple Creek, 10 are small,
with an average of 115 gaming devices. In addition, until the opening of the
Double Eagle, there were only limited overnight accommodations available in
Cripple Creek. Based on these and other factors, the Double Eagle Hotel and
Casino represents management's belief that the casinos which will be more
successful and best able to take advantage of the market potential of Cripple
Creek will be the larger casinos that have reached a "critical mass", and,
ideally, can offer hotel accommodations.
The Company faces competition from other casinos in Cripple Creek. Although
there can be no assurance that other casinos in Cripple Creek will not undertake
expansion efforts similar to those initiated by the Company, or that large,
established gaming operators will not enter the market, management believes that
the timely opening of the Double Eagle has secured a lucrative position for the
Company in the Cripple Creek gaming market.
Competition
Intense competition characterizes the Cripple Creek and Black Hawk/Central
City markets. A number of Colorado casinos have ceased operations and other have
filed for protection under Chapter 11 of the Bankruptcy Code. Other casinos have
closed temporarily or reduced their number of employees, and many casinos may
not be operating profitably.
The Company competes with several established casino operators, some of
which have greater financial resources, experience and expertise than the
Company. Because of the intense nature of this competition, there can be no
assurance that the Company's present operations will not be adversely affected
or that its proposed expansion activities will be undertaken or will prove to be
economically successful.
Management of the Company believes the Double Eagle Hotel & Casino will
successfully compete in its market primarily due to the fact that it was
designed to be a hotel and casino from the ground up unlike most other
operations which were converted to casinos from saloons and general stores. In
addition, management of the casino has developed internal programs with its
employees to ensure customers are provided a congenial, friendly, safe, service
driven, relaxing environment in which gaming becomes an exciting, fun, energetic
activity. In the management's opinion, these factors, coupled with unique
marketing programs specifically directed at active customer participation,
provides the basis on which the Double Eagle competes in its market area.
From time to time, casino companies have publicly expressed an interest in
pursuing development or expansion in the Cripple Creek market. It appears that
national, regional, state and local competition for the casino gaming market in
general will be extremely high during the foreseeable future, as casino gaming
activities expand in traditional gaming states and in new jurisdictions, a
number of which have adopted or are considering gaming legislation.
In addition, passage of the Indian Gaming Regulatory Act in 1988 has led to
rapid increases in Native American gaming operations, and the Company's two
casinos may compete for customers with casinos located on Indian reservations in
far southwestern Colorado. The Company expects many competitors to enter such
new jurisdictions that authorize gaming, some of whom may have greater financial
and other resources than the Company. Such proliferation of gaming activities
could significantly and adversely affect the Company's business. Although there
are no current proposals to expand gaming into other areas in Colorado, if
gaming is allowed in or near any metropolitan area, such as Colorado Springs,
from which the Company draws customers, such expansion would have a material
adverse effect on the Company's business.
Colorado law requires local voter approval for any expansion of limited
gaming. State and local public initiatives regarding limited gaming in Colorado
are being actively pursued. Several cities within Colorado have active citizens'
lobbies, which in the past, were able to place limited gaming initiatives on the
November 1994 and 1996 statewide ballot. These initiatives failed by substantial
margins. The 1996 initiative to permit limited gaming in Trinidad, Colorado,
located approximately 200 miles south of Cripple Creek, on the New Mexico border
was placed on the November 1996 ballot and also failed. Future initiatives, if
passed, could significantly increase the competition for gaming customers,
thereby adversely affecting the Company's current business activities. In
addition, the Company's casinos in Colorado will compete with casinos in other
parts of the United States as legalized gambling continues to proliferate.
The Company is actively seeking to expand its casino operations into
jurisdictions that have legalized or are expected to legalize gaming in the
future. There can be no assurance that the Company will be able to identify
suitable casino projects in which to invest or will be able to complete any such
projects as scheduled or planned. The Company's ability to complete and operate
new casino projects will be dependent on a number of factors, many of which are
beyond its control, including identification of suitable partners (if needed),
negotiation of acceptable terms, securing the required local, state, (or
foreign) licenses, permits and approvals, voter and other political approvals,
and any other trends. As a result, there can be no assurance that the Company
will be able to develop its current casino operations beyond the Colorado
market. In addition, the Company may incur costs in connection with pursuing new
gaming opportunities that it cannot recover and may be required to expense a
portion of these costs, which may negatively affect the Company's reported
operating performance for the periods the costs are expensed.
Employees
As of January 24, 1997, the Company employed approximately 367 persons on
an equivalent full-time basis, including cashiers, dealers, housekeepers, food
and beverage service personnel, facilities maintenance staff, and accounting and
marketing personnel. Of this total, approximately 90 people work at Creeker's
Casino and 272 people work at the Double Eagle Hotel & Casino. The balance work
at the corporate offices. None of the Company's employees are covered by a
collective bargaining agreement and none are represented by labor unions.
Seasonality
The Company's business is not considered to be seasonal, however, the
anticipated highest levels of business activity (in Colorado) will occur during
the tourist season (i.e., from May through September). Its base level (i.e.,
November through May) is expected to remain fairly constant although weather
conditions during this period could have a significant impact on business levels
in Colorado.
Governmental Regulation
The Company's gaming operations are subject to strict governmental
regulations at federal, state and local levels. Statutes and regulations can
require the Company to meet various standards relating to, among other matters,
business licenses, registration of employees, floor plans, background
investigations of licensees and employees, historic preservation, building, fire
and accessibility requirements, payment of gaming taxes, and regulations
concerning equipment, machines, tokens, gaming participants, and ownership
interests. Civil and criminal penalties can be assessed against the Company
and/or its officers or stockholders to the extent of their individual
participation in, or association with, a violation of any of the state and local
gaming statutes or regulations. Such laws and regulations apply in all
jurisdictions within the United States in which the Company may do business.
Management believes that the Company is in compliance with applicable gaming
regulations.
Colorado Gaming Regulations
The State of Colorado created the Division of Gaming (the "Division")
within the Department of Revenue to license, implement, regulate and supervise
the conduct of limited gaming. The Director of the Division, under the
supervision of a five-member Colorado Commission, has been granted broad power
to ensure compliance with the gaming laws and regulations adopted thereunder
(the "Colorado Regulations"). The Director may inspect, without notice, impound
or remove any gaming device. He may examine and copy any licensee's records, may
investigate the background and conduct of licensees and their employees, and may
bring disciplinary actions against licensees and their employees. He also may
conduct detailed background investigations of persons who loan money to the
Company.
The Colorado Commission is empowered to issue five types of gaming and
gaming-related licenses. The failure or inability of the Company, CreekerOs
Casino, Double Eagle Hotel & Casino or others associated with the Company to
maintain necessary gaming licenses will have a material adverse effect on the
operations of the Company. All persons employed by the Company, CreekerOs and
the Double Eagle and involved, directly or indirectly, in gaming operations in
Colorado also are required to obtain a Colorado gaming license. All licenses
must be renewed annually.
As a general rule, under the Colorado Regulations, it is a criminal
violation for any person to have a legal, beneficial, voting or equitable
interest, or right to receive profits, in more than three retail gaming licenses
in Colorado. The Commission has ruled that a person does not have an interest in
a licensee for purposes of the multiple-license prohibition if: (i) such person
has less than a five percent (5%) interest in an institutional investor which
has an interest in a publicly traded licensee or publicly traded company
affiliated with a licensee (such as the Company); (ii) a person has a five
percent (5%) or more financial interest in an institutional investor, but the
institutional investor has less than a five percent (5%) interest in a publicly
traded licensee or publicly traded company affiliated with a licensee; (iii) an
institutional investor has less than a five percent (5%) financial interest in a
publicly traded licensee or publicly traded company affiliated with a licensee;
(iv) an institutional investor possesses securities in a fiduciary capacity for
another person, and does not exercise voting control over five percent (5%) or
more of the outstanding voting securities of a publicly traded licensee or of a
publicly traded company affiliated with a licensee; (v) a registered broker or
dealer retains possession of securities of a publicly traded licensee or of a
publicly traded company affiliated with a licensee for its customers in street
name or otherwise, and exercises voting rights for less than five percent (5%)
of the publicly traded licensee's voting securities or of a publicly traded
company affiliated with a licensee; (vi) a registered broker or dealer acts as a
market maker for the stock of a publicly traded licensee or of a publicly traded
company affiliated with a licensee and possesses a voting interest in less than
five percent (5%) of the stock of the publicly traded licensee or of a publicly
traded company affiliated with a licensee; (vii) an underwriter is holding
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee as part of an underwriting for no more than 90 days
if it exercises voting rights of less than five percent (5%) of the outstanding
securities of a publicly traded licensee or of a publicly traded company
affiliated with a licensee; (viii) a stock clearinghouse holds voting securities
for third parties, if it |
