1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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: 0-21736
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1158484
------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 21
240 Main Street
Black Hawk, Colorado 80422
--------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 582-1117
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock 4,087,346 shares
- ------------ ----------------
Class Outstanding as of May 5, 1999
2
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FORM 10-Q
MARCH 31, 1999
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 1
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6-10
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 7,840,093 $ 10,887,602
Accounts receivable 286,570 164,077
Inventories 507,130 554,493
Prepaid expenses 774,849 478,866
Deferred tax asset 338,716 338,716
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Total current assets 9,747,358 12,423,754
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GAMING FACILITIES:
Land 15,235,092 15,235,092
------------- -------------
Building and improvements 57,966,514 57,690,399
Equipment 15,364,347 15,427,185
Accumulated depreciation (7,189,136) (6,384,357)
------------- -------------
Total gaming facilities 66,141,725 66,733,227
GOODWILL, NET 6,285,986 6,374,370
OTHER ASSETS 1,534,333 1,029,985
DEFERRED TAX ASSET 265,672 265,672
------------- -------------
$ 99,210,166 $ 102,062,100
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,906,736 $ 9,048,273
Income taxes payable 420,082
Building costs payable 2,295,198
Current portion of long-term debt 1,226,035 373,639
------------- -------------
Total current liabilities 9,552,853 11,717,110
NON CURRENT LIABILITIES
Revolving line of credit and other 12,672,508 15,806,305
Construction loan 31,445,748 36,171,752
Bonds Payable 6,000,000
------------- -------------
Total liabilities 59,671,109 63,695,167
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,750,813 7,541,523
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value; 10,000,000 shares authorized;
none issued and outstanding
Common stock; $.001 par value; 40,000,000 shares authorized;
4,087,346 shares issued and outstanding 4,087 4,087
Additional paid-in capital 18,216,385 18,216,385
Retained earnings 13,567,772 12,604,938
------------- -------------
Total stockholders' equity 31,788,244 30,825,410
------------- -------------
$ 99,210,166 $ 102,062,100
============= =============
See notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ ------------
REVENUE:
Casino $ 18,635,180 $
Food and beverage 2,150,376
Hotel 260,814
Gilpin Hotel Venture - management fees and rental income 281,419
Interest and other 186,812 10,798
------------ ------------
Total revenue 21,233,182 292,217
Promotional allowances 1,471,461
------------ ------------
Net revenue 19,761,721 292,217
------------ ------------
COSTS AND EXPENSES:
Casino operations 6,074,038
Food and beverage operations 2,135,547
Hotel operations 133,555
Marketing, general and administrative 7,439,063 389,536
Preopening costs 136,673
Interest 1,106,853
Depreciation and amortization 1,158,890
------------ ------------
Total costs and expenses 18,047,947 526,209
------------ ------------
MINORITY INTEREST 209,291 (46,668)
EQUITY IN EARNINGS OF JOINT VENTURE 836,683
------------ ------------
INCOME BEFORE INCOME TAXES 1,504,484 649,360
INCOME TAXES (541,650) (244,000)
------------ ------------
NET INCOME $ 962,834 $ 405,360
============ ============
EARNINGS PER SHARE:
BASIC $ 0.24 $ 0.10
Dilutive effect of outstanding:
Options (0.01)
Warrants
------------ ------------
DILUTED $ 0.23 $ 0.10
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 4,087,346 3,947,695
Dilutive effect of outstanding:
Options 98,507 191,251
Warrants 1,658
------------ ------------
DILUTED 4,185,853 4,140,604
============ ============
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PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net Income $ 962,834 $ 405,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,158,890
Equity in earnings of joint venture (555,264)
Minority interest 209,291 (46,668)
Noncash compensation 2,500
Other 703 2,228
Changes in operating assets and liabilities:
Accounts receivable (97,226) (35,165)
Inventories 47,363
Prepaid expenses (319,474)
Other assets 71,840 (8,746)
Accounts payable and accrued expenses (1,166,797) (70,063)
Income taxes payable 420,082 97,559
------------ ------------
Net cash provided by ( used in ) operating activities 1,287,506 (208,260)
------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of equipment 36,967
Construction and equipment costs of gaming facility (2,801,828) (8,597,426)
Distributions from GHC 200,000
Other (990) (72,665)
------------ ------------
Net cash used in investing activities (2,765,851) (8,470,091)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from bond issue 6,000,000
Proceeds from construction loan 8,696,579
Proceeds from revolving line of credit 5,073,182
Payments on revolving line of credit (8,106,715)
Payments on long-term debt and note payable (3,973,873)
Payments to refinance existing debt (561,758)
Other (1,727)
------------ ------------
Net cash ( used in ) provided by financing activities (1,569,164) 8,694,852
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,047,509) 16,501
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,887,602 1,065,274
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,840,093 $ 1,081,775
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Items:
Cash paid for interest $ 1,119,918 $ 357,681
Cash paid for income taxes $ 11,000 $ 156,306
3
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. ("the Company"), was
incorporated on January 10, 1991 and is an owner, developer and operator of two
gaming properties in Black Hawk, Colorado.
The Gilpin Hotel Casino ("GHC") was the Company's first casino project.
The 37,000 square foot facility is located in the heart of the Black Hawk gaming
district. Originally built in the 1860s, the Gilpin Hotel was one of the oldest
in Colorado, however, no hotel or lodging facilities are offered by the casino.
The Gilpin Hotel Casino commenced operations in October 1992, and was expanded
through the acquisition of an adjacent casino in late 1994. Prior to April 24,
1998, the Company owned a 50% interest in the Gilpin Hotel Venture, which owned
GHC. On April 24, 1998, the Company acquired the 50% interest in GHC and related
land that it did not previously own. It now offers customers approximately 455
slot machines, 9 table games, two restaurants, four bars and parking for
approximately 200 cars.
The Lodge Casino at Black Hawk ("The Lodge") is a $74 million
hotel/casino/parking complex and is one of Colorado's largest casinos. The
250,000 square foot facility offers 50 hotel rooms, three restaurants, four bars
and parking for approximately 600 cars. The casino portion of The Lodge opened
for business on June 24, 1998. The Company and its strategic partner, Jacobs
Entertainment Ltd., developed and co-manage The Lodge, through an LLC, in which
the Company owns a 75% interest and affiliates of Jacobs Entertainment Ltd. own
25%. The Lodge and The Gilpin Hotel Casino are sometimes referred to as the
"Casinos."
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Consolidated Financial Statements --- In the opinion of
management, the accompanying unaudited consolidated financial statements reflect
all adjustments, consisting of normal recurring accruals, which are necessary
for the fair presentation of the financial position of the Company at March 31,
1999 and the results of its operations for the three months then ended. The
accompanying unaudited consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries Gilpin Ventures, Inc. and Native
American Management Corp. and its 75% owned subsidiary, Black Hawk/Jacobs
Entertainment, LLC. All significant inter-company transactions and balances have
been eliminated in consolidation. Prior to April 24, 1998, the Company accounted
for its investment in GHC under the equity method of accounting. All
inter-company transactions have been eliminated to the extent of the Company's
50% ownership in GHC for all periods presented before April 24, 1998.
The accompanying unaudited consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes thereto
contained in the Company's Form 10-K for the year ended December 31, 1998. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
Reclassifications - Certain amounts have been reclassified within the
1998 financial statements to conform to the presentation used in 1999.
3. CAPITALIZED CONSTRUCTION INTEREST
The Company began capitalizing interest expense during 1996, due to the
construction of The Lodge hotel/casino/parking complex. Total capitalized
interest through March 31, 1998 was approximately $1,418,000 of which $513,000
related to the quarter ended March 31, 1998. Since the third quarter of 1998 all
interest costs have been expensed.
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(CONTINUED)
4. OTHER MATTERS
In March 1999 the LLC closed financing, with the Black Hawk Business
Improvement District, for $6,000,000 in the form of two series of bonds with
interest rates varying between 6.25% and 6.50% and maturing at various times
through December 2011 (See Liquidity and Capital Resources).
On April 26, 1999, the Company closed a $65,000,000 reducing revolving
credit facility, which refinanced the Company's pre-existing revolving line of
credit and construction loan with a bank syndication group, led by Wells Fargo
Bank. The facility has a four-year term, with a variable interest rate based
either upon the London Interbank Rate ("LIBOR") or the prime interest rate (as
published by Wells Fargo Bank), plus an applicable margin based on the
maintenance of certain financial ratios by the Company. Scheduled reductions in
availability will commence on July 1, 2000. Through April 1999, the Company has
drawn approximately $47,000,000 on the facility. At April 29, 1999, the interest
rate paid by the Company on the facility approximated 8.5% (See Liquidity and
Capital Resources).
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by the financial statements and the notes thereto
included elsewhere in this Report.
RESULTS OF OPERATIONS
INTRODUCTION
During 1998, the Company had two significant events which effected the
comparability of the three months ended March 31, 1999 consolidated financial
statements to the three months ended March 31, 1998: (1) the acquisition on
April 24, 1998 of the other half of the Gilpin Hotel Casino and related land not
previously owned by the Company; and (2) the opening of The Lodge Casino on June
24, 1998; both of which significantly impacted the financial reporting of the
Company. Specifically, the accompanying consolidated statements of income
reflect the operational activity of The Lodge Casino and the Gilpin Hotel Casino
for which there are no prior period comparisons. Additionally, the activity of
the Gilpin Hotel Casino was reported under the equity method of accounting
through April 23, 1998 and by consolidation for all activity after April 23,
1998. Historically, by virtue of the Company's previous 50% ownership of GHC,
the Company was required to record its share of the net earnings of GHC, after
elimination of intercompany transactions and other adjustments, as "Equity in
Earnings of Joint Venture." Although the Company received management fees and
rental revenue from the joint venture, equity in earnings of the joint venture
accounted for substantially all of the Company's income before income taxes. As
a result of the acquisition of GHC, the Company no longer receives rental income
from the ground lease or parking fees or management fees from GHC. However, as a
result of the 100% ownership of GHC, the Company consolidates all of the
operations of GHC and thereby reflects all of the revenue and expense of GHC in
its statements of operations. GHC will no longer incur the related expense of
rent from the ground lease, parking or management fees.
RESULTS OF OPERATIONS--BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
The Company reported net income of $963,000 for the three months ended
March 31, 1999 compared to $405,000 for the same period in 1998. The increase in
net income for the three months ended March 31, 1999 over the comparable period
of 1998 is the result of the impact of The Lodge operations (net of the related
minority interest) which commenced on June 24, 1998 and the additional 50% of
operating results from the GHC.
The significant increases in revenue and costs and expenses during the
quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 is a
direct result of consolidation of the GHC and the opening of The Lodge.
In the opinion of management, The Lodge and GHC's operations for the
three months ended March 31, 1999, are competitive relative to other casinos in
Black Hawk as well as the other two Colorado gaming districts. GHC's adjusted
gross proceeds (AGP) (which is the difference between amounts wagered by
customers and the amount paid to customers) averages for gaming devices (slot
machines and table games) remains in excess of the overall gaming averages for
the state and the city of Black Hawk.
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9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--THE LODGE
The Lodge Casino at Black Hawk opened on June 24, 1998 and therefore,
there are no comparisons to the prior period presented.
During the three months ended March 31, 1999, The Lodge had total
revenue of $14,291,000. However, when reduced by promotional allowances of
$990,000, the net revenue was $13,301,000. The Lodge's total costs and expenses
approximated $12,464,000, resulting in pre-tax net income of approximately
$837,000 (before elimination of minority interest and inter-company
transactions).
The revenue by operating department of The Lodge for the three months
ended March 31, 1999 was as follows: Casino operations of $12,361,000 or 93% of
net revenue; food and beverage operations of $498,000 or 4% (net of promotional
allowances of $990,000); hotel operations of $261,000 or 2% and other revenue of
$181,000 or 1%.
The Lodge's total costs and expenses were $12,464,000 or 94% of net
revenue for the three months ended March 31, 1999. Costs and expenses by
operating department before elimination of inter-company transactions were as
follows: Casino operations of $4,438,000 or 36%; food and beverage operations of
$1,594,000 or 13%; hotel operations of $133,000 or 1%; marketing, general and
administrative expenses of $4,740,000 or 38%; depreciation and amortization of
$747,000 or 6% and interest expense of $812,000 or 6%.
RESULTS OF OPERATIONS--GILPIN HOTEL CASINO
During the three months ended March 31, 1999, GHC had total revenue of
$6,937,000. However, when reduced by promotional allowances of $482,000, the net
revenue was $6,455,000. The GHC's total costs and expenses approximated
$5,633,000, resulting in pre-tax net income of approximately $822,000.
During the three months ended March 31, 1999, the GHC's total revenue
decreased $1,748,000 or 20%, when compared to the comparable period in 1998.
However, when reduced by a decrease in promotional allowances of $186,000 or
28%, net revenues decreased by $1,562,000 or 19%. Total costs and expenses of
GHC decreased by $1,273,000 or 18%, which resulted in an approximate decrease in
the pre-tax net income of the GHC of $289,000 or 26% when compared to the
comparable period of the prior year.
Casino revenues decreased by $1,492,000 or 19% and food and beverage
revenues decreased by $70,000 (after eliminating the decrease in promotional
allowances of $186,000). Management attributes the decrease in casino revenues
to: (1) a decrease in the hold percentage on its slot machines; (2) the
discontinuance of the poker room operations; (3) the discontinuance of the off
track betting operations; (4) a decrease in the number of blackjack type games;
and (5) an increase in the overall number of gaming devices in the city of Black
Hawk (including those provided by The Lodge). The decrease in food and beverage
revenue is primarily due to the increase in the number and type of restaurants
now operational in the City of Black Hawk.
The primary net decrease in costs and expenses was the result of: (1) a
decrease in casino operations of $1,518,000 or 43%, principally due to contracts
cancelled after acquiring the remaining 50% ownership interest in GHC,
discontinuance of costs associated with operating the poker room, the
elimination of costs associated with operating the off track betting facilities
and a decrease in gaming taxes; (2) a decrease in food and beverage operations
of approximately $163,000 or 23%, principally as a result of the decrease in
cost of sales and costs associated with contracts cancelled after acquiring the
remaining 50% ownership interest in GHC. These decreases were offset by: (1)
increases in marketing, general and administrative operations of $112,000 or 5%,
principally as a result of increased bussing costs; (2) increased interest
expense of $178,000 or 152%, due to the Wells Fargo revolving line of credit,
which financed the
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10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--GILPIN HOTEL CASINO (CONTINUED)
acquisition; and (3) an increase in depreciation and amortization of $118,000 or
40% related to the step-up in the fair value of the net assets acquired in the
acquisition of the other half of GHC. It is management's intention to continue
its focus on target marketing to the existing customer base of GHC and to
increase the repeat business of new customers. Additionally, the Company is
continuing its efforts to enhance the overall product offered at GHC.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $1,288,000
during the first three months of 1999 as compared to net cash used in operating
activities of $208,000 during the first three months of 1998. The principal
reason for the increase in cash provided by operating activities is due to an
increase in earnings and an increase in depreciation and amortization offset by
a decrease in accounts payable and accrued expenses. As a result of the
completion of the acquisition of the other half of GHC, the Company's cash flow
from operating activities includes the operations of the GHC. The Company has
previously reported the cash flow from GHC when it receives distributions as
cash from investing activities, however in the future these amounts will be
reported as cash generated from operating activities.
Net cash used in investing activities for the three months ended March
31, 1999 was $2,766,000. The uses of funds included payments for construction
and equipping of gaming facilities totaling $2,802,000 and other investing
activities of $1,000 and were offset by the proceeds from the sale of equipment
of $37,000. Net cash used in investing activities for the first three months of
1998 approximated $8,470,000 and was primarily the result of payments for
project development costs associated with The Lodge of $8,597,000 and other
financing activities of $73,000, reduced by distributions from GHC of $200,000.
The net cash used in financing activities during the three months ended
March 31, 1999 totaled $1,569,000. Sources of funds included: proceeds from
bonds issued by the Business Improvement District totaling $6,000,000 and draws
against the Gilpin's revolving line of credit of $5,073,000. These sources were
reduced by debt payments of $3,973,000, payments against the Gilpin's revolving
line of credit of $8,107,000 and prepayments to refinance existing debt of
$562,000. The net cash provided by financing activities during the first three
months of 1998 amounted to $8,695,000 and were primarily the result of draws
against the Wells Fargo Bank construction loan totaling $8,696,000 offset by
other financing activities of $1,700.
As of March 31, 1999 the Company had working capital of approximately
$195,000 as compared to $648,000 at March 31, 1998 after adding back accrued
building costs payable, which were funded by The Lodge Casino's construction
loan of $3,335,000.
In March 1999, the LLC closed financing with the Black Hawk Business
Improvement District, which is a quasi-municipal corporation and political
subdivision of the State of Colorado, organized for the purpose, among others,
of providing financing for public improvements and services primarily benefiting
the commercial properties within the District. The Bonds were issued in two
series with an aggregate principal amount of $6,000,000. The purpose of the
bonds was to finance the Company's costs of various infrastructure improvements
made for the benefit of the city of Black Hawk and The Lodge, the proceeds of
which were used to pay down existing debt at The Lodge. The bonds carry an
interest rate varying between 6.25% and 6.50% and mature at various times up to
and including December of 2011.
8
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
In April 1999, the Company closed financing, with a bank syndication
group led by Wells Fargo Bank, ("Wells Fargo"). Some of the more important
terms of the Credit Agreement are: (i) the facility is a four year reducing
commitment in the aggregate amount of $65 million (approximately $45,286,000
million was drawn at closing to pay existing debt at The Lodge totaling
$32,508,000 and $12,778,000 was disbursed to pay existing debt at the Gilpin);
(ii) the available balance of the facility may be used for working capital
and/or to finance other possible growth opportunities; (iii) the facility bears
interest at the rate based on either the prime rate as published by Wells Fargo
or the London interbank rate ("LIBOR") each of which is added to an applicable
margin based on financial ratios maintained by the Company, (approximately 8.5%
at April 29, 1999); (iv) the scheduled reductions in the availability of the
commitment will be made on a quarterly basis commencing on July 1, 2000. The
first four quarterly reductions in availability will be $1,300,000, the next
four quarterly reductions in availability will be in the amount of $2,275,000
and the following four reductions in availability will be $3,250,000 per quarter
until January 1, 2003 when the outstanding balance of the facility will be due;
(v) the Credit Agreement contains a number of affirmative and negative covenants
which, among other things, requires the Company to maintain certain financial
ratios and refrain from certain actions without the syndicate group's
concurrence; and (vi) substantially all of the assets of the Company, Gilpin
Hotel Venture, GVI and The Lodge Casino are pledged as security for repayment of
the credit facility. The Credit Agreement also contains customary events of
default provisions.
The Company believes its current working capital position, earnings
from its existing operations and its availability from its revolving credit
facility will be sufficient to meet its short-term cash requirements, which are
generally operating expenses and interest payments on indebtedness. However, any
significant development of other projects by the Company may require additional
financing, other joint venture partners, or both.
YEAR 2000 ISSUE
The "Year 2000" issue potentially affects virtually all companies and
organizations. Specifically, the Year 2000 issue is the result of many existing
computer programs using only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of the
change in the upcoming century. If not corrected, many computer applications
could fail or create erroneous results at the Year 2000.
During 1997 the Company began assessing the impact of the "Year 2000"
issue on its operations. The Company has evaluated the Year 2000 issue at both
the Gilpin Hotel Casino and The Lodge Casino. This evaluation included both
computer-related systems and non-computer-related systems. An outline of the
Year 2000 compliance plan includes the following phases with their completion
dates:
o Initial assessment and impact analysis--Completed September 30,
1998
o Inventory and detailed assessment--Completed September 30, 1998
o Solution design and budget determination--Completed October 31,
1998
o Budget approval--December 31, 1998
o Conversion and testing phase--June 30, 1999 (estimated)
o Final assessment--July 31, 1999 (estimated)
The Company has determined that approximately 15% of the various
computer-related systems and non-computer-related systems are non-compliant and
will need to be modified or replaced so they will function properly with respect
to dates in the year 2000 and beyond.
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12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
The total estimated cost to achieve complete Year 2000 compliance is
estimated to be $150,000. Of this amount, $100,000 had been spent or committed
at March 31, 1999. This expenditure is expected to replace all date-related
systems within the casinos that are not Year 2000 compliant.
Management believes its Year 2000 solution will address all
non-compliance issues found during its Year 2000 assessment. However, if the
solution designs are not implemented, or if a Year 2000 compliance issue was not
revealed during the Company's assessment, operations could be disrupted which
could have a material adverse effect on its financial condition. The Company has
received written assurances from the primary supplier of its slot machines that
they are not date sensitive and that the Year 2000 issue for the majority of the
Company's revenue producing assets is moot, however, the Company can give no
assurance in this regard. The Company faces such issues as the possibility that,
among other things, electrical and gas power are not available to the Black Hawk
community. In the unlikely event that power is not available to the community,
the Company has back-up gas driven generators, which will run for approximately
15 to 20 hours between refills. If the Company is unable to secure food and
beverage products after exhausting its two day inventory levels, it will attempt
to secure food and beverage products from retail outlets. Additionally, if the
Company were to lose the use of any of its surveillance equipment as a result of
the Year 2000 rollover, it may be required to close the casino until the matter
is resolved, but the Company does not believe such an event would go unresolved
for longer than 24 hours.
Although the Company has confirmed the Year 2000 compliance of most of
its vendors, no assurance can be given that its vendors will, in fact, be fully
compliant. The Information Systems Department personnel will be on the property
during the time of the Year 2000 rollover to assist and solve any date related
issues that may occur. Additionally, in the days following the rollover, the
accounting department will compare all computer-related data with a paper trail
backup. This comparison should give management confidence that the data was
processed correctly.
Management believes that the most reasonably-likely worst case scenario
is that the Year 2000 rollover would provide unreliable computer data to many of
the Company's operating departments such as casino operations, food and
beverage, hotel, accounting, finance, facilities, and administration. In the
unlikely event that the Company's efforts to avoid this most reasonably likely
worst case scenario are not 100% successful, a contingency plan will be
implemented. The Company is presently studying its capabilities to manually
operate each of the departments referenced above in parallel with their
respective automated procedures for at least one week before and one week after
the Year 2000 rollover to determine the reliability of all data received. A more
detailed contingency plan is being developed based on actual testing results and
continued assessments of outside risks. Additionally, the Company is continuing
to contact and communicate with all key vendors regarding their Year 2000
respective issues and this ongoing communication may alert the Company to
possible future problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company's primary exposure to market risks relates to its long-term
notes, which contain variable rates. Thus, the Company is exposed to interest
rate risk on this debt, which totaled approximately $45.2 million at March 31,
1999. If market interest rates increase, the Company's cash requirements for
interest would also increase. Conversely, if market interest rates decrease, the
Company's cash requirements for interest would decrease. However, at March 31,
1999 the Company has partially hedged its exposure to interest rate risk via its
participation in an interest rate swap, under which it receives a variable
interest payment and pays a fixed interest payment (settled net) on a notional
amount of $35 million. This has reduced the Company's exposure to interest rate
risk to approximately $10 million of debt not hedged with the interest rate
swap.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine litigation arising in the ordinary
course of business. These matters are believed by the Company to be
covered by appropriate insurance policies or are not deemed material.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
No. Description
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27 Financial Data Schedule
(b) Reports on Form 8-K
(1) February 4, 1999, reporting under Item 5
Withdrawal of filing for a casino license in St.
Croix and termination of its joint venture and
development agreement with the DCI group.
(2) April 30, 1999, reporting under Item 5 $65
Million Bank Syndication Credit Facility.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Black Hawk Gaming & Development Company, Inc.
Registrant
Date: May 5, 1999 By: /s/ Jeffrey P. Jacobs
----------------------------------------
Jeffrey P. Jacobs, Chairman of the Board
of Directors and Chief Executive Officer
/s/ Stephen R. Roark
----------------------------------------
Stephen R. Roark, President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule