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 June 30, 1998
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
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 S
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, $.001 par value 4,054,107 shares
- ----------------------------- ----------------
Class Outstanding as of August 10, 1998
2
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FORM 10-Q
JUNE 30, 1998
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Income for the
three and six months ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Item 3 Quantitative and Qualitative Disclosure
about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
3
PART I - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 AND DECEMBER 31, 1997
- ------------------------------------------------------------------------------
ASETS JUNE 30, DECEMBER 31,
1998 1997
----------- -----------
CURRENT ASSETS
Cash and cash equivalents $8,071,585 $1,065,274
Accounts receivable:
Gilpin Hotel Venture 96,076
Other 94,515 15,032
Inventories 532,902
Prepaid expenses and other 656,525 187,138
Deferred tax asset 90,661 90,661
----------- -----------
Total current assets 9,446,188 1,454,181
----------- -----------
INVESTMENTS:
Gilpin Hotel Venture 4,384,648
-----------
GAMING FACILITIES:
Land 16,042,795 11,292,795
----------- -----------
Building and improvements 55,998,160
Equipment 13,163,833
Accumulated depreciation (4,647,186)
Project development costs 31,534,512
----------- -----------
Total gaming facilities 64,514,807 31,534,512
GOODWILL, NET 2,899,433
OTHER ASSETS 642,110 579,049
DEFERRED TAX ASSET 434,345 58,345
----------- -----------
$93,979,678 $49,303,530
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $8,259,957 $2,606,335
Income taxes payable 463,020 $203,461
Current portion of long-term debt 2,827,604 300,438
----------- -----------
Total current liabilities 11,550,581 3,110,234
----------- -----------
NON CURRENT LIABILITIES
Revolving Line of Credit 17,985,826
Construction Loan 29,043,395 12,897,174
----------- -----------
Total noncurrent liabilities 47,029,221 12,897,174
----------- -----------
Total liabilities 58,579,802 16,007,408
----------- -----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,121,435 6,704,688
----------- -----------
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;
4,054,107 and 3,947,496 shares
issued and outstanding respectively 4,054 3,947
Additional paid-in capital 18,027,102 17,194,574
Retained earnings 10,247,285 9,392,913
----------- -----------
Total shareholder's equity 28,278,441 26,591,434
----------- -----------
$93,979,678 $49,303,530
=========== ===========
See notes to consolidated financial statements.
1
4
PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
- ------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- -----------
REVENUE:
Casino $ 6,665,182 $ $ 6,665,182 $
Food and beverage 757,000 757,000
Gilpin Hotel Venture:
Management fees 25,550 72,553 138,317 162,076
Rental income 29,680 107,333 154,346 219,871
Parking lot operation 5,735 75,000 49,722 150,000
Other 26,692 39,831 37,490 98,779
---------- ---------- ---------- -----------
Total revenue 7,509,839 294,717 7,802,057 630,726
Promotional Allowances 551,143 551,143
---------- ---------- ---------- -----------
Net revenue 6,958,696 294,717 7,250,914 630,726
---------- ---------- ---------- -----------
COSTS AND EXPENSES:
Casino operations 2,205,858 2,205,858
Cost of food and beverage operations 569,521 569,521
Marketing, general and administrative 2,190,083 278,008 2,579,618 569,623
Depreciation and amortization 315,076 315,076
Interest 14,067 14,067
Pre-opening costs 1,355,485 1,492,158
---------- ---------- ---------- -----------
Total costs and expenses 6,650,090 278,008 7,176,298 569,623
---------- ---------- ---------- -----------
EQUITY IN EARNINGS OF GILPIN HOTEL VENTURE 181,105 523,146 1,017,789 1,218,702
ADD BACK LOSS ATTRIBUTABLE TO MINORITY INTEREST 153,977 200,646
---------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES & EXTRAORDINARY ITEM 643,690 539,855 1,293,050 1,279,805
INCOME TAXES (240,870) (172,725) (484,870) (452,725)
---------- ---------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 402,820 367,129 808,180 827,079
EXTRAORDINARY ITEM - EARLY RETIREMENT OF DEBT, NET
OF INCOME TAXES 46,192 85,771 46,192 85,771
---------- ---------- ---------- -----------
NET INCOME $449,012 $452,900 $854,372 $912,850
========== ========== ========== ===========
EARNINGS PER SHARE:
BASIC:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.10 $ 0.14 $ 0.20 $ 0.31
EXTRAORDINARY ITEM 0.01 0.03 0.01 0.03
---------- ---------- ---------- -----------
NET INCOME $ 0.11 $ 0.17 $ 0.21 $ 0.34
========== ========== ========== ===========
DILUTED:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.09 $ 0.11 $ 0.19 $ 0.26
EXTRAORDINARY ITEM 0.01 0.03 0.01 0.03
---------- ---------- ---------- -----------
NET INCOME $ 0.10 $ 0.14 $ 0.20 $ 0.29
========== ========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 4,004,565 2,660,067 3,976,130 2,661,050
Dilutive effect of outstanding:
Convertible debt 665,608 475,662
Options 299,407 252,879
Warrants 12,967 12,624
---------- ---------- ---------- -----------
DILUTED 4,316,939 3,325,675 4,241,633 3,136,712
========== ========== ========== ===========
2
5
PART I - FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
- -------------------------------------------------------------------------------
Six Months Ended
June 30,
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 854,372 $ 912,851
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 315,074 4,269
Deferred taxes (376,000)
Equity in earnings of joint venture (675,405) (686,756)
Minority interest (200,646)
Noncash compensation 6,500 4,000
Loss on sale of assets 13,729
Gain on early retirement of debt (73,322) (136,796)
Other 4,469 (8,649)
Changes in operating assets and liabilities:
Accounts receivable 134,282 (19,970)
Inventories (362,439)
Income taxes receivable 325,100
Other assets (467,770)
Accounts payable and accrued expenses 704,489 (32,758)
----------- -----------
Net cash (used in) provided by operating
activities (122,667) 361,291
----------- -----------
INVESTING ACTIVITIES:
Cash acquired in acquisition of Gilpin Ventures, Inc. 1,726,062
Gilpin Ventures, Inc. acquisition (10,000,000)
Construction and equipment costs of gaming facility (19,166,121) (7,691,024)
Distributions from GHV 1,168,407 709,000
Other 99,186 (35,922)
----------- -----------
Net cash used in investing activities (26,172,466) (7,017,946)
----------- -----------
FINANCING ACTIVITIES:
Acquisition of treasury stock and payments upon
exercise of put option (137,499)
Proceeds from exercise of warrants 846,604
Proceeds from issuance of convertible debt to
shareholders 4,500,000
Minority interest contributions to majority-owned
subsidiary 617,393 3,831,188
Proceeds from construction loan 17,339,534
Proceeds from revolving line of credit 17,994,651
Payments on long-term debt and note payable (3,476,269) (2,238,901)
Other (20,470)
----------- -----------
Net cash provided by financing activities 33,301,444 5,954,788
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 7,006,311 (701,867)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,065,274 4,531,355
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,071,585 $ 3,829,488
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Items:
Cash paid for income taxes $ 638,306 $ 244,776
Noncash Items:
Land contributed to majority-owned subsidiary by
minority interest $ 1,080,000
3
6
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. (the Company), was
incorporated on January 10, 1991 and is an owner, developer and operator of
gaming properties in Black Hawk, Colorado. Through April 23, 1998, the Company
owned a 50% interest in the Gilpin Hotel Venture (GHV), which owned the Gilpin
Hotel Casino, which the Company developed and has managed since its inception in
1992. On April 24, 1998, the Company acquired for $10 million the 50% interest
in GHV and related land that it did not previously own. Additionally, during the
second quarter of 1998, the Company completed the development of the casino
portion of The Lodge Casino at Black Hawk ("The Lodge"), a $74 million
hotel/casino/parking project. The Lodge opened for business on June 24, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Consolidated Financial Statements --- In the opinion of
management, the accompanying unaudited consolidated financial statements reflect
all adjustments, consisting only of normal recurring accruals, which are
necessary for the fair presentation of the financial position of the Company at
June 30, 1998, and the results of its operations for the three an six 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 intercompany transactions and
balances have been eliminated in consolidation. Before April 24, 1998, the
Company accounted for its investment in GHV under the equity method of
accounting. All inter-company transactions have been eliminated to the extent of
the Company's 50% ownership in GHV for all periods presented prior to 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, 1997. The
results of interim periods are not necessarily indicative of results to be
expected for the year.
Net Income Per Common Share Basic and Diluted ---All prior periods
presented in the Consolidated Financial Statements have been retroactively
adjusted to reflect the computation of earnings per share pursuant to Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." This
pronouncement became effective for all financial reporting periods ending on or
after December 15, 1997. Earnings per common share previously reported were not
materially impacted by the application of SFAS 128.
3. GILPIN HOTEL VENTURE
Condensed results of operations of GHV for the periods ended April 24,
1998 and June 30, 1997, during which GHV was accounted for under the equity
method are as follows:
January 1, 1998 Six months April 1, 1998 Three months
through April ended June through ended June
24, 1998 30, 1997 April 24, 1998 30, 1997
--------------- ---------- -------------- ------------
Revenues $9,948,008 $14,361,506 $2,795,593 $7,049,811
Costs and expenses 8,597,200 12,987,995 2,464,823 6,513,288
---------- ----------- ---------- ----------
Net income $1,350,808 $ 1,373,511 $ 330,770 $ 536,523
========== =========== ========== ==========
The Company's equity in earnings of GHV reported in the statements of
income does not equal 50% of the above operating results due to the elimination
of the Company's 50% interest in management fees and rents charged to GHV.
4
7
BLACK HAWK GAMING AND DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
On April 24, 1998 the Company acquired the 50% interest in GHV and
related land that it did not previously own for $10 million. The purchase price
has been initially allocated as follows:
Cash $ 863,000
Land 4,750,000
Building improvements and equipment 6,575,000
Other assets 822,000
Goodwill 240,000
Accounts payable and debt [3,250,000]
-----------
$10,000,000
===========
The costs of the acquisition will be allocated to the assets acquired
and the liabilities assumed based on their fair values at the date of
acquisition as determined by management with the assistance of an independent
valuation consultant. The allocation of the costs of the acquisition is
preliminary until the Company obtains final information regarding the fair
values of all assets acquired; however, management believes that any adjustment
to the amounts allocated above will not have a material effect on the Company's
financial position or results of operations. Additionally, the Company will
allocate approximately $1,360,000 to Goodwill representing the excess of its
investment account before the acquisition over the Company's fifty percent share
of GHV's equity.
The Company borrowed approximately $13,500,000 under a revolving line
of credit with Wells Fargo Bank to finance the acquisition and retire a portion
of the existing GHV debt. The line of credit provides for maximum borrowings of
$20,000,000 and 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 Wells Fargo's concurrence.
Additionally, substantially all of the assets of the Gilpin Hotel Venture,
Gilpin Ventures, Inc. (GVI) and the Company (except the Company's 75% interest
in The Lodge Casino) are pledged as security for repayment of the credit
facility. The revolving line of credit bears interest at the rate of 75 basis
points above the prime rate (approximately 9.5% at June 30, 1998) and beginning
January 1, 1999, the maximum credit line available will be reduced by $500,000
per quarter until April 24, 2001, when the outstanding balance of the facility
will be due.
4. OTHER MATTERS
Black Hawk / Jacobs Entertainment, LLC (the "LLC") --- During 1994, the
Company signed a joint venture agreement with Jacobs Entertainment, Inc.
(Jacobs) of Cleveland, Ohio to develop a major hotel/casino/parking complex in
Black Hawk, Colorado (hereinafter the "Lodge"). On June 24, 1998, the Company
opened the casino portion of the Lodge, with approximately 800 slot machines, 20
table games, three restaurants, four bars, and three floors of underground
parking for approximately 450 cars. A 50-room hotel facility and an overflow
parking garage for approximately 200 additional parking spaces are expected to
open in August and September, 1998, respectively.
The Company is a 75% owner and the manager of the LLC and affiliates of
Jacobs own the remaining 25% interest in the LLC. In connection with the
formation of the LLC, affiliates of Jacobs provided debt and equity financing to
the Company.
5
8
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
In March 1997, the LLC closed financing, with Wells Fargo Bank for a
$40,000,000 construction loan. The loan has a five year term, with a variable
interest rate based upon the London Interbank rate ("LIBOR") plus 3.5%
(approximately 9% at June 30, 1998). Principal payments are due quarterly
beginning April 1999.
As of June 30, 1998, the Company has contributed approximately
$23,000,000 (including certain land) to the LLC which represents 75% of the
total contributed capital and the Jacobs affiliates have contributed
approximately $7,300,000 (including certain land costs) to the LLC which
represents the remaining 25% of contributed capital. As of June 30, 1998, the
LLC has drawn approximately $30,000,000 from its $40,000,000 construction loan
with Wells Fargo Bank. The Company and Diversified are required to maintain
their respective pro rata share of any additional capital contributions to the
LLC. Jacobs' ownership in the LLC is reflected as a minority interest in the
accompanying consolidated balance sheet.
Oklahoma property --- During 1994, the Company acquired a 27,000 square
foot parcel of land in downtown Oklahoma City with the intent of placing the
land into tribal trust for the benefit of the Sac and Fox Nation Indian Tribe
for the purpose of operating a high stakes Indian bingo hall, in a
re-development area of downtown Oklahoma City. The Company endeavored to
establish a mutually acceptable business arrangement with the Sac and Fox Nation
Indian Tribe, however, negotiations did not progress as the Company hoped. The
Company closed on the sale of the Oklahoma City property during the first week
of August 1998 for a cash sale of $600,000 which amount will recover the
Company's cost of the land.
5. CAPITALIZED CONSTRUCTION INTEREST
Because of construction of the Lodge hotel/casino/parking complex, the
Company began capitalizing interest expense during 1996. Capitalized interest
through June 30, 1998 totaled approximately $2,282,579 of which $887,515 and
$1,400,661 related to the quarter and six months ended June 30, 1998,
respectively.
6. PRO FORMA STATEMENTS OF INCOME
On April 24, 1998, the Company acquired the 50% interest in GHV and
related land not it did not previously own. The following unaudited pro forma
statements of income of the Company for the six months ended June 30, 1998 and
1997, assume that the acquisition occurred on January 1, 1997 and January 1,
1998, respectively.
The unaudited pro forma income statements should be read in conjunction
with the historical financial statements of the Company and Gilpin Hotel Venture
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K, for the year
ended December 31, 1997. The unaudited pro forma statements of income are not
necessarily indicative of the financial results that would have occurred had the
acquisition been consummated on the indicated dates, nor are they necessarily
indicative of future financial results. The pro forma statement of income for
the six months ended June 30, 1998 includes net revenues of $1,273,000,
operating expenses of $539,000, and pre opening costs of $1,492,000 related to
the Lodge, which opened for business on June 24, 1998.
6
9
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
6. PRO FORMA STATEMENTS OF INCOME (CONTINUED)
SIX MONTHS ENDED
JUNE 30,
1998 1997
--------------------------
REVENUE:
Gaming $16,303,575 $13,889,223
Food, Beverage and other 1,921,866 1,580,244
--------------------------
Total Gross Revenue 18,225,441 15,469,467
Less Promotional Allownaces 1,368,904 1,009,182
--------------------------
NET REVENUE 16,856,537 14,460,285
--------------------------
COSTS AND EXPENSES:
Casino operations 6,586,950 6,381,555
Food and beverage operations 1,440,867 1,226,923
Marketing, general and administrative 4,392,196 3,478,253
Preopening costs 1,492,158
Depreciation and amortization 794,028 838,867
Interest 415,546
--------------------------
Total cost and expenses 14,706,199 12,341,144
ADD BACK LOSS ATTRIBUTABLE TO MINORITY INTEREST 200,646
--------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 2,350,984 2,119,141
INCOME TAXES 881,619 794,678
INCOME BEFORE EXTRAORDINARY ITEM 1,469,365 1,324,463
EXTRAORDINARY ITEM - EARLY RETIREMENT OF DEBT,
NET OF RELATED INCOME TAXES 46,192 85,771
--------------------------
NET INCOME $ 1,515,557 $ 1,410,234
==========================
EARNINGS PER COMMON SHARE:
BASIC:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.37 $ 0.50
EXTRAORDINARY ITEM 0.01 0.03
--------------------------
TOTAL BASIC EARNINGS PER SHARE $ 0.38 $ 0.53
==========================
DILUTED:
INCOME BEFORE EXTRAORDINARY ITEM $ 0.35 $ 0.42
EXTRAORDINARY ITEM 0.01 0.03
--------------------------
TOTAL DILUTED EARNINGS PER SHARE $ 0.36 $ 0.45
==========================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
BASIC 3,976,130 2,661,050
==========================
DILUTED 4,241,633 3,136,712
==========================
7
10
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(CONTINUED)
Generally Accepted Accounting Principles (GAAP) require the
capitalization of interest during periods of construction. During the six months
ended June 30, 1998 and 1997, the Company was required to capitalize certain
interest incurred because of construction activities at the Lodge Casino at
Black Hawk. The accompanying unaudited pro forma income statements assume that
pro forma interest that would have been incurred on the revolving line of credit
used to finance the acquisition of GHV and interest on unretired debt of GHV
would have been capitalized based on a construction in progress to debt
outstanding ratio. Such interest assumed to be capitalized for the six months
ended June 30, 1998 and 1997 totaled $163,810 and $336,755 respectively. If such
pro forma interest had been expensed instead of being capitalized, pro forma net
income (net of related taxes) would have been $1,413,176 or $.36 earnings per
basic share and $.33 earnings per diluted share for the six months ended June
30, 1998 and $1,199,762 or $.45 earnings per basic share and $.38 earnings per
diluted share for the six months ended June 30, 1997.
8
11
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
The Company had two significant events during the quarter ended June
30, 1998--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 the
opening of The Lodge Casino at Black Hawk on June 24, 1998--which significantly
impacted the financial reporting of the Company. As a result of these two
events, the consolidated statements of income for the three and six months ended
June 30, 1998 are not comparable to the same periods of 1997. Specifically, the
activity of the Gilpin Hotel Casino has been reported under the equity method of
accounting for all transactions through April 24, 1998 and through consolidation
for all activity beginning after April 23, 1998. Additionally, the accompanying
consolidated statements of income reflect the operational activity of The Lodge
Casino at Black Hawk beginning on the opening day of the casino (June 24, 1998)
through June 30, 1998. Historically, by virtue of the Company's previous 50%
ownership of GHV, the Company was required to record its share of the net
earnings of GHV, 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 GHV, the Company
will no longer receive rental income from the ground lease or parking fees or
management fees from GHV. However, the Company will as a result of the 100%
ownership of GHV and the related consolidation of all of the operations of GHV
with those of the Company, receive all of the revenues and expenses of GHV and
GHV will no longer incur the related expense of rent from the ground lease,
parking or management fees.
Note 6 to the financial statements presents pro forma income statements
for the Company for the six month periods ended June 30, 1998 and 1997 that
assume the acquisition of the other half of the Gilpin occurred on January 1,
1998 and 1997.
Additionally, the financial information for the Gilpin Hotel Casino
shown on page 11 compares the actual quarter and six months ended June 30, 1998
operations of the Gilpin Hotel Venture with the comparable periods of the
preceding year. Net income for the quarter and six months ended June 30, has
been adjusted to eliminate expenses which are no longer applicable since the
acquisition of the other half of the Gilpin Hotel Venture.
Results of Operations - Black Hawk Gaming & Development Company, Inc.
The Company reported net income of $854,372 for the six months ended
June 30, 1998 compared to $912,850 for the same period in 1997. Net income for
the quarters ended June 30, 1998 and 1997 was $449,012 and $452,900,
respectively. The slight decrease in net income resulted from the impact of
$1,492,158 and $1,355,485 of pre opening costs for the Lodge in the six and
three month period ended June 30, 1998 which was almost entirely offset by the
additional 50% of operating results from the Gilpin Hotel Casino beginning April
24, 1998 (net of the related decrease in equity in earnings of GHV) and the
results of operations of the Lodge beginning June 24, 1998 (net of the related
minority interest in the Lodge).
The significant increases in revenues and costs and expenses in the
1998 periods compared to the 1997 periods are directly a result of consolidation
of the Gilpin Hotel Casino and the opening of the Lodge.
9
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Included in the consolidated statements of income for the three and six
months ended June 30, 1998 is a $46,192 extraordinary gain realized from the
early retirement of debt. This amount reflects the after tax benefit of the
early retirement of debt resulting from the acquisition and consolidation of
debt related to the acquisition of the Gilpin Hotel Venture.
Basic and fully diluted earnings per share for the 1998 periods were
less than that of the prior periods primarily because of an increase in the
weighted average common shares outstanding and pre-opening costs incurred at the
Lodge.
Results of Operations--Gilpin Hotel Casino
The financial information of the Gilpin Hotel Casino shown on the
following page compares the quarter and six months ended June 30, 1998
operations of the Gilpin Hotel Venture with the comparable period of the
preceding year and as adjusted for expenses of contracts cancelled post
acquisiton. Following the table is a discussion and analysis of the operations
of the Gilpin Hotel Casino for the periods shown.
10
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS (CONTINUED)
GILPIN HOTEL CASINO
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
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REVENUES:
Casino $ 7,294,469 $ 6,806,559 $ 15,060,575 $ 13,889,223
Food and Beverage 856,499 750,220 1,774,662 1,481,465
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Total revenues 8,150,968 7,556,779 16,835,237 15,370,688
Promotional allowances 621,585 506,968 1,289,343 1,009,182
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Net revenues 7,529,383 7,049,811 15,545,894 14,361,506
COSTS AND EXPENSES:
Casino operations 2,809,315 3,216,860 6,333,847 6,381,555
Cost of food and beverage sales 102,443 107,592 212,308 218,223
Food and beverage operations 524,654 512,441 1,119,353 1,008,700
Marketing, general and administrative 2,173,002 2,206,692 4,440,024 4,437,854
Depreciation and amortization 345,148 337,960 637,910 670,532
Interest 46,707 131,743 163,810 271,131
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Total costs and expenses 6,001,269 6,513,288 12,907,252 12,987,995
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EXTRAORDINARY ITEMS:
Gain on early retirement of debt 73,322 73,322
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NET INCOME 1,601,436 536,523 2,711,964 1,373,511
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PRO FORMA ADJUSTMENTS FOR EXPENSES
OF CONTRACTS CANCELLED POST - ACQUISITION
Management fees 51,100 145,106 276,634 324,152
Parking rent 11,470 150,000 99,444 300,000
Land rent 118,720 429,332 617,384 879,484
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PRO FORMA NET INCOME $ 1,782,726 $ 1,260,961 $ 3,705,426 $ 2,877,147
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
During the six months ended June 30, 1998, GHV's total revenues
increased by $1,464,000 or 10%. However, when reduced by an increase in
promotional allowances of $280,000 or 28%, net revenues realized an increase of
$1,184,000 or 8%. Total costs and expenses of GHV decreased by $81,000 or 1%.
The net result is an increase in the net income of GHV of $1,265,000 or 92%
before extraordinary items and an increase of $1,338,000 or 97% after
extraordinary items. However, a more meaningful comparison can be reached when
the statements of income for the six months ended June 30, 1997 and 1998 are
adjusted for management fees, parking and rent that would not have been incurred
during 1997 and 1998 had the Company entered into the transaction to acquire the
other half of the Gilpin on January 1,1997. After giving effect to these
adjustments net income would have been increased by $828,279 or 28%.
Casino revenues increased by $1,171,000 and food and beverage revenues
increased by $293,000. Management attributes the increase in casino revenues to
the success of the ongoing plan to target market to the slot player club of the
Gilpin, the continuing breakfast promotion and the overall increase in customer
traffic through the casino resulting from the completion of the Business
Improvement District (BID) project for the full six months of 1998 as compared
to 1997 when the BID project was still in process and traffic was inhibited from
entering the Casino.
The income statement of GHV includes classification of costs and
expenses by operating departments. When the operating departments are
aggregated, the most significant changes that comprise the net increase in costs
and expenses of $80,700 include, increases in food and beverage cost of sales
and food and beverage operations of $105,000 or 9%; marketing, general and
administrative expenses and depreciation and amortization remained relatively
consistent between the six month periods while interest expense declined by
$107,300 due to the capitalization of interest cost at the Gilpin Hotel Venture
level resulting from the construction of the Lodge and the parking garage.
A large part of GHV's success has been attributed to its on site
parking. During 1997 and into 1998, management increased dollars spent on busing
programs in order to compensate for the expected reduction in parking
availability due to the ongoing Lodge construction as well as the construction
of the upstream parking garage for the benefit of the Lodge and the Gilpin. When
the upstream parking garage for the Lodge is fully completed (presently
anticipated to be early September 1998), the total parking availability for GHV
will approximate 225 cars and total parking for the Lodge will approximate 640
cars. Additionally, with the completion of the Business Improvement District's
redesign and upgrade of Main Street in the City of Black Hawk and the related
infrastructure improvements, GHV has gained a permanent bus stop, which is
located directly in front of GHV.
It is management's present plan to continue focusing and target
marketing to the existing customer base of GHV and to attempt to increase the
repeat business of new customers. Additionally, the Company is working to
enhance the product offered at the Gilpin in order to provide customers with a
user-friendly gaming environment coupled with the newest in gaming technology.
In the opinion of management, the mild weather, the temporary decline in the
number of available gaming devices in the City of Black Hawk as well as the
marketing strategies discussed above have allowed GHV to remain competitive when
compared to the comparable six months of 1997. However, until the GHV parking
garage is completed, parking for GHV will continue to be limited.
In the opinion of management, GHV's operations for the six months ended
June 30, 1998, are competitive relative to other casinos in Black Hawk as well
as the other two Colorado gaming districts. GHV's adjusted gross proceeds (AGP)
(which is the difference between amounts wagered by customers and payments to
customers) averages
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15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
for gaming devices (slot machines and table games) remains in excess of the
overall gaming AGP averages for the state and the city of Black Hawk.
The Lodge
The Lodge Casino at Black Hawk opened on June 24, 1998 and therefore,
there are no comparisons to the prior periods presented. The current
consolidated statements of income for the six months ended June 30, 1998 contain
only six and one-half days of operations of the Lodge, and accordingly no
meaningful analysis can be made. The Company opened the casino portion of the
project, with approximately 800 slot machines, 20 table games, 3 restaurants, 4
bars, and three floors of underground parking for approximately 450 cars. A
50-room hotel facility and an overflow-parking garage for approximately 225
additional parking spaces are expected to open in August and September 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $123,000 in the six months of
1998 versus net cash provided by operating activities of $361,000 in the first
six months of 1997. The principal reason for the decrease in cash provided by
operating activities is due to expenditure of $1,492,158 on non recurring
preopening costs of the Lodge and collection of an income tax refund in 1997
with no comparable collection in 1998. As a result of the completion of the
acquisition of the other half of GHV, the Company's cash flow from operating
activities will include the operations of the GHV. The Company has previously
reported the cash flow from GHV 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 six months ended June 30,
1998 was $26,173,000 and was the result of payments of project development costs
associated with the Lodge of $19,166,000, the acquisition of GVI for
$10,000,000, offset by cash on GHV books as of the date of acquisition of the
GVI buyout of $1,726,000, distributions from GHV of $1,168,400 and other
investing activities of $99,000. Net cash used in investing activities for the
first six months of 1997 was $7,018,000 and was primarily the result of:
payments for project development costs associated with the Lodge totaling
$7,691,000 and other miscellaneous payments of approximately $36,000. These
expenditures were offset by distributions from GHV of $709,000.
The net cash provided by financing activities during the six months
ended June 30, 1998 was $33,301,400 and was the result of draws against the
Lodge's construction loan of $17,339,500, draws against GHV's line of credit of
$17,994,700, minority interest contributions of $617,000, proceeds from the
exercise of warrants of $847,000 offset by debt payments of $3,476,000 and other
net financing activities of $20,500. The net cash provided by financing
activities during the first six months of 1997 amounted to $5,954,788 and
principally was the result of proceeds from the issuance of convertible debt to
Jacobs Entertainment, Inc. totaling $4,500,000 and minority interest
contributions totaling $3,831,188. These increases are offset by the acquisition
of common stock "put" to the Company totaling $137,499 and payments on long-term
debt aggregating $2,238,901.
During 1998 the Company's principal sources of cash flow consisted of
distributions from GHV, cash generated from its rental and management
operations, minority interest contributions to the Company's majority owned
subsidiary, the construction loan and the revolving line of credit with Wells
Fargo Bank. As of June 30, 1998 the Company has working capital of approximately
$2,975,000 (after eliminating accrued expenses of the LLC of $5,079,500 to be
financed under the Wells Fargo Bank credit facility) as compared to $509,000 at
December 31, 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As discussed previously, on April 24, 1998 the Company completed the
acquisition of Gilpin Ventures, Inc. (GVI), the Company's joint venture partner
in GHV and acquired the other half of the Gilpin Hotel Venture. The financial
terms consisted of the acquisition of all of the outstanding shares of Gilpin
Ventures, Inc. for $5,000,000; a payment of $250,000 to an affiliate of GVI at
closing for termination of a consulting agreement and the purchase of an
undivided 50% interest in the land underlying the GHV Casino and in certain
parcels across Main Street from the Casino for $4,750,000.
In order to complete the acquisitions discussed above, the Company
entered into a Credit Agreement with Wells Fargo Bank, National Association
("Wells Fargo"). Some of the more important terms of the Credit Agreement are:
(i) the facility is a five year reducing revolving line of credit in the amount
of $20 million (approximately $13.5 million was drawn at closing to fund the
acquisitions described above and to pay existing mortgage debt against the
property purchased); (ii) the available balance of the facility will be used to
pay certain equipment debt, to pay for the third story of a parking garage under
construction across Main Street from the Gilpin Hotel Casino, and as discussed
above, with the balance (estimated to approximate $1,000,000) for working
capital; (iii) the facility bears interest at the rate of 75 basis points above
the prime rate (approximately 9.5% at June 30, 1998); (iv) beginning January 1,
1999, the maximum credit line available will be reduced by $500,000 per quarter
until April 24, 2001, 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 Wells Fargo's concurrence; and
(vi) substantially all of the assets of the Gilpin Hotel Venture, GVI and the
Company (except the Company's 75% interest in 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 coupled with
the increased profits and realization of certain economies of scale, which may
result from the acquisition of the other half of GHV as well as the remaining
balance on the revolving line of credit after paying of additional Lodge capital
contributions and GHV garage construction costs, will be sufficient to meet the
Company's short-term cash requirements which are operating expenses and interest
payments on indebtedness. However, any significant development of other projects
by the Company will require additional financing, other joint venture partners,
or both. The members of the LLC have contributed approximately $31 million to
the LLC and the LLC's credit facility is $40 million of which approximately $30
million has been drawn through June 30, 1998. The Company believes it will cover
its remaining share of the total projected cost of The Lodge Casino and start-up
costs with the balance of the LLC's credit facility, current working capital,
funds from operation of the Gilpin Hotel Casino and with a portion of the new
credit facility discussed above.
YEAR 2000 ISSUE
During 1997 the company began assessing the impact of the so-called
"Year 2000" Issue on its operations as well as the existing operations of the
GHV. 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. The company has been
studying the problem and uncertainties associated with the consequences of the
Year 2000 Issue on its overall future operations. The Company continues to
evaluate whether its preliminary conclusions are correct, and is coordinating
with other entities with which the company interacts electronically, including
suppliers, customers and creditors
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to ensure their compliance (or lack thereof) will not have an impact on the
Company's future operations. While the financial impact to the Company to ensure
year 2000 compliance is not anticipated by management to be material to the
financial position, results of operations or cash flow, the Company has
developed an in-house plan to address the issue. The in-house plan was presented
to the Board of Directors at the quarterly meeting in December 1997 and March
1998. The team for the plan is responsible for the implementation of the plan
and reports to the Board on a quarterly basis until December 1998 and on a
monthly basis thereafter until the plan is completed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
NONE
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is also involved in routine litigation arising in the
ordinary course of GHV's business. These matters are believed by the
Company to be covered by appropriate insurance policies.
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) January 6, 1998, reporting under Item 2
The signing of agreements to acquire assets and
land related to GHV
(2) April 24, 1998, reporting under Item 2
The closing of the transactions reported in the
January 6, 1998, Report on Form 8-K.
(3) June 1, 1998, reporting under Item 7
The reporting of pro-forma financial statements
related to the acquisition of the transaction
reported in the April 24, 1998 Form 8-K.
(4) July 24, 1998, reporting under Item 5
Disclosure of the filing for a gaming
application in St. Croix, USVI
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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: August 10, 1998 By: /s/ Jeffrey P. Jacobs
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Jeffrey P. Jacobs, Chairman of the Board
of Directors and Chief Executive Officer
/s/ Stephen R. Roark
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Stephen R. Roark, President and Chief Financial
Officer
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EXHIBIT INDEX
Exhibit No. Description
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27 Financial Data Schedule