<PAGE> 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 September 30, 1996
-------------------
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: 33-57342
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.)
2060 Broadway, Suite 400
Boulder, Colorado 80302
- --------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 444-0240
--------------
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.
<TABLE>
<S> <C>
Common Stock, $.001 par value 2,481,567 shares
- ----------------------------- ----------------
Class Outstanding as of November 11, 1996
</TABLE>
<PAGE> 2
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FORM 10-Q
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995 1
Consolidated Statements of Income
for the three and nine months ended
September 30, 1996 and 1995 2
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE> 3
PART 1. - FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
- -------- ----------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,868,096 $ 2,189,648
Accounts receivable:
Gilpin Hotel Venture 137,081 104,235
Other 31,111
Income taxes receivable 89,367 45,367
Note receivable - Gilpin Gold, inc. 1,335,971
Deferred tax asset 109,867 109,867
------------ -----------
Total current assets 3,204,411 3,816,199
INVESTMENT IN AND ADVANCES TO:
Gilpin Hotel Venture 3,932,835 4,858,270
Black Hawk Gaming/Jacobs Joint Venture 1,674,361 594,361
LAND:
Leased to Gilpin Hotel Venture 1,967,689 1,967,689
Held for development:
Millsite 29 791,801 791,801
Millsite 30 and other 1,466,317 1,466,317
Millsite 32 3,568,234 3,568,234
Oklahoma 589,808 551,698
------------ -----------
Total land 10,802,603 10,764,493
OTHER ASSETS 548,315 234,998
------------ -----------
TOTAL $ 20,162,525 $20,268,321
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 58,530 $ 47,520
Current portion of long-term debt 122,061 802,980
------------ -----------
Total current liabilities 180,591 850,500
LONG-TERM DEBT 2,283,583 2,376,655
Total liabilities 2,464,174 3,227,155
------------ -----------
COMMITMENT AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT OPTIONS 273,218 666,667
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;
2,494,067 and 2,534,567 shares issued and outstanding, respectively 2,494 2,534
Additional paid-in capital 9,698,218 9,728,751
Retained earnings 7,724,421 6,643,214
------------ -----------
17,425,133 16,374,499
------------ -----------
TOTAL $ 20,162,525 $20,268,321
============ ===========
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE> 4
PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------- ----------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Gilpin Hotel Venture:
Management fees $83,595 $98,041 $248,297 $280,419
Rental income 109,220 113,870 323,690 336,905
Parking lot operation 70,000 88,804 262,608 258,743
Interest 39,528 75,744 142,426 231,299
------------------------------------------------
Total revenue 302,343 376,459 977,020 1,107,366
------------------------------------------------
COSTS AND EXPENSES:
Compensation and related costs 185,099 186,010 536,370 492,386
Other general and administrative 103,157 126,493 353,055 336,809
Interest 48,664 67,264 168,546 201,950
------------------------------------------------
Total costs and expenses 336,920 379,767 1,057,971 1,031,145
------------------------------------------------
EQUITY IN EARNINGS OF JOINT VENTURE 599,332 743,954 1,830,722 2,028,348
------------------------------------------------
INCOME BEFORE INCOME TAXES 564,755 740,646 1,749,770 2,104,568
INCOME TAXES (225,000) (285,000) (665,000) (780,000)
------------------------------------------------
NET INCOME 339,755 455,646 1,084,770 1,324,568
Costs related to common stock subject to put options (3,817) (17,354) (19,051) (80,562)
------------------------------------------------
NET INCOME ATTRIBUTABLE TO COMMON SHARES $335,938 $438,292 $1,065,719 $1,244,006
================================================
NET INCOME PER COMMON SHARE $0.13 $0.17 $0.42 $0.48
================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,494,484 2,568,667 2,508,031 2,570,977
================================================
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 5
PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------- ----------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,084,770 $1,324,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of joint venture (996,128) (1,152,281)
Changes in operating assets and liabilities:
Accounts receivable (1,735) 145,990
Note receivable Gilpin Gold, Inc. 138,568
Accounts payable and accrued expenses 11,010 (20,976)
Income taxes receivable/payable (44,000) (104,000)
--------------------------
Net cash provided by operating activitis 53,917 331,869
--------------------------
INVESTING ACTIVITIES:
Land and land improvements (38,110) (16,971)
Distributions from GHV 1,921,563 850,000
Collection on note receivable from Gilpin Gold, Inc. 1,335,971
Payments received from Gilpin Ventures, Inc. on return of investment 90,163
Contributions to capital--Gilpin Hotel Venture (123,318)
Contributions to Black Hawk Gaming/Jacobs Joint Venture (1,080,000)
Other (313,317) (334,628)
--------------------------
Net cash provided by investing activities 1,826,107 465,246
--------------------------
FINANCING ACTIVITIES:
Acquisition of treasury stock and payments upon exercise of put option (427,584) (275,000)
Payments on Oklahoma note (450,000)
Payments on long-term debt (773,992) (89,747)
--------------------------
Net cash used in financing activities (1,201,576) (814,747)
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 678,448 (17,632)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,189,648 2,363,416
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,868,096 $2,345,784
==========================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 168,546 $ 201,950
==========================
Cash paid for income taxes $ 659,000 $ 840,000
==========================
Acquisition of treasury stock $ 412,500 $ 275,000
==========================
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 6
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. and subsidiary (the
Company) was incorporated on January 10, 1991 in Colorado, to acquire gaming
properties for development, joint venture and operation. The Company completed
the construction of the Gilpin Hotel Casino (the Casino) in Black Hawk,
Colorado, in September 1992 and the Casino opened October 1, 1992. The Casino
is owned by the Gilpin Hotel Venture (GHV), in which the Company owns a 50%
interest. In November 1994, GHV acquired an adjacent casino facility, which was
put into operation in January 1995.
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 a fair presentation of the financial position of the Company
at September 30, 1996, and the results of its operations for the three and nine
months ended September 30, 1996. The accompanying unaudited consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiary Native American Management Corp. (NAMC). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the notes to the consolidated financial statements contained
in the Company's Form 10-K for the year ended December 31, 1995.
Joint Venture --- The Company accounts 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 ownership in GHV.
-4-
<PAGE> 7
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(CONTINUED)
3. GILPIN HOTEL VENTURE
Summarized financial information relating to GHV is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Current assets $ 2,418,079 $ 2,431,052
Gaming facility, net 8,887,982 9,211,930
Goodwill 1,402,396 1,481,178
-------------- ------------
$ 12,708,457 $ 13,124,160
============== ============
LIABILITIES AND VENTURERS'
INVESTMENTS AND ADVANCES
Current liabilities $ 2,312,188 $ 2,267,980
Long-term debt 5,251,521 3,860,561
Venturers' investments and advances 5,144,748 6,995,619
-------------- ------------
$ 12,708,457 $ 13,124,160
============== ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,486,930 $ 7,853,016 $22,237,876 $ 23,180,757
Expenses (6,813,893) (6,966,536) (20,245,620) (20,876,195)
----------- -------------- ----------- ------------
NET INCOME $ 673,037 $ 886,480 $ 1,992,256 $ 2,304,562
=========== ============== =========== ============
</TABLE>
The Company's equity in earnings of GHV as reflected in the consolidated
statements of income has been adjusted for the Company's share of fees and
rentals it receives from GHV. Certain items in the September 30, 1995 financial
information have been reclassified to conform to the September 30, 1996
presentation.
-5-
<PAGE> 8
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(CONTINUED)
4. OTHER MATTERS
Oklahoma property acquisition --- 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. Assuming the Company is successful in placing the land into trust
for the Tribe, the Company intends to open a 53,000 square foot, high stakes
Indian bingo hall, in a re-development area of downtown Oklahoma City known as
"Bricktown". The Company continues to negotiate with the Sac and Fox Nation
Indian Tribe, however, during the second and third quarters of 1996,
negotiations were not progressing as the Company had hoped. The exceedingly
difficult inter-relationships between the Tribe, the Bureau of Indian Affairs,
and the National Indian Gaming Commission have caused the Company to reconsider
the overall economics of this transaction. The Company is now considering other
uses of the property and is unable to determine if the property will be in
trust before the end of 1996, if at all. Presently, the Company is pursuing
alternative uses of the property or its sale in which event the Company
believes it can recoup its cash cost, however can give no assurance in this
regard.
Casino acquisition and refinancing --- During 1994, GHV acquired an
adjacent casino for $7,600,000, which was substantially financed by seller debt
of $4,500,000. The Company loaned $1,495,000 to Gilpin Gold, Inc. (GGI), an
affiliate of Gilpin Ventures, Inc., the Company's joint venture partner in GHV.
The loan was made to finance Gilpin Gold Inc.'s share of costs to acquire the
land underlying the adjacent casino. The note required monthly interest
payments beginning in December 1994 through February 1995 and beginning in
March 1995, payments increased to include principal payments, at an interest
rate of 10% per annum. During the first quarter of 1996 GHV was successful in
obtaining a third party equipment financing loan totaling $2,125,000. The terms
of the loan require payments of principal and interest of 11% payable
approximately $41,000 monthly with the final payment due in 2001. The Company
was repaid the majority of its loan from GGI from the proceeds of the third
party equipment financing loan during the first quarter of 1996 and received
the remaining balance of the loan during the second quarter.
Jacobs Entertainment, Inc. Joint Venture --- During 1994, the Company
signed a joint venture agreement with Jacob's Entertainment, Inc. (Jacob's) of
Cleveland, Ohio to develop a major hotel/casino/parking complex in Black Hawk,
Colorado on Millsites owned by the Company and Jacobs. After several
modifications of the original plan, occasioned largely by the various
regulatory agencies involved, the project has now evolved into a single phased
50 room hotel/casino, with approximately 850 slot machines, 22 table games, 3
restaurants, 4 bars, three floors of underground parking and an attendant
two-story parking structure on adjacent Millsite 30. Completion of financing
and construction is anticipated in the late fall of 1996 with completion of the
project projected for the spring of 1998. (See "Liquidity and Capital
Resources-Jacobs Joint Venture" under Management's Discussion and Analysis of
Financial Condition and Results of Operations).
5. COMMON STOCK SUBJECT TO PUT OPTIONS
On December 30, 1994, the Company purchased Millsite 32 in Black Hawk,
Colorado. Millsite 32 is an approximate 35,000 square-foot parcel of land
adjacent to the Company's Millsite 31. The land was
-6-
<PAGE> 9
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(CONTINUED)
purchased under a bankruptcy court order for $3.5 million in the form of
$1,000,000 in cash, a $1,400,000 10-year note convertible into the Company's
common stock at $20 per share and 100,000 shares of the Company's $.001 par
value common stock. The stock can be sold back to the Company by the holder, if
not sold in the market, for $11 per share at the rate of 12,500 shares per
quarter over 2 years. During the quarters ended September 30, 1996 and 1995, a
portion of the Company's cost related to common stock subject to put options,
$3,817 and $17,354, respectively, is attributable to that period's accretion of
the discount of the fair market value of the common stock issued on the date of
the transaction and the exercise price of the put. Accordingly, the current
quarter computation of net income per common share reflects this amount as a
deduction from net income only when computing net income per common share. The
effect of the accretion of the discounts of $3,817 and $17,354 was immaterial
for the respective quarters. Moreover, the accretion of discounts of $19,051
and $80,562 reduced net income per common share by approximately $.01 and $.03,
respectively, for the nine months ended September 30, 1996 and 1995.
-7-
<PAGE> 10
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
IMPACT ON OPERATIONS OF THE COMPANY DUE TO PLANNED CONSTRUCTION
EFFORTS ON MILLSITES 31, 32, 34 AND POSSIBLY MILLSITE 30
As a result of the complex site development issues related to the
Black Hawk Gaming/Jacobs Joint Venture (Jacobs project), there has been a
revision in the original three-phase project. The Jacobs project may commence
with the development of a two story parking structure on a significant portion
of Millsite 30 during the fourth quarter of 1996, however this may be delayed
until the third or fourth quarter of 1997 depending upon the construction
schedule of the Jacobs project (see below discussion). The venturers have been
working to determine the ultimate timing and phasing of this portion of the
project during the third and fourth quarters of 1996. Should development
commence on a parking structure on Millsite 30, the Company's operations at the
Casino will more than likely be significantly impacted. The Company may realize
reduced management fees, parking fees and rental income as these elements of
the Company's revenues are derived from the Casino. Additionally, the Company's
share in the equity in earnings of the joint venture would more than likely
decline as a result of reduced business at the Casino resulting from
construction. If and when construction commences on Millsite 30, the Company
intends to stage the construction of the parking structure in such a manner as
to minimize the impact on the operations of the Casino, however, it can give no
assurance in this regard.
Additionally, the City of Black Hawk through its Business Improvement
District (BID), is presently constructing significant improvements to Main
Street in Black Hawk. These efforts have been ongoing for most of 1996 and will
soon be in front of the Casino. The BID is making these improvements on behalf
of the City to ultimately benefit all casinos on Main Street. Presently, the
BID is running approximately 6 to 8 months behind schedule and is considering
terminating its efforts in late November 1996 and recommencing construction in
the early spring of 1997, with an anticipated completion date of Main Street by
Memorial Day 1997. The Company believes the BID will terminate its efforts in
November and begin the Main Street improvements in front of the Casino in the
early spring of 1997, however it can give no assurance in this regard. While
the Company's operations for 1997 have been affected by the BID improvements
made so far during 1996, it is anticipated that operations will be further and
more adversely impacted when the street directly in front of the Casino is
under construction beginning in March 1997.
Therefore, the following discussion of the comparison of the Company's
operations for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995 as well as the quarterly comparisons between
September 30, 1996 and 1995 should be read with the recognition that: (1)
should the Company commence construction on the planned parking structure on
Millsite 30 and the hotel/casino complex on Millsites 31, 32 and 34, and/or (2)
should the BID begin repairing Main Street in front of the Casino during the
fourth quarter of 1996 or the beginning
-8-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
of the second quarter of 1997, operations of the Casino will more than likely
be significantly and adversely affected with respect to one or both of these
events.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
Income before income taxes for the nine months ended September 30,
1996 is less than the comparable period of 1995 by approximately $355,000.
Total revenue of the Company has declined by approximately $130,000 or 12%;
total costs and expenses have increased by approximately $27,000 or 3% and the
Company's share of the equity in earnings of Joint Venture has declined by
approximately $198,000, or 10%. The combination of these three elements of the
Company's consolidated statements of income comprise the approximate $355,000
decline in the Company's income before income taxes. The following is a
discussion of the various changes in the components of the Company's
consolidated statements of income for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995.
REVENUES
The Company's current period total revenue has declined by 12% or
$130,000 as compared to the comparable period of 1995. The decline in the
Company's management fees of approximately $32,000 and rental income of $13,000
is marginally offset with the increase in the parking lot operation of $4,000.
Generally, management fees and rental income decline as operations of the
Casino decline. The substantial portion of the decline in the Company's
revenues for the current period is the result of a decline in interest income
of approximately $89,000. During the nine months ended September 30, 1995 the
Company had an outstanding note receivable from an affiliate of its joint
venture partner totaling approximately $1,500,000 on which the Company was
earning 10% interest. The major portion of this note was repaid during the
first quarter of 1996, with the remaining balance repaid during the second
quarter.
Other components of revenue of the Company, which remained relatively
constant as compared to the comparable period of 1995, were management fees and
rental income. Management fee income is computed based upon 11% of the defined
volume of the various departments of the Casino's operations reduced by defined
expenses. Usually as the volume of business of GHV increases or decreases, the
management fee earned by the Company will fluctuate accordingly. However, as
costs and expenses of the Casino for the nine months ended September 30, 1996
declined by approximately $631,000 and the total revenue generated by the
Casino decreased by $943,000, the management fee earned by the Company for the
current period, after elimination of the amount of such fee attributable to the
Company's 50% interest in the Joint Venture, declined by $32,000.
The Company and its joint venture partner are the co-owners of the
land underlying the Casino. The Joint Venture agreement provides for GHV to pay
a monthly land rental fee equivalent
-9-
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
to 7% of the net gaming revenues of the Casino. Rental income attributable to
the land underlying the Casino is reported after elimination of the amount of
such fees attributable to the Company's 50% interest in the Joint Venture. The
Company's rental income for the current period was approximately $13,000 less
than the comparable period of 1995. While net gaming revenues of the Casino for
the current period have declined by approximately $936,000 as compared to the
same period last year (as discussed in more detail below), the overall impact
on the Company's rental income was not material.
The other principal revenue account of the Company is the parking fees
it receives from the Joint Venture for the use of Millsites 30, 31, and on an
as needed basis, Millsite 32, as parking for the patrons of the Casino. In
November 1995, the Company agreed to allow the use of Millsite 32 for parking,
on a trial basis, for a monthly charge of $10,000 to determine if the
additional parking for the use of Millsite 32 was warranted. Additionally, the
Joint Venture utilized Millsite 32 for January and February, however, as the
Company was conducting pre-development work on Millsite 32 during March,
parking has not been available on Millsite 32 since that time. Additionally,
the BID efforts in the City will cause the Company to lose some parking on
Millsite 30 due to the rerouting of Main Street onto the Company's property and
accordingly, the amount the Company charges the Casino will be reduced by the
number of spaces lost to the City and its efforts constructing Main Street. The
Company is unable to commit to any long term parking arrangements for the use
of Millsites 30, 31 and 32 with the Casino due to the development efforts
currently underway with the Jacobs Joint Venture (see below discussion).
The remaining portion of the Company's revenue is the result of
interest it receives on temporary cash investments. During the fourth quarter
of 1994 the Company advanced $1,495,000 to an affiliate of its joint venture
partner in order to effectuate the closing for the purchase of the Pick-A-Dilly
casino. The Company earned 10% interest on this note, plus a fee for having
made the loan to its joint venture partner, which amounts are reflected in the
first nine months of 1995. In February 1996 a significant portion of the
principal balance of this note was repaid, and accordingly interest income for
the current period is less than the comparable period of the prior year. As the
Company expends funds on other projects, particularly the Black Hawk/Jacobs
Joint Venture (see below), interest income will continue to decline.
COSTS AND EXPENSES
Total compensation and related costs increased for the nine months
ended September 30, 1996 by approximately $44,000 due principally to a
negotiated severance package with the Company's former General Manager of the
Casino of $30,000 and other increases of $14,000; other general and
administrative costs increased by $16,000; and interest costs declined by
$33,000 for an overall increase in costs and expenses of approximately $27,000
for the nine months ended September 30, 1996 as compared to the comparable
period of 1995.
-10-
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
EQUITY IN EARNINGS OF JOINT VENTURE
By virtue of the Company's 50% ownership of GHV, generally accepted
accounting principles require the Company 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
receives other revenue from the joint venture, as discussed above, equity in
earnings of Joint Venture accounts for substantially all of the Company's
income before income taxes. Summarized financial information on the Joint
Venture is provided in Note 3 to the financial statements included within this
report. See the introductory paragraphs to "Results of Operations" above.
During the nine month period ended September 30, 1996 the Casino's
total revenues decreased by approximately $943,000 (4%) while total expenses of
the Casino decreased by approximately $631,000 (3%) resulting in a net decrease
in the net income of the Casino of approximately $312,000, or 14% over the
comparable period of 1995.
The Company attributes the approximate $943,000 decrease in revenues
to a decline in slot machine play of approximately $1,064,000, off-track
betting revenue of approximately $33,000, and food and beverage revenue of
$1,000, offset by an increase in games revenue of $155,000.
The most significant reasons for the decrease in total revenues for
the Casino are due to a decline in available customer parking as well as the
continuously changing competitive environment within the Black Hawk/Central
City gaming districts. Beginning in the second quarter and continuing through
the third quarter of the current year, the Casino's available customer parking
has diminished by approximately 29% from the comparable period of the previous
year. The declines in available Casino customer parking is primarily due to a
significant Black Hawk Business Improvement District (BID) "Streetscape"
project on Black Hawk's Main Street. The project began early in the second
quarter of 1996 and continues through the third quarter. Presently, the BID is
uncertain whether it will continue work through the winter in Black Hawk or
not. Assuming, the BID discontinues the project, the estimated completion date
of the main street improvements is Memorial Day 1997. Additionally, during the
period of reduced parking for the Casino, several of the larger competing
casinos in the Black Hawk gaming district have brought on-line a significant
amount of additional customer parking spaces that were not affected by the
"streetscape" project.
The approximate decrease of $631,000 in Casino expenses is due
principally to a decline in payroll costs of $279,000, direct marketing related
expenditures of $102,000, gaming taxes (due to a decline in gaming revenues) of
$163,000, and a decline in net progressive jackpot activity of $122,000.
Additional significant cost reductions were realized in costs of food and bar
sales of $50,000, rent of $63,000, management related fees of $70,000, net bad
checks of $92,000, and parking fees of $13,000. These reductions in costs were
offset by increases in food and bar complimentary sales of $24,000 and $67,000
respectively, interest expense of $147,000 and
-11-
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
depreciation of $72,000.
The competitive environment in the Black Hawk/Central City gaming
districts increased significantly during 1995 and continues into 1996. The
Joint Venture implemented many new programs and continues to revise its
marketing packages in an effort to maintain a level of competitiveness as well
as maintain its market share.
Many of these programs have not proven to be beneficial to GHV's
overall operations. In late 1995 and early 1996, GHV reduced and/or
discontinued several programs, began to rearrange the Casino layout and
instituted what it believes to be significantly improved operational
procedures. The Company also implemented several cost cutting programs in an
effort to improve efficiency. The Company believes these efforts are being
realized in the nine months ended September 30, 1996 which is represented by
the overall decline in Casino expenses of $631,000 as discussed above.
The ongoing success of GHV may be due to parking availability provided
by Millsites 29, and 30 (however, see above discussion), implementation of a
newly revised marketing plan, constantly analyzing and monitoring costs,
controls and procedures while maintaining a continuing philosophy of providing
a congenial, relaxed and exciting environment for gaming customers. Black Hawk
has been the leading city in Colorado gaming, however, increased competition in
the area continues to be a significant factor in the ongoing success of GHV.
In the opinion of management, GHV's operations for the nine months
ended September 30, 1996 are competitive relative to other casinos in Black
Hawk as well as the other two Colorado gaming districts. GHV's adjusted gross
proceeds (AGP) (total gambling receipts less jackpots/winnings, less restocking
monies for slot machines, plus monies collected from table games and deposited
with the cashier) averages for slot machines and table games remains in excess
of the overall gaming AGP averages for the state and the city of Black Hawk.
INCOME TAXES
The nine month income tax expense is based upon a combined federal and
state tax rate approximating 37%. During the third quarter of 1994, the
Internal Revenue Service commenced an audit of the income tax returns of GHV
for 1992, 1993 and 1994. GHV and the IRS have reached a settlement for
findings, excluding the issue of complimentary sales, in GHV's 1992 income tax
return totaling approximately $158,000 of additional taxable income, which
findings carried forward into 1993 and 1994 are approximately $144,000 and
$137,000, respectively. The additional taxable income principally represents
temporary differences that will reverse in future years. No determination of
the outcome of the complimentary sales issue or the examination of GHV's 1993
or 1994 income tax return can be made at this time. The issue involving the
deductibility of complimentary sales is being disputed nationally by the gaming
industry and is not expected to be resolved in the near term nor without
political involvement. GHV is unable to determine when the examination will
conclude and can give no assurance that any proposed adjustments and/or tax
liabilities will not be material.
-12-
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET INCOME PER SHARE OF COMMON STOCK
Results of operations for the nine months ended September 30, 1996
yielded net income per common share of approximately $.42 based on weighted
average shares outstanding of 2,508,000, while earnings per share for the
comparable nine months of 1995 were approximately $.48 based on weighted
average shares outstanding of approximately 2,571,000. In connection with the
purchase of Millsite 32, the Company issued 100,000 shares of its $.001 par
value common stock. These shares can be sold back to the Company by the holder,
if not sold in the market, for $11 per share at the rate of 12,500 shares per
quarter for two years. During the nine months ended September 30, 1996 and
1995, a portion of the Company's cost related to common stock subject to put
options, $19,051 and $80,562, respectively, represents the period's accretion
of the discount of the fair market value of the common stock issued on the date
of the transaction and the exercise price of the put. Accordingly, the
computation of the quarterly net income per common share reflects this amount
as a deduction from net income only when computing net income per common share.
The respective effect of the accretion of the discount of $19,051 and $80,562
for the nine month period ended September 30, 1996 and 1995 was $.01 and $.03,
respectively.
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 1995
Generally, no activity occurred during the quarter ended September 30,
1996 that has not otherwise been discussed above in the comparison between the
nine-month period of 1996 to the nine month period of 1995 with respect to the
Company's overall operations; however, the following is a discussion of
significant factors affecting the Casino's operations for the third quarter of
1996 as compared to the third quarter of 1995. See the introductory paragraphs
to 'Results of Operations" above.
EQUITY IN EARNINGS OF JOINT VENTURE
The net income of the Casino for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995 shows a decrease
in the overall revenues of approximating $366,000, offset by a corresponding
decrease in the costs and expenses of the Casino of $153,000, resulting in a
net decrease in the net income of the Casino of $213,000 for the quarter ended
September 30, 1996.
Generally, the decline in the revenues for the current quarter is due to
decreases in slot revenue and other gaming revenue of approximately $410,000
and $16,000, respectively, offset by an increase in food and beverage revenue of
$60,000. As discussed above many of the marketing programs implemented by the
Casino have not proven to be beneficial to GHV's overall operations. In late
1995 and early 1996 GHV reduced and/or discontinued several programs, began to
rearrange the Casino layout and instituted new operational procedures. The
Company continues to pursue new and creative marketing packages in an effort to
find the right mix to generate new Casino patrons as well as to gain back
previous patrons of the Casino who have been lost to competitive forces within
the Black Hawk market place.
-13-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In addition to implementing new marketing programs and revising old
ones, GHV embarked on a program to significantly reduce overhead of the
Casino's operations. These efforts are proving-to be worthwhile as GHV reduced
its overall overhead during the current quarter by approximately $152,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $54,000 for the nine
months ended September 30, 1996 and $332,000 for the comparable nine months of
1995.
Cash flows provided by investing activities for the nine months ended
September 30, 1996 were $1,826,000 and were primarily the result of
distributions from GHV of $1,921,600 and the collection of the balance of the
note receivable from Gilpin Gold, Inc. of $1,336,000. These increases were
offset principally by contributions to the Black Hawk Gaming/Jacobs Joint
Venture of $1,080,000 and the pursuit of other projects totaling $313,000 and
improvements to land totaling $38,000. During the nine months ended September
30, 1995 the Company provided cash of $465,000 in its investing activities,
principally due to distributions from GHV of $850,000 and the receipt of
payments from Gilpin Ventures, Inc. on return of investment of $90,000, offset
by contributions to capital of GHV totaling $123,000; and other expenditures
on projects and land improvements totaling approximately $352,000.
The net cash used in financing activities during the nine months of
1996 amounted to $1,202,000 and is principally the result of the acquisition of
treasury stock and common stock "put" to the Company totaling $428,000 and
payments on long-term debt of $774,000. Financing activities used $815,000 of
cash in the nine months of 1995, principally for the repayment of the Oklahoma
City land note totaling $450,000; acquisition of treasury stock and common
stock put to the Company totaling $313,000 and other payments on long-term debt
totaling $90,000.
The Company's principal sources of capital consist of cash flow
distributions from GHV and cash generated from its rental and management
operations. As of September 30, 1996 the Company has working capital of
$3,026,000 as compared to $2,965,700 at December 31, 1995. In the nine months
of 1996 the Company received $1,921,600 of distributions from GHV. Of this
amount, $1,246,600 is the result of the distribution of loan proceeds and
$675,000 is the result of profit distributions.
During the first two quarters of 1996 the Joint Venture borrowed
approximately $2,125,000, secured by the majority of the equipment at the
Casino. The Company believes its current working capital position and
distributions from GHV will be sufficient to meet its short term requirements,
which are operating expenses, principal and interest payments on indebtedness
and various project development costs, as well as additional expenditures to
identify and pursue new gaming opportunities. However, it is anticipated that
any significant development of Millsites 30, 31, and 32 or the Company's
Oklahoma City property will require additional financing, other joint venture
partners, or both.
-14-
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The recoupement provision of the GHV agreement provides the Company
with a small amount of working capital in addition to the distributions it
receives from GHV. The Company's joint venture partner is obligated to repay a
remaining balance of approximately $1,244,000 for its proportionate share of
the development account, but only based upon 40% of the after tax profits of
the Casino, if any. There have been no repayments against the development
account during the nine months ended September 30, 1996.
DISPUTED ISSUES BETWEEN THE COMPANY AND ITS JOINT VENTURE PARTNER
OF THE CASINO
The Company's joint venture partner (GVI) is withholding payment
against the development account discussed immediately above, and it is
disputing certain expenses paid by, and distributions made to the Company. The
Company has requested that GVI prepare a detailed listing of the dates and
amounts of the disputed matters, which if not soon resolved by negotiation will
be submitted by the Company to arbitration. Presently, the Company is unable to
determine the amounts disputed by GVI.
Additionally, the Joint Venture agreement with GVI provides that
certain performance standards be met by the Company as the general manager of
the Casino. Among other things, it provides that if for two consecutive
quarters the total revenues or net income of GHV are not at least 80% of
budgeted amounts for the current year the management agreement is subject to
review by the Policy Board. During the second and third quarters of 1996, the
net income of GHV was less than 80% of budgeted amounts for the respective
periods. If the Policy Board deems that the failure to meet the standard is not
the result of extenuating circumstances, and the parties disagree, the matter
will be immediately submitted to arbitration. As discussed above, the Company
believes that the efforts of the BID have had a significant and substantial
adverse effect on the operations of GHV, especially for the second and third
quarters of 1996. Accordingly, the Company does not presently anticipate that
the management agreement with GHV will be subject to review by the Policy Board
of GHV.
JACOBS JOINT VENTURE
In December 1994, the Company entered into a joint venture agreement
with Jacobs Entertainment, Inc. ("Jacobs") of Cleveland, Ohio to develop a
major hotel/casino/parking complex in Black Hawk. The joint venture developed a
preliminary master plan, and on March 7, 1995 approved Phase 1 of the master
plan and agreed to continue to study the development of a three-phase project
to be built on Millsites 30, 31, 32, and 34. Jacobs purchased the approximate
10,000 square foot parcel known as Millsite 34, which adjoins Millsite 32, in
March 1995 for approximately $1,000,000. The Jacobs Joint Venture agreed to
conduct further studies of the Master Plan by June 1, 1995, with the intention
of: (i) conducting additional market analyses; (ii) undertaking a thorough
legal analysis of the complex real estate, zoning, permitting and environmental
issues presented by the project; and (iii) preparing preliminary drawings and
specifications for the Phase 1 development designed to lead to a detailed
construction budget, schedule and approach to the project. The second phase of
the project was changed to accommodate certain infrastructure requirements of
the city of Black Hawk and other state and federal agencies. These changes have
resulted in a redefinition of the original project. Presently, the Company and
-15-
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Jacobs intend to move forward to a revised version of the project which will
take into account the changes required by the various agencies discussed above.
Various changes to Phase 1 occurred during the third quarter of 1995 which were
essentially a combining of Phase 1 and 2 of the original project. Revised Phase
1 of the project is now projected to encompass Millsites 31, 32, and 34. The
presently contemplated plan for revised Phase 1 is to construct a 50 room
hotel/casino, with three floors of underground parking for approximately 500
cars. As a result of the refinements occurring on Phase 1, the Company has
decided to incorporate a two-story overflow parking facility on approximately
40,000 square feet of Millsite 30 into the Jacobs project.
There are many infrastructure and financing considerations to be
resolved before the Company begins construction on Millsites 31, 32 and 34 and
before the successful completion of the project contemplated with Jacobs can be
realized. Since commencement of the project, the Company has funded its share
of the Jacobs Joint Venture costs, totaling $1,377,000 through September 30,
1996 ($1,647,500 through October 31, 1996) as well as an additional $297,000 in
costs which were incurred prior to the Jacobs Joint Venture project, out of
current working capital and/or funds generated by operations. Presently, the
total project costs are estimated to be approximately $62,000,000.
The Joint Venture hopes to bring to fruition the resolution of several
interrelated local, state and federal issues surrounding the project during the
fourth quarter of 1996. During the first and second quarters of 1996 the Jacobs
Joint Venture successfully completed a land trade with the Colorado Department
of Transportation (CDOT) which enhanced the developable ground of the project
and widened CDOT's right-of-way along state highway 119, the main highway
leading into the Black Hawk/Central City gaming area. Additionally, the Joint
Venture received approval from the Black Hawk City Council for its Planned Unit
Development (PUD) for the project and completed the City's platting and
re-zoning requirements late in the first quarter of 1996. The Joint Venture is
now pursuing financing plans for the project. Assuming the successful
resolution of the remaining development issues, completion of the development
of Millsites 31, 32 and 34, as well as the construction of the two story garage
facility on 44,000 square feet of Millsite 30 is projected to be in the spring
of 1998.
Prior to commencing construction and as pre-development efforts
continue, the Company and Jacobs are jointly pursuing financing of the project
through public and/or private sources. In the Company's opinion the current
market for financing potential gaming projects such as this are very difficult.
The cash requirements of a project of this magnitude are presently beyond the
Company's existing cash flow capabilities. Assuming sources of financing can be
found, the Company would more than likely incur significant additional debt
and/or may realize dilution of its current equity position depending upon the
final structure of the financing.
-16-
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INVESTMENT OF CAPITAL INTO THE COMPANY BY JACOBS ENTERTAINMENT, LTD.
On November 12, 1996 the Company concluded its financing arrangement
with Diversified Opportunities Group Ltd. (DOGL), an affiliate of Jacobs
Entertainment Inc. (Jacobs). Jacobs is the joint venture partner, with the
Company, in the development of the casino on Millsites across from the Gilpin
Hotel Casino, all as more fully described above.
Under the Agreement, the Company issued 190,476 shares of its
restricted common stock for $1,000,000 ($5.25 per share) and also issued a
$1,500,000 promissory note convertible, as discussed below, into shares of the
Company's Common Stock at $5.25 per share. Further, DOGL is committed to
advance up to an additional $4,500,000 on the same basis when funds are needed
by the Company to meet its share of joint venture costs. Under the terms of
the agreement, Jeffrey P. Jacobs, President of Jacobs Entertainment, Inc. was
elected Chief Executive Officer of the Company and Vice-Chairman of its Board of
Directors. Mr. Jacobs and two persons nominated by him were also elected to the
Board of Directors. In addition, the agreement provides for existing officers
and directors of the Company, to purchase up to $750,000 of convertible notes
under terms similar to those offered to Jacobs. Jacobs has also agreed to
contribute one-half of its interest in the joint venture (see above) to the
Company, thereby increasing the Company's ownership of the project to 75%.
The conversion feature with respect to the second note (also $5.25 per
share) is subject to shareholder approval which will be sought as soon as
possible. In addition, conversion of all the notes (including those purchased by
current officers and directors) is subject to satisfactory resolution, in DOGL's
sole but reasonable discretion, of an investigation which is being conducted
with respect to certain previous activities of the Casino. The Casino has been
made aware that the Colorado Division of Gaming (Division) is conducting an
investigation into its past check cashing and bad check collection practices of
the Casino or certain of its personnel and agents. No proceedings have been
initiated against the Casino in any judicial or administrative forum as of the
date of this Form 10-Q, although financial penalties and/or license suspension
or revocation could result if material charges, such as extending credit by the
Casino, are established. The Casino will vigorously contest any remedial actions
sought by the Division but the outcome of this matter is not presently
determinable.
Upon conversion of the notes, the Board of Directors of the Company
will be expanded to nine members from the current seven. Adequate vacancies
will be created by an action of the Company's Shareholders to accomplish this
change. If the notes are converted, DOGL will own 1,333,333 shares of the
Company's then outstanding Common Stock (or approximately 30%), and have the
right to appoint 5 nominees to the Board of Directors.
-17-
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
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:
27 Financial Data Schedule
(b) Reports on Form 8-K:
(1) August 30, 1996
-18-
<PAGE> 21
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: November 11, 1996 By: /s/ ROBERT D. GREENLEE
-------------------------------------------
Robert D. Greenlee, Chairman of the Board
of Directors and Chief Executive Officer
/s/ STEPHEN R. ROARK
----------------------------------------------
Stephen R. Roark, President and Chief
Financial Officer
-19-
<PAGE> 22
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1996 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH SEPTEMBER 30, 1996 FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,868,096
<SECURITIES> 0
<RECEIVABLES> 336,315
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,204,411
<PP&E> 10,802,603
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,162,525
<CURRENT-LIABILITIES> 180,591
<BONDS> 2,283,583
0
0
<COMMON> 2,494
<OTHER-SE> 17,422,639
<TOTAL-LIABILITY-AND-EQUITY> 20,162,525
<SALES> 2,665,316
<TOTAL-REVENUES> 2,807,742
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 889,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168,546
<INCOME-PRETAX> 1,749,770
<INCOME-TAX> 665,000
<INCOME-CONTINUING> 1,084,770
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084,770
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
