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, 1999
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-21736
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Colorado 84 -1158484
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(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
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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 4,110,557 shares
- ------------ ----------------
Class Outstanding as of July 29, 1999
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FORM 10-Q
JUNE 30, 1999
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 1
Consolidated Statements of Income for the three and
six months ended June 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the six
months ended June 30, 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 6-12
Item 3. Quantitative and Qualitative Disclosure
about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1999 AND DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS JUNE 30, DECEMBER 31,
1999 1998
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CURRENT ASSETS
Cash and cash equivalents $ 8,369,573 $ 10,887,602
Accounts receivable 90,400 164,077
Inventories 527,490 554,493
Prepaid expenses 796,231 478,866
Deferred tax asset 338,716 338,716
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Total current assets 10,122,410 12,423,754
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LAND 15,235,092 15,235,092
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GAMING FACILITIES:
Building and improvements 57,717,786 57,690,399
Equipment 16,002,396 15,427,185
Accumulated depreciation (8,229,929) (6,384,357)
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Total gaming facilities 65,490,253 66,733,227
GOODWILL, NET 6,040,665 6,374,370
OTHER ASSETS 3,048,110 1,029,985
DEFERRED TAX ASSET 265,672 265,672
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$ 100,202,202 $ 102,062,100
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 6,786,585 $ 9,048,273
Income taxes payable 237,432
Building costs payable 2,295,198
Current portion of long-term debt 570,931 373,639
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Total current liabilities 7,594,948 11,717,110
NON CURRENT LIABILITIES
Revolving line of credit and other 595,672 15,806,305
Construction loan 36,171,752
Reducing and revolving credit facility 46,000,000
Bonds Payable 5,825,000
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Total liabilities 60,015,620 63,695,167
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COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,326,764 7,541,523
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STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value; 10,000,000 shares authorized;
none issued and outstanding
Common stock; $.001 par value; 40,000,000 shares authorized;
4,110,557 shares issued and outstanding 4,110 4,087
Additional paid-in capital 18,358,385 18,216,385
Retained earnings 14,497,323 12,604,938
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Total stockholders' equity 32,859,818 30,825,410
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$ 100,202,202 $ 102,062,100
============= =============
See notes to consolidated financial statements.
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PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE:
Casino $ 20,233,838 $ 6,665,182 $ 38,869,018 $ 6,665,182
Food and beverage 2,093,382 757,000 4,205,833 757,000
Hotel 278,698 539,512
Gilpin Hotel Casino - management fees and rental income 60,965 342,385
Interest and other 179,487 26,692 404,225 37,490
------------ ------------ ------------ ------------
Total revenue 22,785,405 7,509,839 44,018,588 7,802,057
Promotional allowances 1,440,105 551,143 2,911,566 551,143
------------ ------------ ------------ ------------
Net revenue 21,345,300 6,958,696 41,107,022 7,250,914
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Casino operations 6,290,489 2,205,858 12,364,527 2,205,858
Food and beverage operations 2,053,641 569,521 4,189,190 569,521
Hotel operations 143,502 277,057
Marketing, general and administrative 8,715,810 2,190,083 16,154,872 2,579,618
Preopening costs 1,355,485 1,492,158
Interest 1,069,774 14,067 2,176,627 14,067
Depreciation and amortization 1,269,781 315,076 2,428,671 315,076
------------ ------------ ------------ ------------
Total costs and expenses 19,542,997 6,650,090 37,590,944 7,176,298
------------ ------------ ------------ ------------
MINORITY INTEREST (349,903) 153,977 (559,194) 200,646
EQUITY IN EARNINGS OF JOINT VENTURE 181,105 1,017,789
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES & EXTRAORDINARY ITEM 1,452,400 643,690 2,956,884 1,293,050
INCOME TAXES (522,850) (240,870) (1,064,500) (484,870)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 929,550 402,820 1,892,384 808,180
EXTRAORDINARY ITEM - EARLY RETIREMENT OF DEBT, NET OF
INCOME TAXES 46,192 46,192
------------ ------------ ------------ ------------
NET INCOME $ 929,550 $ 449,012 $ 1,892,384 $ 854,372
============ ============ ============ ============
EARNINGS PER SHARE:
BASIC
INCOME BEFORE EXTRAORDINARY ITEM $ 0.23 $ 0.10 $ 0.46 $ 0.20
EXTRAORDINARY ITEM -- 0.01 -- 0.01
------------ ------------ ------------ ------------
NET INCOME $ 0.23 $ 0.11 $ 0.46 $ 0.21
============ ============ ============ ============
DILUTED
INCOME BEFORE EXTRAORDINARY ITEM $ 0.22 $ 0.09 $ 0.45 $ 0.19
EXTRAORDINARY ITEM -- 0.01 -- 0.01
------------ ------------ ------------ ------------
NET INCOME $ 0.22 $ 0.10 $ 0.45 $ 0.20
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC 4,094,611 4,004,565 4,091,182 3,976,130
Dilutive effect of outstanding:
Options 79,153 299,407 72,722 252,879
Warrants 12,967 12,624
------------ ------------ ------------ ------------
DILUTED 4,173,764 4,316,939 4,163,904 4,241,633
============ ============ ============ ============
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PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
1999 1998
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OPERATING ACTIVITIES:
Net Income $ 1,892,384 $ 854,372
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,428,671 315,074
Deferred taxes (376,000)
Equity in earnings of joint venture (675,405)
Minority interest 559,194 (200,646)
Noncash compensation 2,750 6,500
Gain on early retirement of debt (73,322)
Other 1,733 18,198
Changes in operating assets and liabilities:
Accounts receivable 98,155 134,282
Inventories 27,003 (362,439)
Prepaid expenses (340,856)
Other assets 216,442 (467,770)
Accounts payable and accrued expenses (2,286,162) 704,489
Income taxes payable 237,432
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Net cash provided by (used in) operating activities 2,836,746 (122,667)
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INVESTING ACTIVITIES:
Cash acquired in acquisition of Gilpin Ventures, Inc. 1,726,062
Gilpin Ventures, Inc. acquisition (10,000,000)
Proceeds from sale of equipment 48,967
Construction and equipment costs of gaming facility (3,565,967) (19,166,121)
Proceeds from the City of Black Hawk for public improvements 380,000
Distributions to minority interest (773,952)
Distributions from GHC 1,168,407
Other (990) 99,186
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Net cash used in investing activities (3,911,942) (26,172,466)
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FINANCING ACTIVITIES:
Proceeds from exercise of warrants 846,604
Minority interest contributions to majority-owned subsidiary 617,393
Proceeds from bond issue 6,000,000
Proceeds from construction loan 17,339,535
Proceeds from GHC revolving line of credit 6,573,122 17,994,651
Payments on GHC revolving line of credit (8,874,275)
Proceeds from reducing and revolving credit facility 47,940,534
Payment to retire GHC revolving line of credit (12,706,000)
Payment to retire construction loan (32,317,500)
Payments on long-term debt and note payable (5,975,974) (3,476,269)
Payments to refinance existing debt (2,222,015)
Other 139,275 (20,470)
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Net cash (used in) provided by financing activities (1,442,833) 33,301,444
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (2,518,029) 7,006,311
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 10,887,602 1,065,274
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,369,573 $ 8,071,585
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Items:
Cash paid for interest, net of amounts capitalized $ 2,392,274
Cash paid for income taxes $ 716,500 $ 638,306
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. ("the Company") was
incorporated in January, 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 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 on June 24, 1998
and the hotel opened in mid August 1998. The Company and its strategic partner,
Jacobs Entertainment Ltd., developed and co-manage The Lodge, through Black Hawk
/ Jacobs Entertainment, Inc., LLC ("the 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 June 30,
1999 and the results of its operations for the three and 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 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 June 30, 1998 was approximately $2,282,579 of which $888,000
and $1,401,000 was related to the quarter and six months ended June 30, 1998.
Interest costs have been expensed for all periods subsequent to June 30, 1998.
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(CONTINUED)
4. OTHER MATTERS
In March 1999 The Lodge 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 Management's Discussion and Analysis - Liquidity and
Capital Resources).
On April 26, 1999, the Company closed a $65,000,000 reducing and
revolving credit facility with a bank syndication group, led by Wells Fargo
Bank, which repaid the Company's existing revolving line of credit and
construction loan. 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 June 30, 1999, the Company
has drawn $46,000,000 on the facility. At June 30, 1999, the interest rate paid
on the facility approximated 7.9% (See Management's Discussion and Analysis
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 with the financial statements
and the notes included in this Report.
RESULTS OF OPERATIONS
INTRODUCTION
The consolidated statements of income for the three and six months
ended June 30, 1999 combine the corporate overhead of Black Hawk Gaming &
Development Company, Inc. and the operational results for The Lodge and GHC.
Throughout this report we will refer to these three entities as the Company. The
discussion and analysis below will describe the individual components of these
operations during the three and six-month periods ended June 30, 1999 as
compared to the same time periods last year.
During 1998, the Company had two significant events. Both of these had
a major impact on the comparability and financial reporting of the Company for
the three and six months ended June 30, 1999. On April 24, 1998 we acquired the
other half of GHC and related land and on June 24, 1998 we opened The Lodge
Casino. Because of these two events the consolidated statements of income for
1999 now reflect 100% of the operational activity of The Lodge Casino, GHC, and
the corporate overhead of Black Hawk Gaming. The activity of GHC was previously
reported under the equity method of accounting through April 23, 1998. After
that date we have consolidated all activity of GHC. Before April 24, 1998,
because we owned only 50% of GHC, we were required to record our share of the
earnings of GHC, after eliminating inter-company transactions and other
adjustments, as "equity in earnings of joint venture." Even though we received
management fees and rental revenue from GHC, the equity in earnings of the joint
venture accounted for almost all of our income before income taxes. Since we
bought the other half of GHC, we no longer receive rental income from the ground
lease or parking fees or management fees from GHC and GHC no longer has an
expense for these same items. Since we now own 100% of GHC, we consolidate all
of the operations of GHC and reflect all of the revenue and expense of GHC in
our statements of income.
The Company reported net income of $930,000 and $1,892,000 for the
three and six months ended June 30, 1999, compared to $449,000 and $854,000 for
the same periods of 1998. The vast majority of the increase in net income for
the three and six months ended June 30, 1999 is because The Lodge opened on June
24, 1998. The two periods presented for 1999 contain all Lodge operations (after
deducting the 25% portion of the Lodge that the Company does not own) while the
1998 periods only include six full days of Lodge operations. Also, the 1998
periods include 50% of the operations of GHC through April 24, 1998. The 1999
periods include 100% of GHC operations.
RESULTS OF OPERATIONS--BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
Corporate overhead for the three months ended June 30, 1999 totaled
$790,000 (net of $5,000 of interest income) compared to $425,000 (net of $21,000
of interest income) for the same period of 1998. The net increase of $365,000 is
primarily the result of an arbitration loss totaling $298,000 and an increase in
labor costs of $67,000 associated with additional employees.
Corporate overhead for the six months ended June 30, 1999 was
$1,107,000 (net of $11,000 of interest income) compared to $753,000 (net of
$32,000 of interest income) for the same period of 1998. The net increase of
$354,000 for the six months is also primarily the result of the arbitration loss
and an increase in labor costs associated with additional employees.
The Company was a defendant in arbitration proceedings in Denver,
Colorado in which a person contended, among other things, that the Company under
its former name, Mountain Casino Properties, Inc. ("Mountain Casino") breached a
1991 agreement. On May 26, 1999 the arbitrators awarded the claimant $298,000 in
full settlement of all claims submitted to the arbitration.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS-BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(CONTINUED)
As discussed above, the significant increases in revenue and costs and
expenses during the three and six months ended June 30, 1999 compared to the
three and six months ended June 30, 1998 is a direct result of consolidation of
GHC and the opening of The Lodge.
In the opinion of management, The Lodge and GHC's operations for the
three and six months ended June 30, 1999, are competitive relative to other
casinos in Black Hawk as well as the other two Colorado gaming districts. The
Lodge and 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) remain in excess of the overall
gaming averages for the state and the city of Black Hawk.
RESULTS OF OPERATIONS--THE LODGE
The Lodge Casino at Black Hawk opened on June 24, 1998. Therefore,
there are no practical comparisons of the prior periods to the current periods,
the following will discuss the components of the operations of The Lodge for the
three and six month periods ended June 30, 1999.
During the three months ended June 30, 1999, The Lodge had total
revenue of $15,323,000. However, when reduced by promotional allowances of
$951,000, the net revenue was $14,372,000. The Lodge's total costs and expenses
approximated $12,972,000, resulting in pre-tax net income of $1,400,000 (before
elimination of minority interest and inter-company transactions).
The revenue by operating department of The Lodge for the three months
ended June 30, 1999 consisted of: Casino operations of $13,493,000 or 93% of net
revenue; food and beverage operations of $529,000 or 4% (net of promotional
allowances of $910,000); hotel operations of $238,000 or 2% (net of promotional
allowances of $41,000) and other revenue of $112,000 or 1%.
The Lodge's total costs and expenses were $12,972,000 or 90% of net
revenue for the three months ended June 30, 1999. Costs and expenses by
operating department before elimination of inter-company transactions were:
Casino operations of $4,512,000 or 35%; food and beverage operations of
$1,453,000 or 11%; hotel operations of $144,000 or 1%; marketing, general and
administrative expenses of $5,260,000 or 41%; depreciation and amortization of
$817,000 or 6% and interest expense of $786,000 or 6%.
During the six months ended June 30, 1999, The Lodge had total revenue
of $29,614,000. However, when reduced by promotional allowances of $1,941,000,
the net revenue was $27,673,000. The Lodge's total costs and expenses
approximated $25,436,000, resulting in pre-tax net income of $2,237,000 (before
elimination of minority interest and inter-company transactions).
The revenue by operating department of The Lodge for the six months
ended June 30, 1999 consisted of: Casino operations of $25,854,000 or 93% of net
revenue; food and beverage operations of $1,059,000 or 4% (net of promotional
allowances of $1,869,000); hotel operations of $467,000 or 2% (net of
promotional allowances of $72,000) and other revenue of $293,000 or 1%.
The Lodge's total costs and expenses were $25,436,000 or 92% of net
revenue for the six months ended June 30, 1999. Costs and expenses in dollar
amount and as a percentage of net revenue by operating department before
elimination of inter-company transactions were: Casino operations of $8,950,000
or 35%; food and beverage operations of $3,046,000 or 12%; hotel operations of
$277,000 or 1%; marketing, general and administrative expenses of $10,000,000 or
39%; depreciation and amortization of $1,564,000 or 6% and interest expense of
$1,599,000 or 6%.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--THE LODGE (CONTINUED)
Even though we have operated The Lodge for a year through the quarters
presented, and there exists no practical comparisons to prior periods, there are
some trends in our operations that may prove meaningful to our future
operations.
Specifically, on December 31, 1998 another casino opened in Black Hawk
with approximately 1,200 devices and a 1,100 car valet/self-parking garage.
Additionally, there are currently 2 other large casinos under construction in
Black Hawk which are expected to open late in the fourth quarter of 1999 or
early in the first quarter of 2000. Also, discussions are in progress for
possibly a third project to recommence construction with an opening date
sometime late in 2000 or early 2001.
We believe the new casinos will expand the existing market to some
extent, however we anticipate some of the existing Black Hawk market, including
ours, will be lost to the new casinos. The competition within the City will
continue to increase as these new casinos open.
With the increased competition currently in the City and coming in the
next six to nine months, we would expect our marketing costs, our personnel
costs and some of our other costs at both of our properties to increase
significantly while we attempt to maintain our market share.
RESULTS OF OPERATIONS--GILPIN HOTEL CASINO
During the three months ended June 30, 1999, GHC had total revenue of
$7,457,000. However, when reduced by promotional allowances of $489,000, the net
revenue was $6,968,000. GHC's total costs and expenses approximated $6,179,000,
resulting in pre-tax net income of approximately $789,000.
During the three months ended June 30, 1999, GHC's total revenue
decreased $767,000 or 9%, when compared to the comparable period in 1998.
However, when reduced by a decrease in promotional allowances of $133,000 or
21%, net revenues decreased by $634,000 or 8%. Total costs and expenses of GHC
increased by $178,000 or 3%, which resulted in an approximate decrease in the
pre-tax net income of the GHC of $812,000 or 51% when compared to the comparable
period of the prior year.
During the three months ended June 30, 1999 casino revenue decreased by
$554,000 or 8%; food and beverage revenue decreased by $17,000 (after
eliminating the decrease in promotional allowances of $133,000) and other
revenues decreased by $63,000 or 50%. The decrease in casino revenue is the
result of: (1) a decrease in the hold percentage on our 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 tables; 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 operating in the City of Black Hawk.
The primary net increase in costs and expenses for the three months
ended June 30, 1999 was the result of: (1) increases in marketing, general and
administrative operating costs of $489,000 or 22%, principally as a result of
increased bussing costs; (2) increased interest expense of $237,000 or 507% on
the revolving line of credit which financed the acquisition of the other half of
GHC; and (3) an increase in depreciation and amortization of $106,000 or 31%
related to the step-up in the fair value of the net assets acquired in the
acquisition of the other half of GHC. These decreases were partially offset by:
(1) a decrease in casino operation costs of $627,000 or 22%, 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
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--GILPIN HOTEL CASINO (CONTINUED)
gaming taxes; (2) a decrease in food and beverage operations of approximately
$27,000 or 5%, principally due to the decrease in cost of sales and costs
associated with contracts cancelled after acquiring the remaining 50% ownership
interest in GHC.
During the six months ended June 30, 1999, GHC had total revenue of
$14,394,000. However, when reduced by promotional allowances of $970,000, the
net revenue was $13,424,000. GHC's total costs and expenses approximated
$11,813,000, resulting in pre-tax net income of approximately $1,611,000.
During the six months ended June 30, 1999, GHC's total revenue
decreased $2,515,000 or 15%, when compared to the comparable period in 1998.
However, when adjusted for a decrease in promotional allowances of $319,000 or
25%, net revenues decreased by $2,196,000 or 14%. Total costs and expenses of
GHC decreased by $1,095,000 or 8%, which resulted in an approximate decrease in
the pre-tax net income of GHC of $1,101,000 or 41% when compared to the
comparable period of the prior year.
During the six months ended June 30, 1999, casino revenue decreased by
$2,045,000 or 14%; food and beverage revenue decreased by $74,000 (after
eliminating the decrease in promotional allowances of $319,000) and other
revenue decreased by $77,000 or 43%. The decrease in revenue is the result of
the same factors described above for the three months ended June 30, 1999
The primary net decrease in costs and expenses for the six months ended
June 30, 1999 was the result of: (1) a decrease in casino operations costs of
$2,144,000 or 34%, 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
OTB and a decrease in gaming taxes; (2) a decrease in food and beverage
operations of approximately $189,000 or 14%, principally due to 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 costs of $601,000 or 14%,
principally as a result of increased bussing costs; (2) increased interest
expense of $414,000 or 253%, on the revolving line of credit which financed the
acquisition of the other half of the GHC; and (3) an increase in depreciation
and amortization of $223,000 or 35% related to the step-up in the fair value of
the net assets acquired in the acquisition of the other half of GHC.
GHC's operations have been impacted by the additional competition in
Black Hawk, including The Lodge. However, we continue to review our overall
costs at the GHC as well as eliminate areas that do not provide a meaningful
contribution to our operations, such as the OTB facility and the poker room, in
an effort to be able to successfully compete within the market place. We intend
to continue our focus on target marketing to the existing customer base of GHC
and to increase and retain our new customers. Additionally, we are working on
enhancing the overall product offered at GHC in an effort to be responsive to
the new and increased competition in Black Hawk.
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12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,837,000 during the
first six months of 1999 as compared to net cash used in operating activities of
$123,000 during the first six months of 1998. The principal reason for the
increase in cash provided by operating activities is due to an increase in
earnings before 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, our cash flow from operating activities now includes
the operations of the GHC. We previously reported the cash flow from GHC when we
received distributions as cash from investing activities, however, GHC cash flow
is now reported as cash generated from operating activities.
Net cash used in investing activities for the six months ended June 30,
1999 was $3,912,000. This included payments for construction and equipping our
gaming facilities totaling $3,566,000 and distributions to our 25% minority
interest owner of The Lodge of $774,000. The proceeds from the sale of equipment
of $49,000, payments from the City of Black Hawk for its negotiated share of
public improvements in the amount of $380,000 and $1,000 in other investing
related activities offset some of the cash we used. Net cash used in investing
activities for the six months ended June 30, 1998 was $26,172,000 and was the
result of payments of project development costs associated with The Lodge of
$19,166,000 and the acquisition of GHC for $10,000,000, offset by cash on GHC
books as of the date of acquisition of the GHC buyout of $1,726,000,
distributions from GHC of $1,169,000 and other investing activities of $99,000.
The net cash used in financing activities during the six months ended
June 30, 1999 totaled $1,443,000. Sources of funds that we generated included:
proceeds from bonds issued by the Business Improvement District totaling
$6,000,000, borrowings against the GHC's revolving line of credit of $6,573,000,
and proceeds from the borrowing of the Wells Fargo syndicated bank loan of
$47,941,000 and other proceeds of $139,000. These sources of funds were reduced
by debt payments of $5,976,000, payments against the Gilpin's revolving line of
credit of $8,874,000, payments to retire GHC revolving line of credit of
$12,706,000, payments to retire The Lodge's construction loan of $32,318,000 and
payments to refinance debt of $2,222,000. The net cash provided by financing
activities during the six months ended June 30, 1998 was $33,300,000 and was the
result of draws against The Lodge's construction loan of $17,339,000, draws
against GHC's line of credit of $17,995,000, 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 $21,000.
As of June 30, 1999 the Company had working capital of approximately
$2,527,000 as compared to $2,975,000 at June 30, 1998 after adding back accrued
building costs payable, which were funded under the Wells Fargo Bank credit
facility.
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, generally organized for the purpose of
providing financing for public improvements and services benefiting the
commercial properties within the District. The Bonds were issued in two series
with a total principal balance 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 Company used the proceeds
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.
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13
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 and
revolving commitment in the aggregate amount of $65 million ($45,286,000 was
drawn at closing to pay existing debt and accrued interest at The Lodge and GHC
totaling $32,508,000 and $12,778,000, respectively), (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 a rate based on
either the prime rate 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 7.9% at June 30, 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 per quarter reductions in
availability are $1,300,000, the next four per quarter reductions in
availability are $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 is due; (v) the Credit Agreement contains a number of
affirmative and negative covenants which, among other things, require 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, GHC 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 the availability from its revolving credit
facility are 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.
Many of 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, we began assessing the impact of the Year 2000 issue on
our operations. We have evaluated the Year 2000 issue at GHC, The Lodge Casino
and at Black Hawk Gaming's corporate offices. 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--Completed December 31, 1998
o Conversion and testing phase--August 31, 1999 (estimated)
o Final assessment--September 30, 1999 (estimated)
We have determined that approximately 15% of our 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 in the year
2000 and beyond.
The total estimated cost to achieve complete Year 2000 compliance and
replace or modify all date-related systems company wide that are not Year 2000
compliant is estimated to be $150,000. Of this amount, approximately $131,000
has been spent or committed at June 30, 1999.
11
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR 2000 ISSUE (CONTINUED)
We believe our 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
our assessment, operations could be disrupted which could have a material
adverse effect on our financial condition. We have received written assurances
from the primary supplier of our slot machines that they are not date sensitive
and that the Year 2000 issue for the majority of our revenue producing assets is
not a factor, however, the we can give no assurance in this regard. We face
third party issues such as the possibility that, among other things, electrical
and gas power will not be available to the Black Hawk community. In the event
that power is not available to the community, we have back-up gas driven
generators, which will run for approximately 15 to 20 hours between refills. If
we are unable to secure food and beverage products after exhausting our two day
inventory levels, we will attempt to secure food and beverage products from
retail outlets. Additionally, if we were to lose the use of any of our
surveillance equipment as a result of the Year 2000 rollover, we may be required
to close the casino until the matter is resolved, but we do not believe such an
event would go unresolved for more than 24 hours.
Although we have confirmed the Year 2000 compliance of most of our
vendors, no assurance can be given that our 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 us confidence that the data was processed
correctly.
We believe that the most reasonably-likely worst case scenario is that
the Year 2000 rollover would provide unreliable computer data to many of our
operating departments such as casino operations, food and beverage, hotel,
accounting, finance, facilities, and administration. In the unlikely event our
efforts to avoid this most reasonably likely worst case scenario are not 100%
successful, a contingency plan will be implemented. We are presently and have
been studying our 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, we are continuing to contact and communicate with all key
vendors regarding their Year 2000 issues and this ongoing communication may
alert us to possible future problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Our primary exposure to market risks relates to our long-term notes,
which contain variable rates. We are exposed to interest rate risk on this debt,
which totaled approximately $46 million at June 30, 1999. If market interest
rates increase, our cash requirements for interest would also increase.
Conversely, if market interest rates decrease, our cash requirements for
interest would decrease. However, at June 30, 1999 we have partially hedged our
exposure to interest rate risk by participating in an interest rate swap, under
which we receives a variable interest payment and pay a fixed interest payment
on a notional amount of $35 million. This has reduced our exposure to interest
rate risk to approximately $11 million of debt not hedged with the interest rate
swap at June 30, 1999.
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15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation arising in the ordinary
course of business. We believe these matters are covered by appropriate
insurance policies or are not deemed material.
On June 25, 1999, a complaint was filed by a casino which
operates downstream from The Lodge Casino against Black Hawk / Jacobs
Entertainment LLC ("LLC"), which owns and operates The Lodge Casino and
against John Does 1-3 which apparently are other casino projects
upstream from the plaintiff's. The complaint alleges that the plaintiff
is being damaged by subsurface water flows onto its property from The
Lodge Casino property and the properties of John Does 1-3, which are
presently under construction. The LLC, which is 75% owned by the
Company, has denied all liability and has turned the matter over to its
insurance carrier for defense. The Company does not believe the suit
has merit and will not result in any material liability to the Company.
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
--- -----------
10.99-1 Employment Agreement
27 Financial Data Schedule
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16
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: July 29, 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
14
17
EXHIBIT INDEX
No. Description
--- -----------
10.99-1 Employment Agreement
27 Financial Data Schedule