<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996 Commission File No. 33-57342
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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 Identification No.)
incorporation or organization)
2060 Broadway, Suite 400, Boulder, Colorado 80302
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(Address of principal executive offices) (Zip code)
(303) 444-0240
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock $.001 Par Value
Class A Warrants
Class B Warrants
------------------------------
(Title of Classes)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 12, 1997, was approximately $7,948,400 based upon the
reported closing sale price of such shares on the NASDAQ National Market System
for that date. As of March 12, 1997, there were 2,672,043 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: -NONE-
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
1996 Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Item Description Page
- ---- ----------- ----
<S> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a vote of Security Holders . . . . . 15
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 16
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 18
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . 33
Item 10. Directors and Executive Officers Of the Registrant . . . . . 34
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 39
Item 13. Certain Relationships and Related Transactions . . . . . . . 41
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 43
</TABLE>
<PAGE> 3
Item 1. Business.
A. Introductory Statement.
Black Hawk Gaming & Development Company, Inc. (the "Company") was
incorporated on January 10, 1991 in Colorado for the purpose of acquiring
gaming properties for development, joint venture and operation. The Company's
initial activities were concentrated on acquiring, financing, developing and
then operating the Gilpin Hotel Casino ("Casino"). Improvements and
construction of the 21,000 square foot Casino started on February 1, 1992, were
completed in September, 1992, and gaming operations commenced on October 1,
1992. The Company's ownership in the Casino is through a 50% interest in the
Gilpin Hotel Venture, which is a joint venture ("Joint Venture") with Gilpin
Ventures, Inc. ("GVI"), an unaffiliated company.
On November 7, 1994, the Joint Venture acquired an adjacent casino
property, consisting of a building and related casino equipment, from Dolly's
Casino, Inc. (Dolly's). Also, the Company and an affiliate of its joint
venture partner, Gilpin Gold, Inc. ("GGI"), each acquired a 50% interest in the
land underlying the casino and now rent the land, as well as the land under the
Casino, to the Joint Venture for a total of 7% (3 1/2% each) of gaming
revenues. The Joint Venture acquired the Casino building and equipment for
$4.6 million, $4.5 million of which was financed by the seller. The Company
acquired its interest in the land for cash of $1.5 million. The Joint Venture
spent approximately $1,000,000 to connect the two buildings and complete
interior modifications. These were completed and the new addition opened for
business in late January, 1995. The Company manages the Casino for 11% of
defined gaming revenues.
Until formation of the Black Hawk/Jacobs Entertainment LLC venture
described immediately below, the other primary properties of the Company
consisted of Millsites 29, 30, 31 and 32. All four are undeveloped parcels in
the core gaming district of Black Hawk and separated by Main Street from the
Gilpin Hotel Casino. The Company owns a 50% undivided interest in Millsite 29
with GGI; the Company owned 100% of Millsites 30, 31 and 32. In December,
1994, the Company announced it had signed a joint venture agreement with Jacobs
Entertainment, Inc. ("Jacobs") of Cleveland, Ohio to develop a major
hotel/casino/parking complex in Black Hawk (hereinafter the "Black Hawk/Jacobs
Project"). The proposed development is to be built on part of Millsite 30 and
all of Millsites 31, 32, and 34. Jacobs purchased Millsite 34 (which is
adjacent to Millsite 32) on March 7, 1995. It is anticipated that the entire
cost of the Black Hawk/Jacobs Project, including land costs, will approximate
$67 million.
Except for the historical information contained herein, the matters
set forth in this Report include forward-looking statements within the meaning
of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially. These risks
and uncertainties are detailed throughout this Report and will be further
discussed from time to time in the Company's periodic reports filed with the
Commission. The forward-looking statements included in this Report speak only
as of the date of filing. Such can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussion of strategy. See, e.g., "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Black Hawk/Jacobs Project." In particular, no assurance can be given that the
anticipated results covered by the forward-looking statements concerning the
Casino
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will be achieved or that construction of the Black Hawk/Jacobs Project will
proceed on schedule or within budget.
B. Activities During Fiscal 1996.
The Company's activities during the year ended December 31, 1996, in
addition to managing the Casino, were directed to:
(i) continuing the development and permitting of the
Black Hawk/Jacobs Project in order to develop the substantial land
position assembled by the Company and Jacobs;
(ii) undertaking and completing arrangements ("the
Purchase Agreement") which provided the Company with equity and debt
financing necessary to meet its obligations with respect to the Black
Hawk/Jacobs Project;
(iii) negotiating and completing an agreement ("the LLC
Agreement") with Jacobs regarding the ownership, financing and
management of the Black Hawk/Jacobs Project; and
(iv) participating in obtaining significant debt funding
from a major financial institution required by the Black Hawk/Jacobs
Project (the "Construction and Revolving Credit Loan").
Each of the three agreements mentioned above is important to the
future of the Company, and each is summarized below:
SIGNIFICANT PROVISIONS OF PURCHASE AGREEMENT. Under terms of the
Purchase Agreement, Diversified Opportunities Group Ltd. ("Diversified"), an
assignee of Jacobs Entertainment Ltd., purchased 190,476 shares of the
Company's Common Stock for $5.25 per share--a total investment of $1,000,000.
These shares represent an amount equal to approximately 7% of the Company's
Common Stock now outstanding.
In addition, at closing on November 12, 1996, Diversified:
(i) purchased a $1,500,000 Convertible Note from the
Company which is convertible as described below into 285,714 shares of
the Company's Common Stock at $5.25 per share; and
(ii) agreed, subject to shareholder approval which was
obtained on January 13, 1997, to purchase an additional $4,500,000
Convertible Note from the Company which is convertible as described
below into 857,143 shares of the Company's Common Stock at $5.25 per
share.
Therefore, if both Convertible Notes are converted, and assuming no
additional issuances, Diversified will own an aggregate of 1,333,333 shares of
the Company's Common Stock or 33.7% of its Common Stock outstanding (after
giving effect to the conversion of notes to be issued to Messrs. Greenlee, Day
and Roark as described below).
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Diversified may convert all or a part of the Convertible Notes into
Common Stock at any time. Moreover, the Convertible Notes are automatically
convertible into Common Stock upon the occurrence of certain conditions
primarily including resolution in Diversified's sole but reasonable discretion,
of an investigation which is being conducted with respect to certain activities
of the Casino of which the Company is the manager. The Casino has been
investigated by the Colorado Division of Gaming ("Division") regarding certain
of its check cashing and debt collection practices. These practices are being
scrutinized in light of Colorado law that prohibits the extension of credit by
gaming licensees to any person for the purpose of engaging in limited gaming.
The statute containing this prohibition has been ruled unconstitutional in an
unrelated action before the Gilpin County Court, and that decision is being
appealed to higher courts. The Company has not yet been advised as to the
status or possible conclusion of the Division's inquiry into this matter. If
an extension of credit is found to have occurred, the Casino and/or the Company
could be subject to criminal and administrative penalties, including fines,
temporary closure of the Casino, license suspension or revocation, or
incarceration for individuals involved. However, the Colorado Limited Gaming
Control Commission has scheduled a rule making proceeding to establish
standards for the parameters of "extension of credit" not otherwise apparent
from the face of the gaming statutes or existing regulations. The Company and
the Casino intend to vigorously contest any remedial actions brought by the
Division in the foregoing regard, but the outcome of this matter is not
presently determinable.
In addition, the agreement provides that upon issuance of both
Convertible Notes to Diversified, Messrs. Greenlee, Day and Roark, officers and
directors of the Company, must purchase notes in the face amount of $750,000
which are convertible into 142,857 shares of Common Stock under the same terms
and subject to the conditions governing the Diversified Convertible Notes as
described above.
Proceeds from the Diversified Convertible Notes, its Common Stock
investment and proceeds from the Greenlee, Day and Roark notes have been or
will be used by the Company to fund its share of costs associated with the on-
going Black Hawk/Jacobs Project, which is described in more detail in Item 2
below.
Diversified's Convertible Notes are secured by the Company's 75%
interest in the Black Hawk/Jacobs Project but are otherwise non-recourse to the
Company. The Greenlee, Day and Roark notes are not secured but are full
recourse against the Company. All such Convertible Notes and notes bear
interest at the London InterBank rate (LIBOR) plus 2% and are due and payable,
if not converted, on November 12, 1998. Until conversion, the holder is
entitled to receive 40% of the net cash flow, as defined, distributed by the
LLC. Certain default provisions described below could cause the Convertible
Notes and notes to be accelerated as to payment.
Finally, as part of the Purchase Agreement, two members of the
Company's Board of Directors resigned and three new members appointed by
Jeffrey P. Jacobs, Manager of Diversified, (including himself) were elected to
the Company's current seven person Board of Directors. Mr.Jacobs was also
elected Co-Chairman of the Company's Board of Directors and Chief Executive
Officer of the Company.
The Purchase Agreement has a number of other provisions which are
described in the Company's Report on Form 8-K dated December 4, 1996 which is
incorporated herein by this reference.
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THE LLC AGREEMENT. The Company and two affiliates of Jacobs, DOGL and
BH Entertainment Ltd. ("BH"), have formed a Colorado limited liability company
("LLC") to continue the development of the Black Hawk/Jacobs Project. As part
of the Purchase Agreement discussed above, the interests in the LLC were
reallocated from 50%-50% to a 75% interest in favor of the Company and 25% in
favor of BH.
The Company's 75% interest in the LLC may be purchased by BH if on or
before January 1, 1998 the Colorado Limited Gaming Commission has not approved
a retail license for the Black Hawk/Jacobs Project and Diversified, in its sole
but reasonable discretion, believes that such license will not be issued and
such failure is attributable to the Casino Investigation discussed above. The
total of $6,000,000 in Convertible Notes will be canceled in consideration for
30% of 100% of the LLC and the Company's remaining 45% of the LLC will be
purchased by BH. The purchase price will be 90% of the fair market value,
determined by appraisal, of the Company's 45% interest in the LLC. The Company
has the right, however, to repurchase its interest essentially for the same
amounts paid by BH, if within two years of opening of the Black Hawk/Jacobs
Project, the Company's participation presents no licensing problems.
Finally, the Company's interest in the LLC could be automatically
divested, subject to the same purchase and re-purchase terms described above,
upon the occurrence of certain events, essentially anything which would prevent
the Black Hawk/Jacobs Project from obtaining a retail gaming license because of
the Company's participation.
The above summary of the LLC is qualified by the more extensive
description set forth in the Company's Report on Form 8-K dated December 4,
1996 which is incorporated herein by this reference.
THE CREDIT FACILITY AGREEMENT. The Black Hawk/Jacobs Project through
the LLC has entered into a Construction and Reducing Revolving Credit Loan
Agreement with Wells Fargo Bank, National Association which, in general,
provides the LLC with a $40 million credit facility. In summary, the credit
facility provides that:
(i) the credit facility is non-recourse to the Company,
hence the Company is not an obligor thereon; certain affiliates of
Jacobs, including Jeffrey P. Jacobs, Chief Executive Officer of the
Company, have personally guaranteed repayment of the credit facility;
(ii) excluding certain land contributions, the Company
must contribute $15 million and Jacobs must contribute $5 million in
equity to the Black Hawk/Jacobs Project prior to any draw-downs under
the credit facility;
(iii) all of the Black Hawk/Jacobs Project's land (which
includes most of the Company's former Millsite 30, and all of its
former Millsites 31 and 32 and all of Jacobs' former Millsite 34) and
all of its equipment, contracts, permits and all other assets of
whatever kind and nature are pledged as security for amounts borrowed
under the credit facility; and
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(iv) the Company provides for certain continuing
representations, warranties and covenants; for certain principal and
interest repayment terms and default provisions; and for other terms
and conditions which the LLC believes are customary in large,
commercial loan transactions of a similar nature.
OTHER ACTIVITIES. During 1996, the Company and Mr. Robert D. Greenlee
continued to pursue efforts to obtain a gaming concession in Mexico. The
Company also continued to develop and attempted to market its Prospector Poker
table game. Certain costs associated with both of these efforts were written
off during the fourth quarter of 1996. For further details, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Relationships and Related Transactions."
C. Narrative Description of the Company's Business.
The Company's primary operating business at present is its 50%
ownership interest in and the management of the Casino. The Casino is located
in Black Hawk, Colorado. In November 1990, Colorado voters approved limited
stakes gambling (generally $5.00 or less per bet) in three historic mining
towns--Central City, Black Hawk and Cripple Creek. Central City and Black Hawk
are contiguous, located about 35 miles west of downtown Denver, and about ten
miles north of Interstate Highway 70. As of March 1, 1997, there were 57
limited stakes gaming establishments open in Colorado employing a total of over
5,000 persons. At that date, there were a total of approximately 12,600 gaming
devices in operation including slot, keno and video poker machines and
blackjack and poker tables which are presently the only devices allowed under
Colorado gaming laws.
GENERAL GAMING INFORMATION. The following table sets forth certain
historical information obtained from the Colorado Gaming Commission which is
not intended by the Company to imply, nor should a reader infer, that it is any
indication of future Colorado or Company gaming revenues.
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<TABLE>
<CAPTION>
Average
Adjusted AGP Average Average
Gross Per Number of Number of
State of Colorado(1) Proceeds(3) Casino(4) Casinos(5) Devices(6)
- ----------------- ----------- --------- ---------- ----------
Year
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<S> <C> <C> <C> <C>
1991(2) $ 23,129,000 $ 965,000 24 2,166
1992 179,984,000 3,327,000 56 7,624
1993 259,879,000 4,025,000 65 10,370
1994 325,684,649 5,441,918 60 11,325
1995 384,342,947 6,660,572 58 12,400
1996 410,565,443 7,202,903 57 12,621
</TABLE>
<TABLE>
<CAPTION>
Average
Adjusted AGP Average Average
Gross Per Number of Number of
City of Black Hawk(1) Proceeds(3) Casino(4) Casinos(5) Devices(6)
- ----------------- ----------- --------- ---------- ----------
Year
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<S> <C> <C> <C> <C>
1991(2) $ 6,561,000 $ 1,640,000 4 448
1992 56,201,000 4,223,000 14 1,987
1993 112,140,000 5,303,000 21 3,564
1994 173,703,267 8,635,308 20 4,452
1995 195,855,640 10,171,421 19 4,737
1996 220,199,550 11,589,450 19 5,066
</TABLE>
The Company commenced gaming operations through its joint venture
interest in the Gilpin Hotel Casino on October 1, 1992. The Casino's AGP and
number of devices at December 31, were as follows:
GILPIN HOTEL CASINO
<TABLE>
<CAPTION>
Number of
Year AGP Devices(7)
- ---- --- ----------
<S> <C> <C>
1992 $ 2,908,000 293
1993 25,060,000 286
1994 28,036,000 286
1995 27,924,751 499(8)
1996 26,689,513 488
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</TABLE>
(1) Limited stakes gaming totals for Colorado include Black Hawk, Central
City and Cripple Creek and commenced October 1, 1991.
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(2) Limited stakes gaming began in October, 1991; thus the 1991 results
reflect gaming activities from October through December.
(3) Adjusted gross proceeds means total gambling receipts less
jackpots/winnings, less restocking monies for slot machines, plus
monies collected from table games and deposited with the cashier.
(4) Adjusted gross proceeds divided by the number of reporting licenses
(averaged on a monthly basis).
(5) Represents average number of licensees reporting adjusted gross
proceeds.
(6) Represents average number of slot machines reported by licensees over
the calendar year.
(7) Includes table games.
(8) Includes expansion of the Casino completed in January, 1995.
For further information concerning the Company's operations and the
operations of the Casino and management's discussion thereof, see Items 6 and 7
below and the Financial Statements included under Item 8.
Casino owners in Black Hawk and Central City estimate that about 80%
of the gaming customers come from the greater Denver metropolitan area. In
1991, this area encompassed eight counties with an estimated population base of
approximately 2,000,000 persons, according to statistics released in September,
1992 by the Denver Regional Council of Governments. The Denver metropolitan
population base is projected to increase steadily through 2015.
OPERATIONAL CONTROLS. The Colorado Gaming Commission has established
strict rules with regard to the supervision and control of all gaming
activities, including security and cash control systems. The Casino employs
these controls and paperwork systems to insure internal integrity and
compliance with regulations. The Casino is also required to obtain an annual
audit report from an independent certified public accounting firm, which in
turn is required to make certain surprise inspections. There are approximately
240 video cameras throughout the Casino with taping devices in place to record
all play at all times. These tapes and live action are monitored and reviewed
by both staff and Gaming Commission employees to insure the integrity of gaming
activities. The Casino employs a controller who is responsible for an
accounting staff of 12 people. The controller is also responsible for all
internal accounting matters.
In October, 1992, the Casino initiated a "slot player tracking
system." Patrons are invited to register and receive a frequent player card
which may be inserted into slot, keno, and video poker machines while playing
in the Casino. This computerized tracking system provides management with
valuable marketing information about its patrons.
Additionally, in late 1994 the Casino employed a full-time compliance
officer who reports directly to the General Manager of the Casino. His job is
to ensure the Casino complies with the Internal Control Minimum Procedures as
established by the Colorado Division of Gaming.
EMPLOYEES. The Casino employs approximately 310 full-time persons
including cashiers, dealers, food and beverage service personnel, facilities
maintenance, accounting, marketing, and personnel services. An employees'
manual has been prepared for each employee which emphasizes customer service as
the number one goal of each individual employee. No labor unions represent any
employee group. A standard package of employee benefits is provided to
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full-time employees along with training and job advancement opportunities.
Relations with employees are deemed by management to be good.
COMPETITION. Colorado law permits limited stakes casino gaming in
three historic mining towns, Black Hawk and Central City, adjacent towns
located approximately 35 miles west of Denver, and Cripple Creek, approximately
90 miles south of Denver. Black Hawk and Central City form the primary gaming
market in Colorado, and competition is intense. The Company believes that its
primary competition for the Casino are other casinos operating in Black Hawk
and Central City, of which there were approximately 33 as of December 31, 1996,
and, secondarily, casinos operating in Cripple Creek of which there were
approximately 24 as of December 31, 1996. More experienced, nationally
recognized casino operators from other areas of the country have entered, or
announced plans to enter, the Colorado gaming market, including Harvey's, ITT
Sheraton, Anchor Gaming, Fitzgerald's, and the Riviera, many of which have
substantially greater financial and marketing resources than the Company.
Because Colorado does not limit the total number of gaming licenses available
for issuance in Colorado and there are no minimum facility size requirements,
the Company expects the number of gaming facilities to continue increasing.
The Company believes that the primary competitive factors in the Black
Hawk-Central City market are location, availability and convenience of parking,
number of slot machines and gaming tables, types and pricing of amenities, name
recognition, and overall atmosphere.
The Company believes that since October 1991, approximately 12 casinos
in Black Hawk and 20 casinos in Central City have ceased operations. In
addition, several operators have reduced staffing and others have closed
temporarily or reduced their square footage and/or hours of operations. The
Company believes that the casinos that failed did so for a variety of reasons,
including inferior design, inconvenient or no parking, inadequate size,
inexperienced management and undercapitalization.
Various published reports detailing additional gaming projects have
been announced for Black Hawk. The majority of these projects are along the
southern end of Black Hawk at the first major intersection off State Highway
119, providing these projects with the initial opportunity to capture visitors
to Black Hawk and Central City from the Denver metropolitan area. In addition,
the Company, through the LLC, has obtained permission from the Colorado
Department of Transportation and the City of Black Hawk to construct a third
major intersection off State Highway 119 in between the two current
intersections. This additional intersection will provide excellent access to
the Black Hawk/Jacobs Project.
While it is difficult to assess the development stage of each of the
announced projects and the likelihood of whether any or all of the announced
projects will eventually be built and at what size, it is reasonably likely
that at least some of the new competition may be completed and open to the
public by early to mid-1998 which is also the target date for opening of the
Black Hawk/Jacobs Project. Therefore, should any of the announced competitive
projects open, the increased competition may adversely affect the Company's
operations and proposed operations and, accordingly, may have a material
adverse effect on the Company's results of operations, financial position and
cash flows.
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Several lobbying groups placed initiatives for additional Colorado
limited stakes gaming venues, including Denver, on the November 1992 statewide
ballot. Each of these initiatives was defeated by a wide margin. In November
1996 there was an initiative on the statewide ballot (which was defeated) to
expand limited stakes gaming to the city of Trinidad, approximately 125 miles
south of Colorado Springs, and similar initiatives, legislation or regulations
could be introduced in the future. The enactment of any initiative, legislation
or regulations legalizing gaming elsewhere in Colorado could, and if such
legalized gaming was closer to Denver would, have a material adverse effect on
the Company's results of operations, financial position and cash flows.
In addition to competing with other gaming facilities in Colorado as
described above, the Company competes, to a lesser degree, for both customers
and potential future gaming sites, with gaming facilities nationwide, including
casinos in Nevada and Atlantic City, many of which have substantially greater
financial resources and experience in the gaming business. The Company also
competes with other forms of gaming on both a local and national level,
including state-sponsored lotteries, charitable gaming and pari-mutuel
wagering, among others, and competes for entertainment dollars generally with
other forms of entertainment. The recent and continuing expansion of legalized
casino gaming to new jurisdictions throughout the United States may also affect
competitive conditions. Although the Company's focus is the Colorado gaming
market, it is considering gaming ventures in other locations that the Company
believes present favorable opportunities, and may pursue certain of such
opportunities if its resources allow it to do so. However, its ability to
capitalize on such opportunities is expected to be limited due to competition
for such opportunities from more experienced and financially stronger entities.
FLUCTUATING MARKET. Due to the rapid growth of the Colorado gaming
market, changes in the number of facilities operating and their individual
layouts, the seasonality of the business and the local attributes of each
Colorado gaming market, revenue results have varied, and likely will vary,
significantly between the various Colorado gaming markets and between
properties within those markets. As the Black Hawk market expands, both in
terms of gaming device capacity and market share, the Central City market tends
to contract. The majority of new projects are focused in Black Hawk,
accordingly, the Company expects revenue per gaming device in Black Hawk may
decline over the foreseeable future.
RELIANCE ON DENVER MARKET. The Casino's gaming revenues currently
depend primarily upon "day-tripper" visitor traffic from Denver metropolitan
area residents. A decline in the Denver economy, a decline in the Black Hawk
gaming market, or increased competition for Denver metropolitan area residents
from other gaming jurisdictions both inside and outside Colorado, could have a
material adverse effect on the Company's results of operations, financial
position and cash flows.
COLORADO GAMING REGULATIONS. Under Colorado law and regulations (the
"Colorado Regulations"), the ownership and operation of casino facilities in
Colorado are subject to strict and extensive regulation by the Colorado
Division of Gaming supervised by the five-member Colorado Limited Gaming
Control Commission (the "Gaming Commission").
The ownership and operation of casino gaming facilities are subject to
extensive state and local regulation. The Gaming Commission requires various
licenses, findings of suitability, registrations, permits and approvals to be
held by the Company and its subsidiaries. The Gaming Commission may, among other
things, limit, condition, suspend or revoke a license to operate for
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any cause deemed reasonable. Substantial fines or forfeiture of assets for
violations of gaming laws or regulations may be levied against the Company, the
Company's subsidiaries and the persons involved. In addition, the actions of
persons associated with the Company and its management employees, over which
the Company may have no control, could jeopardize any licenses held by the
Company in Colorado. The suspension or revocation of any of the Company's
licenses or the levy on the Company of substantial fines or forfeiture of
assets would have a material adverse effect on the Company.
To date, the Company has obtained all governmental licenses, findings
of suitability, registrations, permits and approvals necessary for the
operation of the Gilpin Hotel Casino. However, gaming licenses and related
approvals are deemed to be privileges under Colorado law, and no assurances can
be given that any new licenses, permits and approvals that may be required in
the future, especially for the Black Hawk/Jacobs Project, will be given or that
existing ones will not be revoked. The current license for the Casino expires
in September, 1997. Renewal is subject to, among other things, continued
satisfaction of suitability requirements. There can be no assurance that the
Company can successfully renew its licenses in a timely manner or at all.
Under the Colorado Regulations, no person can have an "interest" in
more than three gaming retailer/operator licenses. The Company currently has
one such license and may have another if the Black Hawk/Jacobs Project is
completed. Accordingly, any expansion opportunities that the Company may have
in Colorado may be limited.
RESTRICTIONS ON HOLDERS OF COMMON STOCK. Under Colorado Regulations,
the definition of an "interest" in a gaming license excludes ownership of less
than 5% of a "publicly traded" company such as the Company. To enable the
Company to comply with the Colorado Regulations and secure and maintain the
business and other regulatory approvals necessary for operating a gaming-
related business in Colorado, the Company's Articles of Incorporation provide
that the Company may not issue voting securities except in compliance with the
rules of any gaming authority. The Company's Articles of Incorporation also
provide that all transfers of its voting securities must be in compliance with
applicable gaming authority rules and if any gaming authority issues an order
disqualifying a person from owning shares of Common Stock, the Company may
redeem the stock of the disqualified holder unless Common Stock is transferred
to a person found by the Gaming Commission to be suitable within 60 days from
the finding of unsuitability.
LIQUOR REGULATION. The sale of alcoholic beverages is subject to
licensing, control and regulation by certain Colorado state and local agencies
(the "Liquor Agencies"). Subject to certain exceptions, all persons who
directly or indirectly own 5% or more of the Company must file applications
with and are subject to investigation by the Liquor Agencies. The Liquor
Agencies also may investigate persons who, directly or indirectly, loan money
to liquor licensees. All liquor licenses are subject to renewal, are revocable
and are not transferable. The Liquor Agencies have broad powers to limit,
condition, suspend or revoke any liquor license. Any disciplinary action could,
and any failure to renew or other revocation of any of its liquor licenses
would, have a material adverse effect upon the operations of the Company and
the Casino.
TAXATION. The Company's operations are subject to taxes imposed upon
gaming operators by the Gaming Commission and the municipality of Black Hawk.
Taxes currently levied on the Company's operations include taxes on adjusted
gross gaming proceeds and annual gaming device fees. Such taxes and fees are
subject to revision from time to time. Effective October 1,
-10-
<PAGE> 13
1996, the Gaming Commission changed the tax rate. While certain of the tax
rates were decreased in some of the lower-revenue brackets, the top tax rate
was increased from 18% to 20% on all revenue in excess of $10 million. The new
tax rates are 2% of the adjusted gross gaming revenue up to and including $2
million (unchanged from the previous year), 4% of the adjusted gross gaming
revenue above $2 million up to and including $4 million (a decrease from the 8%
tax rate for the previous year), 14% of the adjusted gross gaming revenue above
$4 million up to and including $5 million (a decrease from the 15% tax rate for
the previous year), 18% of adjusted gross gaming revenue above $5 million up to
and including $10 million (unchanged from the previous year) and 20% of
adjusted gross gaming revenue in excess of $10 million (an increase in the top
tax rate). The increase in the top tax rate is expected to have a greater
effect on the Company than the tax decrease in the lower revenue brackets.
SEASONALITY AND INCLEMENT WEATHER. Because the Gilpin Hotel Casino is
located in the Rocky Mountains, it is subject to sudden and severe winter
storms. Access to Black Hawk, which is located ten miles from Interstate 70, is
made via a two-lane secondary road. In bad weather, and in the winter months
generally, this access road is difficult to traverse, which reduces the number
of patrons traveling to Black Hawk and, accordingly, negatively affects the
Company's operating results during these periods. In addition, bad weather can
result in a loss of services to the Casino which also negatively affects the
Company's operating results. As a result, the Casino's business tends to be
seasonal, with the highest level of activity occurring during the summer
months.
FLOODING. The site of the Gilpin Hotel Casino is located in a 100-year
flood plain. To date, the Company has not experienced any flooding resulting in
damage to the Casino. The Company carries no significant flood insurance on the
Casino. There can be no assurance that the Casino will not suffer flood damage
in the future or that any damage will be adequately covered by insurance.
-11-
<PAGE> 14
Item 2. Properties.
Information concerning the properties of the Company is summarized as
follows:
THE BLACK HAWK/JACOBS PROJECT. In December 1994, the Company signed a
joint venture agreement with Jacobs Entertainment, Inc. ("Jacobs") of
Cleveland, Ohio, to develop a major hotel/casino/parking complex in Black Hawk,
Colorado. The joint venture (which was later reorganized as a limited liability
company) developed a preliminary master plan for a project which will be built
on part of Millsite 30 and on Millsites 31 and 32 all contributed to the
venture by the Company (there is no Millsite 33) and on Millsite 34 which was
contributed to the venture by Jacobs.
During 1996, the Black Hawk/Jacobs Project received all necessary
permits from various governmental and municipal authorities and commenced
actual construction on the project. The project is presently projected to be a
55 to 60-room hotel/casino with an adjacent underground parking garage for
approximately 500 cars. The completion date for the project is expected to be
mid-1998 at a total estimated cost of approximately $67 million. See Item 1
above for additional details.
GILPIN HOTEL CASINO ("CASINO"). Originally built in the 1860s, the
Gilpin Hotel is one of the oldest in Colorado. However, no hotel or lodging
facilities are offered by the Casino. Construction of the Casino property
started on February 1, 1992 and was completed in September 1992. Currently,
within the facility are 488 slot machines and table games, 2 restaurants, 4
bars, an entertainment area and almost one floor of office space. See Item 1
above for additional details.
Reference is made to the Company's Annual Report on Form 10-K for its
fiscal year ended December 31, 1995 which contains a description under Item 2
thereof of various contractual relationships between the Company and its joint
venture partner in the Casino. Such discussion is incorporated herein by this
reference.
LOCATION AND PARKING. The scarcity of convenient parking facilities
has been a problem in Black Hawk and Central City since legalized gaming began.
The Company's marketing staff, based on interviews with gaming patrons, has
determined that the convenience of parking on Millsites 29 and 30 was a
significant factor in many patrons' decision to visit the Casino. In the last
year, several competitors have developed or arranged for convenient parking in
or near their casinos which has diminished the advantage previously enjoyed by
the Casino.
During a part of 1996, the Company charged the Casino $50,000 per
month for the use of the approximate 170 space parking lot known as Millsite
30. The Casino also utilized Millsites 31 and 32 for parking during 1996.
Approximately 35 and 95 cars can park on Millsites 31 and 32, respectively, and
the resultant monthly charge was approximately $19,200 per month. Parking on
much of Millsite 30 is still available, however parking on Millsites 31 and 32
is no longer available to the Casino since construction of the Black
Hawk/Jacobs Project has commenced. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
GAMING EQUIPMENT. In its current configuration and after the Dolly's
expansion, the Casino operates with 7 blackjack tables, 2 Let-It-Ride tables, 1
Three Card Poker table, and 8 poker tables along with 470 slot machines. During
1994, the Casino added bill acceptors to 150
-12-
<PAGE> 15
of its slot machines at a cost of approximately $700,000. Included in the mix
of gaming devices are poker machines, keno machines, and a series of
progressive payoffs on nickel, quarter, and dollar slot machines. The Company
believes the Casino has a suitable mix of machines based on the popularity of
the types of play which casinos have been receiving in the Black Hawk-Central
City gaming area.
SUPPORT SYSTEMS. The Casino utilizes a computerized slot data tracking
system which allows it to track individual play, payouts, and develop mailing
lists for special events and contest play. The system also provides management
with a variety of other useful marketing information. Several restaurants and
bars are located on the four floors of the Casino. A computer based point of
sale accounting and data tracking system monitors the popularity of all food
and beverage items and offers management controls on food and beverage sales.
OFF-TRACK BETTING OPERATIONS. On October 6, 1994, the Casino entered
into an agreement with Cloverleaf Kennel Club of Loveland, Colorado to provide
simulcast off-track betting (OTB) on dog and horse races conducted at various
tracks in the United States. The term of the agreement is five one-year options
commencing October 1, 1994 through September 30, 1999. The Casino must pay
Cloverleaf an annual fee of $40,000 in return for 50% of the net revenues
derived from pari-mutual wagering at the Casino. The Casino is responsible for
all costs of operating the facility. Operation of the OTB facility commenced on
February 14, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNPATENTED MINING CLAIM. The Company owns an unpatented mining claim
covering approximately 118,000 square feet, located approximately seven miles
east of Black Hawk, Colorado. Although it has no present plans with respect to
this property, the Company believes it may be suitable for future development
as a parking "staging" area or as a gas station/mini-mart facility. It may,
however, sell, lease, or co-develop this property as future events warrant.
-13-
<PAGE> 16
Item 3. Legal Proceedings.
Except as described below and non-material litigation incident to its
ordinary course of business, the Company is not a party to, and is not aware of
any threatened litigation which could have a material adverse effect on its
business or results of operations.
The Gilpin Hotel Casino has been investigated by the Colorado Division
of Gaming ("Division") regarding certain of its check cashing and debt
collection practices. These practices are being scrutinized in light of
Colorado law that prohibits the extension of credit by gaming licensees to any
person for the purpose of engaging in limited gaming. The statute containing
this prohibition has been ruled unconstitutional in an unrelated action before
the Gilpin County Court, and that decision is being appealed to higher courts.
The Gilpin Hotel Casino has not yet been advised as to the status or possible
conclusion of the Division's inquiry into this matter. If an extension of
credit is found to have occurred, the Casino and the Company, since it is
manager of the Gilpin Hotel Casino, could be subject to criminal and
administrative penalties, including fines, temporary closure of the Casino,
license suspension or revocation, or incarceration for individuals involved.
However, the Colorado Limited Gaming Control Commission has scheduled a rule
making proceeding to establish standards for the parameters of "extension of
credit" not otherwise apparent from the face of the gaming statutes or existing
regulations. The Company and the Gilpin Hotel Casino intend to vigorously
contest any actions brought by the Division in the foregoing regard, but the
outcome of this matter is not presently determinable.
-14-
<PAGE> 17
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of shareholders of the Company was held on January 13,
1997, for the following purposes:
1. To amend the Company's Articles of Incorporation to increase the
size of its Board of Directors from not more than seven to not
more than nine members;
2. To amend the Company's Articles of Incorporation to provide for
staggered terms for the Company's Board of Directors; and
3. To approve, in accordance with the bylaws of the National
Association of Securities Dealers, Inc. ("NASD"), the conversion
feature of certain notes issued by the Company pursuant to which
shares of the Company's Common Stock may be issued (all as more
fully described in Item 1 above).
The Board of Directors fixed the close of business on December 13, 1996,
as the record date for the determination of shareholders entitled to vote at
the meeting. Reference is made to a definitive proxy statement filed by the
Company pursuant to Regulation 14A adopted under the Securities Exchange Act of
1934 which is incorporated herein for further details.
Results of voting on the three proposals were as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C> <C>
1. Increase in Size of Board 2,389,008 25,286 1,925
2. Staggered Board* 1,243,254 38,540 1,700
3. Approval per NASDAQ Listing 1,044,962 23,711 6,051
Agreement
</TABLE>
- ------------------
*not approved by requisite number of shares.
-15-
<PAGE> 18
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
MARKET INFORMATION. The common stock and "A" and "B" Warrants of the
Company began trading publicly in the over-the-counter market on the NASDAQ
National Market System on May 15, 1993 under the symbols: BHWK, BHWKW and
BHWKZ, respectively. The following table sets forth the high and low sale
prices of the Company's securities as reported in the NASDAQ National Market
System for the periods indicated:
<TABLE>
<CAPTION>
Common Stock "A" Warrants* "B" Warrants *
"BHWK" "BHWKW" "BHWKZ"
--------------- ------------- --------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1995
- ----
First Quarter $11-1/4 $7-3/4 $ 7/8 $ 1/2 $ 5/8 $ 3/8
Second Quarter 10 7-1/4 1/2 1/4 1/2 3/8
Third Quarter 9-1/8 6-1/2 5/8 3/8 3/8 1/4
Fourth Quarter 7-7/8 5 5/8 1/4 3/8 1/16
1996
- ----
First Quarter $ 6-7/8 $4-1/2 $ 3/8 $ 1/8 $ 5/32 $1/32
Second Quarter 10-3/8 4-3/4 15/16 1/8 19/32 1/16
Third Quarter 8-3/4 5-1/8 11/16 1/8 3/8 1/16
Fourth Quarter 7 4-1/2 1/4 1/32 1/8 1/32
- ----------
</TABLE>
*These Warrants expire on June 30, 1997.
HOLDERS. At March 1, 1997, the Company had approximately 200 holders of
its voting common stock of record; it estimates that it may have approximately
1,600 additional beneficial owners of its common stock held in names of brokers
and securities depositories. At March 1, 1997, there were approximately 100
holders of record of the Company's "A" and "B" Warrants but, again, the Company
believes the number of beneficial owners to be much greater.
DIVIDENDS. The Company has not paid or declared cash distributions or
dividends on its common stock and does not intend to pay cash dividends in the
foreseeable future. Future cash dividends will be determined by the Board of
Directors based on the Company's earnings, financial condition, capital
requirements and other relevant factors.
-16-
<PAGE> 19
Item 6. Selected Financial Data.
The selected financial data of the Company for the periods set forth
below have been derived from the Company's financial statements included
elsewhere herein. The selected financial data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and the related Notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATION
DATA:
Revenues $1,263,887 $ 1,493,655 $ 1,411,310 $ 1,238,626 $ 342,040
Costs and expenses 1,736,688 1,420,742 1,040,370 682,662 397,746
Equity in earnings of
Joint Venture 2,255,635 2,785,929 3,493,149 4,171,640 265,245
Net income 1,046,941 1,773,247 2,493,807 3,128,604 134,539
Net income per
common share:
Primary .41 .65 1.00 1.61 0.14
<CAPTION>
At December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 5,016,658 $ 3,816,199 $ 4,177,418 $ 6,761,623 $ 131,945
Noncurrent assets 19,507,337 16,452,122 15,593,263 7,263,517 7,192,076
Total assets 24,523,995 20,268,321 19,770,681 14,025,140 7,324,021
Current liabilities 620,282 850,500 762,801 1,926,451 2,087,779
Convertible note payable
to shareholder 1,500,000 1,787,715
Long term capital lease
obligations 375,076
Long-term debt 2,251,639 2,376,655 3,189,084 776,300 1,049,347
Deferred tax liability 61,506
Common stock subject to
put options 137,499 666,667 986,000 --- ---
Minority interest 1,793,500
Shareholders' equity 18,159,569 16,374,499 14,832,796 11,322,389 2,024,104
</TABLE>
- ------------------
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional information.
-17-
<PAGE> 20
Item 7. 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 consolidated financial statements and the
notes thereto included elsewhere in this Report.
GENERAL
Black Hawk Gaming & Development Company, Inc. (the Company) was
incorporated on January 10, 1991 in Colorado to acquire gaming properties for
development, joint venture and operation. The Company completed construction of
the Gilpin Hotel Casino (the Casino) 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.
Year ended December 31, 1996 compared to the year ended December 31,
1995
Income before income taxes for the year ended December 31, 1996 is
approximately $1,076,000 less than the year ended December 31, 1995. Total
revenue of the Company declined by approximately $230,000 or 15%; total costs
and expenses increased by approximately $316,000 or 22% and the Company's share
of the equity in earnings of Joint Venture declined by approximately $530,000,
or 19%. The combination of these three elements of the Company's consolidated
statement of income comprise the approximate $1,076,000 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 year ended December 31, 1996 compared to the year ended December
31, 1995.
Revenues
The Company's operating revenue during 1996 declined by 15% or $230,000
as compared to 1995. A decline in the Company's management fees of
approximately $67,000, rental income of $ 15,000, parking lot operation income
of $35,000 and interest income of $113,000 account for this decline. Generally,
management fees and rental income decline as operations of the Casino decline.
The decline in interest income during the year ended 1995 is the result of the
repayment of an outstanding note receivable from an affiliate of the Company's
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. Additionally, throughout 1996 the Company expended funds on
development efforts required for the Jacobs project. As the Company expends
funds on other projects, particularly the Jacobs project (see below), interest
income will continue to decline.
Other components of the Company's revenue, which declined in the fiscal
year 1996 as compared to the fiscal year 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 year ended 1996 declined by
approximately
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
$757,000 and the net revenue generated by the Casino decreased by $1,583,000,
the management fee earned by the Company for the current year, after
elimination of the amount of such fee attributable to the Company's 50%
interest in GHV, declined by $67,000.
The Company and its joint venture partner are the co-owners of the land
underlying the Casino. The GHV agreement provides that the Casino pay a monthly
land rental fee equivalent to 7% of its net gaming revenues (i.e., 3 1/2% to
the Company and 3 1/2% to its joint venture partner). 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 GHV.
The Company's rental income for the current year was approximately $15,000 less
than the year ended 1995. While net gaming revenues of the Casino for the
current year declined by approximately $1,583,000 as compared to 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 GHV for the use of Millsites 30, 31, and, during 1996 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 on Millsite 32 was warranted. GHV utilized Millsite 32
during January and February, however, as the Company started conducting
pre-development work on Millsite 32 during March, parking has not been
available on Millsite 32 since that time. Additionally, the Business
Improvement District's ("BID") efforts in the City during 1996 caused the
Company to lose some parking on Millsite 30 due to the temporary rerouting of
Main Street onto the Company's property. Accordingly, the amount the Company
charged the Casino was reduced by the number of spaces lost to the City for the
construction on Main Street. The Company has not committed 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 project (see
discussion below).
Costs and Expenses
Total compensation and related costs increased for the year ended
December 31, 1996 by approximately $132,000 due principally to a negotiated
severance package with the Company's former General Manager of the Casino of
$50,000, compensation for the Company's new CEO for one month of $12,500, a
marketing consultancy agreement of approximately $50,000 and other increases of
$19,500; other general and administrative costs declined by approximately
$165,000 and interest costs declined by $144,000 for an overall decrease in
costs and expenses from recurring operations of approximately $177,000 for the
year ended December 31, 1996 as compared to the comparable year of 1995.
During late 1995 and 1996 the Company incurred approximately $345,000 in
costs in attempting to secure a gaming concession in Mexico. The Company
deferred writing off these costs until it became known that the possibility of
securing a Mexican gaming license was not practical or on the horizon. The
Mexican legislature was rumored to be set to approve gaming within Mexico at
several times during 1996, however this did not occur. In the fourth quarter of
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<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
1996, the Mexican legislature deferred any further decision making until
sometime in 1997 or later. The Company chose to write these costs off during
the fourth quarter of 1996 as it does not presently appear that any meaningful
value will be realized from these costs in the foreseeable future. See also
"Item 13--Certain Relationships and Related Transactions."
Additionally, during the year ended December 31, 1996 the Company wrote
off the costs of its patented table game known as "Prospector Jackpot Poker."
The Company incurred approximately $148,000 of costs in developing, patenting
and test marketing this game during the past two years. During the fourth
quarter of 1996 and the first quarter of 1997, the Company was unable to secure
any approvals for test marketing the game in Mississippi as it had previously
hoped. Additionally, the Company obtained approval for the game in Colorado and
conducted live play at the Casino to determine if a market existed for the game
in Colorado. The results of that effort led the Company to conclude that the
present market for this table game is very limited and accordingly it wrote
these costs off during the fourth quarter of 1996. The Company, may in the
future attempt to re-introduce the game in new and emerging markets if that
opportunity should present itself, however no assurance can be given in this
regard.
Equity in Earnings of Gilpin Hotel Joint Venture ("GHV")
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 GHV, as discussed above, equity in earnings of
joint venture accounts for substantially all of the Company's income before
income taxes. The following discussion relates to the operation of the Casino
and serves to explain changes in the equity in earnings of joint venture in the
Company's Consolidated Financial Statements. See the separate financial
statements of the Gilpin Hotel Venture under Item 8 herein.
During the year ended December 31, 1996 the Casino's total revenues
decreased by approximately $1,334,000 (4%), however when combined with an
increase in complimentary/promotional allowances of $249,000, the net decrease
in the revenues of the Casino is $1,583,000. Total expenses of the Casino
decreased by approximately $757,000 (3%) resulting in a net decrease in the net
income of the Casino in 1996 of approximately $826,000, or 26% compared to
1995.
The most significant reason for the decrease in the total revenues of
the Casino is the result of a decrease in win from slot machine play. Slot win
is calculated by adding drop, (moneys wagered and retained by the Casino), less
jackpots and fills, (pay outs to customers and restocking of coins to be paid
out of the slot machines). In 1996 drop increased when compared to 1995;
however when reduced by jackpots and fills, the result was a decrease in slot
win of $1,320,000 compared to 1995. The net slot win decrease combined with the
increased win in table games and the OTB of $52,000, a decrease in food and
beverage revenue of $66,000, and an increase incomplimentary/promotional
allowances of $249,000, approximates the total decrease in revenues of
$1,583,000.
-20-
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The approximate decrease of $757,000 in Casino expenses is due
principally to a decline in labor and employee benefits costs of $319,000, food
costs of $173,000, parking fees of $153,000, property taxes of $79,000,
progressive jackpot expense of $112,000 and bad debt expense of approximately
$100,000. Variable expenses related to slot win including gaming taxes, rent
and management fees were reduced by $312,000, $71,000 and $146,000,
respectively. Increases in expenses include marketing costs of $285,000,
contract labor of $135,000, depreciation of $97,700, interest expense of
$195,000 and other net costs and expenses decreased by $5,000.
The competitive environment in the Black Hawk/Central City gaming
districts increased significantly during 1995 and continued into 1996. The
Casino implemented many new programs and continues to revise its marketing
packages in an effort to maintain a level of competitiveness as well as its
market share. During 1997 the Casino is planning several capital expenditures
to improve the interior of the Casino. The Casino has hired an interior design
firm which has provided many recommendations including the installation of new
carpet on the main floor of the Casino, placement of mirrors, improved lighting
and a newly designed main floor cage. Additionally, the Casino is revising its
menus and providing increased service in its food and beverage department.
In the opinion of management, the Casino's operations for the year ended
December 31, 1996 are competitive relative to other casinos in Black Hawk as
well as the other two Colorado gaming districts. The Casino'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.
Impact on Operations of the Company Due to Planned Construction
The City of Black Hawk through its Business Improvement District (BID),
began constructing significant improvements to Main Street in Black Hawk during
most of 1996 but discontinued operations in November 1996 due to mountain
weather conditions. The BID intends to recommence construction in front of the
Casino beginning in March 1997. The BID is making these improvements on behalf
of the City to ultimately benefit all casinos on Main Street. When the BID
discontinued construction in November it was running approximately 1 year
behind schedule. Presently, the anticipated completion date of the Main Street
project is projected to be Labor Day 1997. The Company's operations for 1996
have been adversely affected by the BID construction and it is anticipated that
operations will again be adversely affected when construction recommences in
March 1997.
As discussed above, until approximately June 1996, the date on which
construction efforts began on the Jacobs project, Millsites 31 and 32 were used
as parking for patrons of the Casino. In addition, 44,000 square feet of the
eastern portion of Millsite 30 is committed to the Jacobs project and therefore
will not be available for patron parking for the Casino commencing in the
fourth quarter of 1997. When such parking is no longer available to the Casino,
it will more than
-21-
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
likely have a materially adverse effect on the Company's results of operations.
See Item 1 "Business--Competition."
The Company's share in the equity in earnings of the joint venture will
more than likely decline as a result of reduced business at the Casino
resulting from the reduction of parking spaces available to the Casino as well
as the construction resulting from the BID. The Company has proposed to its
joint venture partner of the Casino that a parking structure be developed and
constructed on the jointly owned Millsite 29 and on the approximately 19,000
remaining square feet of the uncommitted portion of the Company's Millsite 30.
Additionally, during the period of reduced parking for the Casino, several of
the larger competing casinos in the Black Hawk gaming district have developed a
significant number of parking spaces for their casino patrons.
Income Taxes
The income tax expense for the year ended 1996 is based upon a combined
federal and state tax rate approximating 39%. The Internal Revenue Service
(IRS) has examined GHV's 1992, 1993, 1994 and 1995 income tax returns. GHV and
the IRS have reached a settlement of findings in GHV's 1992, 1993 and 1994
income tax returns which will increase the amount of taxable income allocated
to the venturers by approximately $128,000, $62,000 and $200,000, respectively.
GHV and the IRS have also reached a settlement of findings of GHV's 1995 income
tax return which will decrease the amount of taxable income allocated to the
venturer's by approximately $40,000. The findings represent principally
temporary differences, which will reverse in future years.
Net Income Per Share of Common Stock
Results of operations for the year ended December 31, 1996 yielded net
income per common share of approximately $.41 based on weighted average shares
outstanding of 2,527,000, while earnings per share for 1995 were approximately
$.65 based on weighted average shares outstanding of 2,578,000. In connection
with the purchase of Millsite 32, the Company issued 100,000 shares of its
common stock subject to a put option to the Company. These shares have been
sold back to the Company by the holder, at the rate of 12,500 shares per
quarter for two years. During the years ended December 31, 1996 and 1995, a
portion of the Company's cost related to common stock subject to put options,
$20,816 and $93,167, 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 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 $20,816 and $93,167 for the years ended
December 31, 1996 and 1995 was $.01 and $.03, respectively.
Year ended December 31, 1995 compared to the year ended December 31,
1994
Income before income taxes for the year ended December 31, 1995 is lower
than 1994 by approximately $1,005,000, or a 26% decline. The principal cause
for the reduction in the
-22-
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Company's income before income taxes for 1995 is due to an approximate $707,000
decline in the Company's share in the equity in earnings of Joint Venture. The
following is a discussion of the reasons for this decline as well as for the
various other changes in the components of the Company's consolidated
statements of operations for the year ended December 31, 1995 as compared to
the year ended December 31, 1994.
Revenues
The total revenue of the Company increased only slightly during the year
by approximately $82,000 or 6%. The Company experienced a decrease in the
management fees it receives from GHV of $51,000, or 12%. The management fee is
computed based upon 11% of the defined annual net profits of the various
departments of GHV's operations. Current period costs and expenses of GHV
increased and revenues remained flat, and therefore management fees earned by
the Company during 1995 declined as compared to 1994. Management fee income is
reported after elimination of the amount of such fees attributable to the
Company's 50% interest in the Joint Venture.
The Company and its Joint Venture partner are the co-owners of the land
underlying the Casino and the Joint Venture agreement provides that GHV pay a
monthly land rental fee to each Venturer totaling 7% (3.5% each) of the net
gaming revenues of the Casino. Rental income attributable to the land
underlying the Casino is also 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 1995 was down slightly as compared to 1994, by 4%
or $21,000.
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 Millsite
32, as parking for the patrons of the Casino. The base monthly parking charge
for the use of Millsite 30 was increased to $50,000 per month in November of
1994 retroactive to the beginning of 1994, and for all of 1995. In addition, in
February of 1995 the Company began charging an additional monthly fee to the
Joint Venture for the use of Millsite 31, at a rate of $9,202 per month which
is the same per car per day rate charge used on Millsite 30. 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 for the benefit of the Casino and its patrons.
Parking revenues to the Company amounted to approximately $357,000 in 1995,
after elimination of the amount of fees attributable to the Company's 50%
interest in the Joint Venture.
The remaining portion of the Company's revenue is the result of interest
income it receives on temporary cash investments and on its note receivable
from Gilpin Gold, Inc. (GGI), which is an affiliate of the Company's Joint
Venture partner in GHV. Interest income for 1995 is higher than 1994 by
approximately $97,000. During the fourth quarter of 1994 the Company advanced
$1,495,000 to GGI in order to effectuate the closing for the purchase of the
Pick-A-Dilly Casino. During all of 1995 the Company earned 10% on this note,
plus a fee for having made the loan to GGI, which was at a significantly higher
rate than the Company was able to earn on its other funds.
-23-
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Costs and Expenses
Total compensation and related costs increased for the current year by
$106,000 (21%), other general and administrative costs rose by $112,000 (27%)
and interest expense increased $162,000 (152%), resulting in an overall
increase in costs and expenses for 1995 of $380,000 (36%) as compared to 1994.
Principally, compensation and related costs for 1995 increased since the
Company hired a key executive in August 1994 whose compensation for 1995
reflect a full year as compared to 1994 which reflects four months. General and
administrative costs have risen due to the Company's increased level of
activity as it seeks diversification to other markets. Interest costs are
higher than the prior year due to a higher level of debt, resulting primarily
from the acquisition of Millsite 32 in late December 1994. Additionally, the
Company acquired Millsite 31, which was partially financed by $1,200,000 of
seller debt, in the third quarter of 1994.
Equity in Earnings of Joint Venture
While the Casino's total revenues declined only slightly by $26,000, the
complimentary/promotional allowances incurred during 1995 as compared to 1994
declined by $253,000. Hence, the Casino's net revenues for 1995 show an
increase of $227,000 as compared to 1994. The 1995 costs and expenses rose by
approximately $1,612,000 or 7%, which when combined with the net increase in
the net revenues of the Casino of $227,000 referred to above, accounts for the
decline in 1995 net income, as compared to 1994, of approximately $1,385,000 or
30%
In the opinion of the Company, the most significant reason for the
increase in the total costs and expenses of the GHV, was the changing
environment and the high level of competition within the Black Hawk/Central
City gaming districts. Competition in this Colorado gaming district has
increased significantly since gaming commenced and continued to rise in 1995.
The first quarter of 1995 was impacted by the opening of the first major
hotel/casino in the Black Hawk/Central City market place. The third quarter of
1995 represented the first quarter for the opening of a 400 plus gaming device
casino next door to the Gilpin. The addition of these new facilities, as well
as the overall competitiveness within the market place, resulted in GHV
incurring higher costs for labor, marketing and operations. Additionally,
competitors continued to expand their promotional packages, increase their
parking availability and/or construct new parking facilities in an effort to
compete for GHV's customers. GHV responded to these marketing challenges
through the development of its own marketing strategies and the implementation
of new and more aggressive programs as well as hiring additional personnel to
improve customer service.
The Casino began efforts during 1995 to reduce the amount of
complimentary/promotional allowances given to patrons. The
complimentary/promotional allowances for 1995 aggregating$1,143,000 and
$1,396,000 for 1994 represent retail prices and are reflected in food and
beverage revenues. Generally, it is the Casino's goal to break even on its food
and beverage operation without regard to complimentary/promotional allowances.
Excluding complimentary/promotional allowances, net costs of the food and
beverage operation for 1995 increased by $134,000 over 1994. This represents an
approximate 5% increase in food and beverage costs, and is principally
-24-
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
due to overall higher labor and food costs attributable to various food
promotions held at the Casino in 1995.
In addition to the increase in the food and beverage costs discussed
above totalling $134,000, the principal areas accounting for the increase in
the current years total cost and expenses of $1,612,000 lie in the following
areas. During 1995, the Joint Venture incurred an additional $621,000 in
employee labor costs compared to 1994. Throughout the year the Joint Venture
implemented new marketing packages to maintain its existing player base,
however, this effort proved somewhat unsuccessful. The incremental costs of
additional personnel to coordinate, manage and operate efforts such as weekly
slot machine tournaments did not provide meaningful benefits to revenues.
Additionally, early in 1995 GHV completed combining the Gilpin Hotel Casino
with the Pick-A-Dilly Casino, which was purchased in November 1994. In
connection therewith, GHV continued employment of many former Pick-A-Dilly
employees through the first quarter of 1995, in anticipation of increased
activity resulting from the combined structures. This, however, did not occur
and accounts for some of the increase in the payroll costs for 1995 over 1994.
Other increased costs during 1995 included charges for depreciation and
amortization of $513,000 due to the acquisition of the Pick-A-Dilly Casino,
interest expense of $322,000 due to the debt incurred to acquire the Pick-A-
Dilly Casino, an increase of $155,000 in device fees paid to the City of Black
Hawk as a result of approximately 200 additional machines utilized in the Pick-
A-Dilly Casino, utility costs of $96,000, property taxes of $139,000, parking
fees of $140,000, legal and licensing costs of $36,000, property and casualty
insurance of $69,000 and an increase in all other costs of approximately
$180,000. While many costs of GHV increased, GHV realized significant decreases
in some costs during 1995 compared to 1994. Specifically, slot rental expenses
were reduced by $500,000 due to the paid-up status of most of GHV's slot
machine leases. During 1993 and 1994, GHV advanced a total of approximately
$303,000 to a casino in Central City. GHV's intentions were to market and
develop an exclusive slot-player facility catering to specifically identified
customers of GHV. In December 1994, despite continued efforts to market and
develop such a club, the Policy Board of GHV decided to abandon its efforts and
wrote-off the advances to the casino and terminated the relationship due to the
casino's poor operating performance. These decreases in costs in 1995 as
compared to 1994, when combined with the previously mentioned cost increases,
account for the net increase in GHV expenses of approximately $1,612,000.
During 1995, GHV's adjusted gross proceeds (AGP) (total gambling
receipts less jackpots/winnings, less restocking monies for slot machines
(fills), plus monies collected from table games and deposited with the cashier)
averages for slot machines and table games continued to remain in excess of the
overall gaming AGP averages for the state and the city of Black Hawk.
In November, 1994, GHV installed an off-track-betting (OTB) facility
near one of its restaurants in the Casino. The OTB facility opened in February
1995. Through December 31, 1995 the facility produced a loss of approximately
$69,000.
-25-
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Net Income Per Share of Common Stock
Results of operations for 1995 yielded net income per common share of
$.65 based on weighted average shares outstanding of 2,579,000 as compared
to earnings per share for 1994, which were $1.00 based on weighted average
number of shares outstanding of 2,502,000. The effect of an accretion of
discount of $93,167 discussed below served to decrease 1995 net income per
common share by approximately $.04.
During 1995, a portion of the Company's cost related to common stock
subject to put options, $93,167, is 1995's accretion of the difference between
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, 1995's
computation of net income per common share reflects this amount as a deduction
from net income only when computing net income per common share.
See Note 8 to the Consolidated Financial Statements for pro forma
information regarding certain stock options and their accounting treatment
under Statement of Financial Accounting Standards No. 123.
EARNINGS BEFORE INTEREST, FEDERAL AND STATE TAXES, DEPRECIATION AND
AMORTIZATION (EBITDA)
The Company's earnings before interest, federal and state income taxes,
depreciation and amortizations (commonly referred to as "EBITDA") is set forth
below:
-26-
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income $1,046,941 $1,773,247 $ 2,493,807 $ 3,128,604 $ 134,539
Add back:
Interest expense 124,260 268,119 106,067 244,835 137,608
Federal and state
income taxes 735,893 1,085,595 1,370,282 1,599,000 75,000
One-half of interest
expense of the
Joint Venture 263,827 166,214 -- -- --
One-half of depreciation
and amortization
expense of
GHV and 100%
of the Company's
depreciation and
amortization
expense 619,023 565,174 308,600 224,018 38,000
---------- ---------- ----------- --------- --------
Earnings before interest,
federal and state taxes,
depreciation and
amortization
(EBITDA) $2,789,944 $3,858,349 $ 4,278,756 $ 5,196,457 $ 385,147
========== ========== =========== =========== =========
</TABLE>
While the company believes that EBITDA is a relevant and commonly used
measure of operating performance for a gaming company, it does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles and is not indicative of its ability to fund cash needs.
EBITDA should not be considered as an alternative to net income or as an
alternative to cash flow as a measure of liquidity.
Due to the Company's method of accounting for its equity ownership in
the GHV, several adjustments are necessary to arrive at EBITDA for the Company.
The above table, after giving effect to these adjustments, indicate a decline
in the Company's EBITDA during the current year of approximately $1,068,000 as
compared to 1995. Generally, the decline in the current year EBITDA is
attributable to a decrease in equity of earnings of GHV, excluding the portion
of decrease attributable to depreciation and interest. The impact of GHV's
operating results on EBITDA was partially offset by a decline in the amount of
federal and state income taxes due to a lower amount of taxable income realized
in the current year.
-27-
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Net cash provided by operating activities was $668,000 for the
year ended December 31, 1996 compared to net cash provided by operating
activity of $175,000 for the comparable year ended 1995.
Net cash flows provided by investing activities for the year ended
December 31, 1996 was $728,000 and were primarily the result of distributions
from GHV of $2,071,000 and loan repayments of $1,336,000 offset by the
combination of development costs related to the Jacobs project of $3,600,000,
capitalized interest of $124,000 and other uses of $469,000. During the year
ended December 31, 1995, the Company provided cash of $790,000 by investing
activities, principally due to distributions from GHV of $1,100,000 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 $413,000.
The net cash provided by financing activities during 1996 amounted to
$2,401,000 and is principally the result of the sale of stock, net of related
costs, and the proceeds from the sale of a convertible note to a shareholder,
aggregating net proceeds of $2,274,000, reduced by payments on long-term debt
of $803,000 and $565,000 in costs incurred to acquire treasury stock. Financing
activities used $1,139,000 of cash in 1995, principally for the repayment of
the Oklahoma City land note totaling $450,000, payments on long-term debt
totaling $138,000 and acquisition of treasury stock of $551,000.
The Company's principal sources of capital consist of cash flow
distributions from GHV and cash generated from its rental and management
operations and contributions to its subsidiary by the minority owner of the
subsidiary. As of December 31, 1996 the Company had working capital of
$4,396,000 as compared to $2,965,000 at December 31, 1995. In 1996 the Company
received $2,071,600 of distributions from GHV. Of this amount, $1,246,600 is
the result of the distribution of loan proceeds and $825,000 is the result of
profit distributions. During the first half of 1996 GHV 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, as well as the additional proceeds from the sale of
convertible notes and/or stock pursuant to the Jacobs transaction, discussed
below and aggregating up to $4,500,000 at December 31, 1996, will be sufficient
to meet the Company's short term requirements, which are operating expenses,
principal and interest payments on indebtedness and capital contributions
required by the Jacobs project prior to securing permanent project financing.
However, any significant development of other projects by the Company will
require additional financing, other joint venture partners, or both.
-28-
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
JACOBS PROJECT. 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. After many
changes, the current plan for the Jacobs project is a 50 to 60 room
hotel/casino, with three floors of underground parking for approximately 500
cars plus a two-story overflow parking facility on approximately 44,000 square
feet of Millsite 30 into the Jacobs project.
In December 1996 the Jacobs project gave the contractor "notice to
proceed" with limited construction pending securing of permanent financing. On
February 27, 1997 the Jacobs project obtained its excavation/foundation permit
from the City of Black Hawk and closed its financing with Wells Fargo Bank for
a $40,000,000 construction loan effective as of March 7, 1997. Generally, the
term of the loan is 5 years, with interest floating at approximately 3.5% above
the LIBOR rate (a total rate of interest of 9% at December 31, 1996). Principal
payments are due quarterly beginning at the end of the first quarter after the
project is open, which is presently anticipated to be May 15, 1998. Since the
commencement of the project, the Company has funded its share of the Jacobs
project costs, totaling $2,272,000, excluding certain land costs, through
December 31, 1996 ($3,217,500 through March 10, 1997) as well as an additional
$297,000 in costs which were incurred prior to formation of the Jacobs project,
out of current working capital and/or funds generated by operations. Presently,
the total project costs, including land costs, are estimated to be
approximately $67,000,000.
Under the terms of the credit facility agreement described in Item 1
above, the Company must contribute $15 million in equity to the Jacobs project
for its 75% interest before disbursements under the facility will be made by
the lender. It is anticipated that this commitment will be met from the
contribution of certain land ($3,600,000), credit for development costs already
paid ($3,200,000), unfunded commitments of Jacobs ($4,500,000) and other
officers and directors ($750,000) and current working capital ($2,950,000). As
the result of using most of its current working capital, the Company may find
it necessary to seek additional sources of either debt or equity financing.
INVESTMENT OF CAPITAL INTO THE COMPANY BY JACOBS ENTERTAINMENT, LTD. On
November 12, 1996 the Company concluded a financing arrangement ("Agreement")
with Diversified Opportunities Group Ltd. (DOGL), an affiliate of Jacobs
Entertainment Inc. (this company and its affiliates are referred to herein
collectively as "Jacobs"). Jacobs has joined with the Company in the
development of a major hotel/casino in Black Hawk, Colorado. The Jacobs project
is owned by Black Hawk/Jacobs Entertainment LLC in which the Company owns a 75%
interest and Jacobs a 25% interest.
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 Jacobs project costs. In addition, the agreement provides for
-29-
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
existing officers and directors of the Company to purchase up to $750,000 of
convertible notes under terms similar to those offered to Jacobs.
The conversion feature with respect to the second note (also at $5.25
per share) was approved by the shareholders of the Company at a special meeting
held on January 13, 1997. In addition, conversion of all of the notes
(including those purchased by current officers and directors) is subject to the
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 Gilpin Hotel Casino has been investigated by the
Colorado Division of Gaming ("Division") regarding certain of its check cashing
and debt collection practices. These practices are being scrutinized in light
of Colorado law that prohibits the extension of credit by gaming licensees to
any person for the purpose of engaging in limited gaming. The statute
containing this prohibition has been ruled unconstitutional in an unrelated
action before the Gilpin County Court, and that decision is being appealed to
higher courts. The Gilpin Hotel Casino has not yet been advised as to the
status or possible conclusion of the Division's inquiry into this matter. If an
extension of credit is found to have occurred, the Casino and/or the Company,
as manager, could be subject to criminal and administrative penalties,
including fines, temporary closure of the Casino, license suspension or
revocation, or incarceration for individuals involved. However, the Colorado
Limited Gaming Control Commission has scheduled a rule making proceeding to
establish standards for the parameters of "extension of credit" not otherwise
apparent from the face of the gaming statutes or existing regulations. The
Casino intends to vigorously contest any actions brought by the Division in the
foregoing regard, but the outcome of this matter is not presently determinable.
DISPUTED ISSUES BETWEEN THE COMPANY AND ITS JOINT VENTURE PARTNER OF THE
CASINO. The recoupment provision of the GHV agreement has provided 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
approximately $1,244,000 at December 31, 1996 for its proportionate share of
the development cost incurred to construct the Casino (the "recoupment
account") out of 40% of its share of the after tax profits of the Casino, if
any. There were no repayments against the recoupment account during 1996. The
Company's joint venture partner (GVI) is withholding payment against this
recoupment account and is disputing certain expenses paid by, and distributions
made to the Company. The Company has made several requests of GVI to prepare a
detailed listing of the dates, description and amounts of the disputed items,
however the Company has not received any such explanation. The Company intends
to institute arbitration proceedings to pursue collection of the amounts due
pursuant to the recoupment account estimated at $200,000 through March 15,
1997.
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 venture's Policy Board. During the second, third and fourth quarters of
1996 the net income of GHV was less than 80% of budgeted amounts for the
respective periods. If the Policy Board deems the failure to meet the standard
is not the result of extenuating circumstances, and
-30-
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
the parties disagree, the matter will be immediately submitted to arbitration.
As discussed above, the Company believes that the activities of the BID have
had a significant and substantial adverse effect on the operations of GHV
during 1996. Accordingly, the Company does not presently anticipate that the
management agreement will be subject to review by the Policy Board of GHV.
However, under the terms of the Joint Venture agreement the Company's
management contract with GHV expires on June 30, 1997 and is subject to review
by the Policy Board for another five year term. At the date of this Report the
Company can give no assurance that its management contract will be renewed.
-31-
<PAGE> 34
Item 8. Financial Statements and Supplementary Data.
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.:
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements for the Years
Ended December 31, 1996, 1995 and 1994 F-7
GILPIN HOTEL VENTURE:
Independent Auditors' Report F-19
Balance Sheets - December 31, 1996 and 1995 F-20
Statements of Income for the Years Ended December 31, 1996, 1995
and 1994 F-21
Statements of Venturers' Investments and Advances for the Years
Ended December 31, 1996, 1995, and 1994 F-22
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994 F-23
Notes to Financial statements for the Years Ended December 31, 1996,
1995 and 1994 F-24
</TABLE>
All schedules are omitted as they are either inapplicable or the information
required by the schedules is presented in the Company's consolidated financial
statements or notes thereto.
-32-
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Black Hawk Gaming & Development Company, Inc.:
We have audited the accompanying consolidated balance sheets of Black Hawk
Gaming & Development Company, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Black Hawk Gaming & Development
Company, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
DELOITTE & TOUCHE LLP
March 14, 1997 (except for Note 14, as to which the
the date is March 27, 1997)
Denver, Colorado
F-1
<PAGE> 36
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,531,355 $ 2,189,648
Accounts receivable:
Gilpin Hotel Venture 78,865 104,235
Other 2,071 31,111
Income taxes receivable 325,100 45,367
Note receivable - Gilpin Gold, Inc. 1,335,971
Deferred tax asset 79,267 109,867
----------- -----------
Total current assets 5,016,658 3,816,199
INVESTMENT IN AND ADVANCES TO GILPIN
HOTEL VENTURE 3,966,645 4,858,270
LAND:
Leased to Gilpin Hotel Venture:
Casino ground 1,967,689 1,967,689
Millsite 29 791,801 791,801
Held for development:
Oklahoma 579,049
Under development:
Millsite 30 1,466,317 1,466,317
Millsite 31 2,418,754 2,418,754
Millsite 32 3,568,234 3,568,234
----------- -----------
Total land 10,791,844 10,764,493
PROJECT DEVELOPMENT COSTS 4,699,513 594,361
OTHER ASSETS, net 49,335 234,998
----------- -----------
TOTAL $24,523,995 $20,268,321
=========== ===========
</TABLE>
See notes to consolidated financial statements. (Continued)
F-2
<PAGE> 37
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 495,786 $ 47,520
Current portion of long-term debt 124,496 802,980
----------- -----------
Total current liabilities 620,282 850,500
NONCURRENT LIABILITIES:
Convertible note payable to shareholder 1,500,000
Long-term debt 2,251,639 2,376,655
Deferred tax liability 61,506
------------ -----------
Total liabilities 4,433,427 3,227,155
----------- -----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT OPTIONS 137,499 666,667
MINORITY INTEREST 1,793,500
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; 2,672,043 and
2,534,567 shares issued and outstanding, respectively 2,670 2,534
Additional paid-in capital 10,470,306 9,728,751
Retained earnings 7,686,593 6,643,214
----------- -----------
18,159,569 16,374,499
----------- -----------
Total stockholder's equity $24,523,995 $20,268,321
=========== ===========
</TABLE>
(Concluded)
F-3
<PAGE> 38
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Gilpin Hotel Venture:
Management fees $ 316,828 $ 383,901 $ 435,025
Rental income 436,264 451,558 472,449
Parking lot operation 322,607 357,547 300,000
Interest 188,188 300,649 203,836
---------- ---------- ----------
Total operating revenues 1,263,887 1,493,655 1,411,310
---------- ---------- ----------
COSTS AND EXPENSES:
Compensation and related costs 754,173 621,984 515,803
Impairment writedown 492,992
Other general and administrative 365,263 530,639 418,500
Interest 124,260 268,119 106,067
---------- ---------- ----------
Total costs and expenses 1,736,688 1,420,742 1,040,370
---------- ---------- ----------
EQUITY IN EARNINGS OF JOINT VENTURE 2,255,635 2,785,929 3,493,149
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,782,834 2,858,842 3,864,089
INCOME TAXES 735,893 1,085,595 1,370,282
---------- ---------- ----------
NET INCOME $1,046,941 $1,773,247 $2,493,807
========== ========== ==========
NET INCOME PER COMMON SHARE $ 0.41 $ 0.65 $ 1.00
========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 2,527,423 2,578,806 2,502,083
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 39
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
PREFERRED STOCK COMMON STOCK PAID-IN EARNINGS TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1994 2,361,826 $2,362 $ 8,676,819 $2,643,208
Issuance of shares upon
exercise of options,
including tax benefit
of $378,000 150,000 150 1,127,850
Acquisition of treasury 25,659 $(307,900)
shares
Issuance of shares for
services 7,500 8 82,492
Stock issued for land
acquisition 100,000 100 1,099,900
Common stock subject to
put options (986,000)
Constructive retirement of
treasury shares (Note 8) (25,659) (26) (94,271) (213,603) 25,659 307,900
Net income 2,493,807
---- ---- --------- ------ ----------- ---------- ------- ---------
BALANCES,
DECEMBER 31, 1994 2,593,667 2,594 9,906,790 4,923,412
Accretion of discount on
common stock subject
to put options (93,167)
Exercise of put options 412,500 37,500 (412,500)
Acquisition of treasury 21,600 (138,377)
shares
Constructive retirement of
treasury shares (Note 8) (59,100) (60) (497,372) (53,495) (59,100) 550,877
Net income 1,773,247
---- ---- --------- ------ ----------- ---------- ------- ---------
BALANCES,
DECEMBER 31, 1995 2,534,567 2,534 9,728,751 6,643,214
Accretion of discount on
common stock subject
to put options (20,816)
Exercise of put options 550,000 50,000 (550,000)
Acquisition of treasury 3,000 (15,085)
shares
Retirement of treasury
shares (Note 8) (53,000) (53) (561,470) (3,562) (53,000) 565,085
Issuance of shares, net
of issuance costs 190,476 189 773,841
Net income 1,046,941
---- ---- --------- ------ ----------- ---------- ------- ---------
BALANCES,
DECEMBER 31, 1996 0 $ 0 2,672,043 $2,670 $10,470,306 $7,686,593 0 $ 0
==== ==== ========= ====== =========== ========== ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 40
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,046,941 $ 1,773,247 $ 2,493,807
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,359 5,717
Equity in earnings of joint venture (1,179,937) (1,592,922) (2,285,673)
Deferred taxes 92,106 60,875 (48,365)
Noncash compensation 33,750
Impairment writedown 492,992
Other (13,477)
Changes in operating assets and liabilities:
Accounts receivable 54,410 110,514 (90,929)
Accounts payable and accrued expenses 448,266 (32,889) 42,352
Income taxes receivable or payable (279,733) (149,367) (1,284,597)
----------- ----------- -----------
Net cash provided by (used in) operating activities 667,927 175,175 (1,139,655)
----------- ----------- -----------
INVESTING ACTIVITIES:
Maturities of long-term treasury bills 2,556,169
Acquisition of land and land improvements (27,351) (22,665) (3,866,021)
Distributions from joint venture 2,071,562 1,100,000 1,950,000
Advances to joint venture (123,318)
Payments received from Gilpin Ventures, Inc. on return of investment 90,163 302,406
Note receivable from Gilpin Gold, Inc. 1,335,971 159,029 (1,495,000)
Payments of project development costs (3,599,991)
Capitalized interest (124,366)
Effect on cash of consolidating Black Hawk/Jacobs Entertainment, LLC in 1996 85,503
Other (468,993) (413,434) (305,235)
----------- ----------- -----------
Net cash provided by (used in) investing activities (727,665) 789,775 (857,681)
----------- ----------- -----------
FINANCING ACTIVITIES:
Sale of common shares, net of offering costs 774,030
Proceeds from exercise of stock options 442,100
Acquisition of treasury stock and payments upon exercise of put option (565,085) (550,877)
Payments on long-term debt and note payable (803,500) (587,841) (131,871)
Proceeds from issuance of convertible debt to shareholder 1,500,000
Minority interest contributions to majority-owned subsidiary 1,496,000
Net cash provided by (used in) financing activities 2,401,445 (1,138,718) 310,229
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,341,707 (173,768) (1,687,107)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,189,648 2,363,416 4,050,523
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,531,355 $ 2,189,648 $ 2,363,416
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 248,626 $ 268,119 $ 106,067
Cash paid for income taxes 838,000 1,174,000 2,714,597
Noncash investing and financing activities:
Addition to debt due to land acquisitions 3,050,000
Issuance of common stock subject to put options for land 986,000
Deferred tax benefit related to option exercise 378,000
Acquisition of treasury stock for exercise of stock options 307,900
Issuance of common stock for land 114,000
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 41
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. and subsidiaries (the
Company) was incorporated on January 10, 1991 in Colorado to acquire
gaming properties for development, joint venture and operation. The
Company completed 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 (Note 3). In November 1994, GHV acquired an
adjacent casino, joined it with GHV's existing casino, and placed it into
operation in January 1995. In November 1996, the Company entered into an
Amended and Restated Purchase Agreement and an Operating Agreement to
form Black Hawk/Jacobs Entertainment, LLC (the LLC) for the purpose of
developing and managing a hotel/casino project in Black Hawk, Colorado.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The accompanying financial statements include the
accounts of the Company, its wholly owned subsidiary Native American
Management Corp. (NAMC) and its 75% owned subsidiary Black Hawk/Jacobs
Entertainment, LLC. The Company acquired NAMC in June 1994 for $50,000 in
cash and a $450,000 noninterest bearing note financed by the former
stockholder of NAMC. The note was paid in full in February 1995. NAMC's
only significant asset is land in Oklahoma, which is being held for
development. Pursuant to the agreements entered into in conjunction with
the formation of the LLC, the Company will make total capital
contributions of $15,000,000 to the LLC, which will result in a 75%
interest in the LLC. As of December 31, 1996, the Company's contributions
totaled $2,568,727 (Note 4). All significant intercompany transactions
and balances have been eliminated in consolidation.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
OTHER ASSETS - At December 31, 1996, other assets consist primarily of
furniture and fixtures. Depreciation and amortization are provided on the
furniture and fixtures by the straight-line method over the estimated
useful lives of the assets. Other assets are reported net of accumulated
depreciation and amortization.
JOINT VENTURE - The Company accounts for its investment in GHV under the
equity method of accounting. All intercompany transactions have been
eliminated to the extent of the Company's 50% interest in GHV.
STOCK ISSUED FOR SERVICES - Common stock was issued to an officer in 1994
for services and was valued at market value as of the date awarded.
Compensation and related costs in the statement of operations includes
$33,750 for the year ended December 31, 1994, related to stock issued for
services. The Company did not issue stock for services during 1996 or
1995.
F-7
<PAGE> 42
EARNINGS PER COMMON SHARE - Earnings per share is computed on the
weighted average number of common shares outstanding adjusted for the
dilutive effect of options and warrants outstanding during the periods
presented. Net income in 1996 and 1995 was adjusted for accretion of
discount on common stock subject to put options.
Fully diluted earnings per share would include the effect of the
convertible note payable to shareholder, however fully diluted earnings
per share does not differ significantly from the primary earnings per
share.
EMPLOYEE STOCK COMPENSATION PLANS - The Company follows Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." The exercise price of stock options issued to employees
equals the market price of the stock on the measurement date, and
therefore, the Company does not record compensation expense on stock
options granted to employees.
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS- During 1995, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable and establishes guidelines for determining recoverability
based on future net cash flows from the use of the asset and for the
measurement of the impairment loss. Impairment loss is calculated as the
difference between the carrying amount of the asset and its fair value.
Any impairment loss is recorded in the period in which the recognition
criteria are first applied and met. The Company adopted SFAS as of
January 1, 1996. See Note 13 for discussion of the impairment loss
recorded during the year ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." This Statement establishes new standards for computing and
presenting earnings per share. This Statement is effective for financial
statements issued in periods ending after December 15, 1997, including
interim periods; early application is not permitted. The Company will
adopt this Statement in the fourth quarter of 1997 and will restate all
prior period earnings per share data presented as required. The Company
has not yet determined the impact of adopting this Statement on its
reported net income per share.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1995
and 1994 financial statements to conform to the classifications used in
1996.
F-8
<PAGE> 43
3. GILPIN HOTEL VENTURE
In May 1991, the Company entered into an agreement to purchase a one-half
interest in raw land known as Millsite 29 and an historic hotel property
known as the Gilpin Hotel both in Black Hawk, Colorado for $1,125,000. In
connection with the purchase of the property, the Company entered into a
joint venture agreement (the Agreement) to form GHV with the owners of
the remaining one-half interest in the properties, for the purpose of
developing and operating a limited-stakes gaming and restaurant facility.
Each party owns 50% of GHV. Under the Agreement, the Company has been
appointed manager of the joint venture, with the exception of certain
actions which require the consent of both joint venture partners.
Pursuant to the Agreement, the Company was required to provide all
development funds, as defined, for development, refurbishing and
operations of the Casino. One-half of the development funds provided are
recoupable by the Company out of 40% of the other venturer's net profits,
as defined, after allowing for the other venturer's income taxes on such
net profits. No recoupments will occur at any time there are net losses.
In June 1993, the Company and GHV resolved various disagreements
regarding several accounting matters relating to the development of the
Casino. The settlement agreement, among other things, provided that the
amount of the development account was to be $3,328,400, of which
$1,664,200 is recoupable by the Company from its share of the joint
venture partner's profits. The joint venture partner paid the Company
$90,163 and $302,406 for its share of the development account during
1995, and the Company has not accrued any amounts receivable, and 1994,
respectively. Since the first quarter of 1996 the joint venture partner
has not made payments pending the resolution of additional disagreements
regarding matters relating to the development and operation of the
Casino.
Under the terms of the joint venture agreement, the land and improvements
are leased by GHV from the Company and an affiliate of Gilpin Ventures,
Inc. for a monthly rental fee of 7% of gross gaming revenues, as defined.
The Company operates the casino facility pursuant to a management
agreement. The Company is paid a monthly management fee by GHV for
operating the Casino. The monthly fee consists of 11% of the defined
annual net profits from gaming, plus 3% of the adjusted gross sales and
10% of the defined annual net profits of the food and beverage
operations. During the year ended December 31, 1996, the Casino's results
of operations were below the performance levels established by the
management agreement. As of December 31, 1996, the Company does not
believe that it will be removed as manager of the Casino however under
the terms of the joint venture agreement, the Company's management
contract with GHV expires on June 30, 1997. The Company cannot give any
assurance that its management contract will be renewed.
Pursuant to agreements with its joint venture partner, the Company
charged a monthly rental of $50,000 for 1996, 1995 and 1994, for usage of
Millsite 30 as a parking lot for the benefit of casino customers. The
Company expects to rent Millsite 30 at $50,000 per month until the fourth
quarter of 1997, when construction related to the Black Hawk/Jacobs
Entertainment, LLC will begin on Millsite 30. In addition, from February
1995 through September 1996 the Company charged an additional monthly
parking fee to GHV for the use of Millsite 31 at a rate of $9,202 per
month. In September 1996, this additional monthly parking fee arrangement
was terminated and is not expected to be reinstated.
F-9
<PAGE> 44
Summarized balance sheet information of GHV at December 31, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current assets $ 2,712,283 $ 2,431,052
Gaming facility 8,966,878 9,211,930
Goodwill 1,376,136 1,481,178
----------- -----------
Total $13,055,297 $13,124,160
=========== ===========
Current liabilities $ 2,681,137 $ 2,267,980
Long-term debt 5,161,792 3,860,561
Venturers' investments and advances 5,212,368 6,995,619
----------- -----------
Total $13,055,297 $13,124,160
=========== ===========
</TABLE>
Summarized income statement information of GHV for the years ended 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net revenues $ 27,951,521 $ 29,534,440 $ 29,307,985
Operating costs (14,439,944) (15,097,455) (14,833,149)
Marketing, general and administrative
expenses (9,396,004) (9,788,366) (8,972,070)
Depreciation and amortization (1,228,045) (1,130,349) (617,482)
Write-off of advance to casino (303,387)
Interest (527,654) (332,427) (10,552)
------------ ------------ ------------
Net income $ 2,359,874 $ 3,185,843 $ 4,571,345
============ ============ ============
</TABLE>
The Company's equity in earnings of GHV as reflected in the statements of
income has been adjusted for elimination of the Company's share of fees
and rentals it receives from GHV.
4. BLACK HAWK/JACOBS ENTERTAINMENT, LLC
In December 1994, the Company signed a joint venture agreement with
Jacobs Entertainment, Inc. (Jacobs) of Cleveland, Ohio to develop a major
hotel/casino/parking complex in Black Hawk, Colorado. After many changes
and revisions, the current plan for the Jacobs project is a 50-60 room
hotel/casino with three floors of under ground parking for approximately
500 cars. As a result of the refinements during the development process,
it was decided to incorporate a two-story overflow parking facility for
approximately 220 additional parking spaces on 44,000 square feet on
Millsite 30 into the Jacobs project.
On November 12, 1996, the Company entered into an agreement with
Diversified Opportunities Group (Diversified), Inc. and BH Entertainment
Ltd. (BH) (both affiliates of Jacobs) whereby Diversified, BH and the
Company created the LLC in which the Company is a 75% member and the
Jacobs affiliates are a 25% member. Under the agreement, the Company and
Diversified are joint managers of the LLC. The Company's interest in the
LLC is based upon expected total capital contributions of $15,000,000. In
connection with the formation of the LLC, Diversified provided debt and
equity financing to the Company as discussed in Note 7.
F-10
<PAGE> 45
As of December 31, 1996, the Company has contributed $2,568,727 to the
LLC which represents 59% of the contributed capital, as defined, of the
LLC as of year end. The Company is required to continue to contribute to
the LLC until such time as its capital contributions are equal to its 75%
ownership interest, at which time Diversified will resume contributions
to the LLC as necessary. Diversified's interest in the LLC is reflected
as minority interest in the accompanying balance sheet.
5. LONG-TERM DEBT AND CONVERTIBLE NOTE
Long-term debt and convertible note consists of the following at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Convertible Note:
Note payable to shareholder; convertible into common stock at $5.25 per share;
principal balance due in full, unless sooner converted, on November 12, 1998;
interest at LIBOR (5.5% at December 31, 1996) plus 2% per annum due quarterly
through November 12, 1998; secured by 100%
of the Company's interest in the LLC (Note 7) $1,500,000
========== ==========
Long-Term debt:
Notes payable; paid in November 1996 $ $ 688,253
Note payable; payments of $51,178, including principal and
interest at 8% per annum, due quarterly through
January 2005; secured by a first deed of trust on Millsite 32 1,199,431 1,302,961
Note payable; payments of $8,805, including principal and
interest of 8% per annum due monthly through September 2004 with the
remaining principal balance of $1,054,472 due on October 1, 2004; secured by
a first deed of trust on
Millsite 31 1,176,266 1,187,342
Other notes payable 438 1,079
2,376,135 3,179,635
Less current portion 124,496 802,980
---------- ----------
Total $2,251,639 $2,376,655
========== ==========
Scheduled principal payments at December 31 are as follows:
1997 $ 124,496
1998 134,292
1999 145,369
2000 157,359
2001 170,340
Thereafter 1,644,279
----------
Total $2,376,135
==========
</TABLE>
6. WARRANTS
In conjunction with the common stock issued during the initial public
offering in May 1993, the Company also issued Class A and B warrants.
Four Class A warrants entitle the holder to purchase one share of
F-11
<PAGE> 46
$0.001 par value common stock of the Company at an exercise price of
$10.00 per share. The warrants were exercisable at any time during the
period May 13, 1993 (the date of the prospectus) to December 31, 1994
which was extended on two separate occasions with the current expiration
date established to be June 30, 1997. The Company issued 954,500 Class A
warrants corresponding to 238,625 shares of common stock subject to
issuance upon exercise of the warrants. The Company has the right to
redeem all of the Class A warrants at a redemption price of $0.05 per
Class A warrant after providing 60 days prior written notice, subject to
the following conditions: (i) the common stock of the Company is trading
at a price of $12 or more; and (ii) the common stock was traded at or
above such price for a minimum of 30 consecutive trading days ending
within 15 days of notice of redemption.
The terms and conditions applicable to the Class A warrants are also
applicable to the Class B warrants with the following exceptions: (i) the
exercise price of the Class B warrants is $12 per share of common stock;
(ii) the minimum trading price of the Company's common stock as a
condition to redemption must be $14.40 or more, and (iii) the expiration
date of the Class B warrants is June 30, 1997.
The Company issued warrants to purchase 83,000 shares of common stock at
$10.20 to the underwriters of its initial public offering. The warrants
will be exercisable at any time during the period of four years
commencing May 1994. The warrants contain certain demand and piggyback
registration rights. The Company also issued to the underwriters 83,000
Class A warrants and 83,000 Class B warrants which contain the same terms
and conditions as the Class A and Class B warrants included in the units
sold to the public, except that the underwriters' Class A and B warrants
became exercisable in May 1994. The underwriters' Class A warrants are
exercisable at $15.00 per share, and the underwriters' Class B warrants
are exercisable at $18.00 per share.
7. COMMON STOCK
In connection with the LLC agreement, the Company issued 190,476 shares
of its $.001 par value common stock to Diversified Opportunities Group,
Inc. (Diversified) for $1,000,000 and convertible debt amounting to
$1,500,000. The debt is convertible at $5.25 per share and is secured by
a first priority lien on 100% of the Company's interest in the LLC.
Interest on the note is at a variable rate per annum, computed based upon
the London InterBank rate (LIBOR) plus 2% and is payable quarterly. The
Company is also subject to an annual facility fee equal to 1/4 of 1% of
the amount of the principal amount outstanding. Until the entire
principal balance of the note is converted, the Company shall pay to
Diversified a profit participation equal to 40% of the net cash flow, as
defined, distributed by the LLC to the Company. Unless the debt is
converted sooner, the balance of the note is due on November 12, 1998.
Further, subject to approval by the Company's shareholders, Diversified
agreed to purchase an additional $4,500,000 convertible note and certain
officers and directors of the Company agreed to purchase 142,857 shares
of Company common stock for $750,000 ($5.25 per share). Shareholder
approval was obtained in January 1997. The notes are convertible at $5.25
per share by Diversified at any time into 1,142,857 shares of Company
common stock.
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
between Millsites 31 and 34. The land was purchased from the bankruptcy
court 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 put 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. The balance of the common stock subject to put options at December
31, 1996 and 1995 was $137,499 and $666,667, respectively. During 1996
and 1995 the holder put 50,000 and 37,500 shares to the Company for
F-12
<PAGE> 47
$550,000 and $412,500, respectively. On January 10, 1997, the final
12,500 shares were put back to the Company.
Common stock acquired during 1995 and 1994 has been presented as
constructively retired to reflect present Colorado Revised Statutes which
provide that all shares of a company which have been reacquired are
considered authorized but unissued shares. As a result, $550,887 and
$307,900 which represents 59,100 and 25,659 shares acquired in 1995 and
1994, respectively, has been classified as a reduction of common stock,
additional paid-in capital, and retained earnings. During 1996, all
treasury shares acquired by the Company were formally retired.
8. STOCK OPTION PLANS
The Company currently has two stock option plans: the 1994 Employees'
Incentive Stock Option Plan ("1994 Plan") and the 1996 Incentive Stock
Option Plan ("1996 Plan"). The 1994 Plan provides for the grant of
incentive stock options to officers, directors and employees of the
Company. Under the terms of the 1994 Plan, as amended, 345,000 shares of
the Company's common stock were reserved for issuance to key employees.
The 1996 Plan provides for the grant of stock options, including
incentive stock options and non-qualified stock options. Under the terms
of the 1996 Plan, 500,000 shares of the Company's common stock were
reserved for issuance to key employees and other persons. At December 31,
1996, there were 67,500 shares available for future grants under the 1994
Plan and 170,000 shares were available for future grants under the 1996
Plan. Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE PRICE
SHARES PRICE PER SHARE PER SHARE
<S> <C> <C> <C> <C>
Outstanding at
January 1, 1994 200,000 $ 5.00 - $ 13.00 $ 7.00
Granted 190,000 $10.00 - $ 11.00 $10.39
Exercised (150,000) $ 5.00 $ 5.00
Terminated (50,000) $13.00 $13.00
--------
Outstanding at
December 31, 1994 190,000 $10.00 - $ 11.00 $10.39
Granted 110,000 $ 6.75 - $ 7.45 $ 7.04
--------
Outstanding at
December 31, 1995 300,000 $ 6.75 - $ 11.00 $ 9.17
Granted 682,500 $ 5.63 - $ 6.19 $ 5.88
Forfeited (57,500) $ 6.75 - $ 10.00 $ 9.15
Terminated (317,500) $ 6.75 - $ 11.00 $ 8.57
--------
Outstanding at
December 31, 1996 607,500 $ 5.63 - $ 6.19 $ 5.79
========
</TABLE>
F-13
<PAGE> 48
Grants issued to owners of more than 10% of the outstanding common stock
of the Company are issued at 110% of fair market value at the date of
grant and expire five years after the date of grant. Grants issued to
owners of less than 10% of the outstanding common stock of the Company
are issued at 100% of fair market value at the date of grant and expire
ten years after the date of grant. Options granted to officers,
directors, and employees under the 1994 Plan generally vest
proportionately over three years on June 30 following the grant date.
Options issued to officers, directors, employees and non-affiliated
persons under the 1996 Plan generally vest proportionately over three
years on each of the first, second, and third anniversary dates of the
grant. The number of stock option shares exercisable at December 31, 1996
was 247,500. These stock options have a weighted average exercise price
of $5.88 per share.
On November 12, 1996, all options outstanding were canceled and reissued
at the then-current market price, with the appropriate adjustments made
for owners of more than 10% of the Company's outstanding common stock.
This transaction resulted in the cancellation and reissuance of 307,500
options.
As discussed in Note 1, the Company follows APB No. 25 for stock options
issued to employees, rather than following Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123, among other things, requires estimating the
fair value of stock options using an option pricing model that considers
factors specified by this SFAS, and recording compensation cost based on
the estimated fair value of the stock options.
Had compensation cost for the Company's plans been determined based on
the fair value at the grant date of awards under those plans consistent
with the provisions of SFAS 123, the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income - as reported $1,046,941 $1,773,247
Net income - pro forma $ 761,134 $1,211,797
Earnings per share - as reported $ 0.41 $ 0.65
Earnings per share - pro forma $ 0.30 $ 0.47
</TABLE>
The weighted average fair value of the stock options granted during 1996
was $3.52. The fair value of each stock option granted is estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in 1996: risk-free interest rate of
6.00%; expected dividend yield of 0%; expected life of three to six
years; and expected volatility of 73.88%. The outstanding stock options
at December 31, 1996 have a weighted average contractual life of 7.92
years.
F-14
<PAGE> 49
9. INCOME TAXES
Income tax expense includes the following current and deferred provisions
at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $643,787 $1,024,720 $1,418,647
Deferred 92,106 60,875 (48,365)
-------- ---------- ----------
Total $735,893 $1,085,595 $1,370,282
======== ========== ==========
</TABLE>
In addition, the Company realized a tax benefit of $378,000 in 1995 when
holders of nonqualified stock options exercised their options. The tax
benefit was credited to additional paid-in capital.
Income tax expense includes the following federal and state components
for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<S> <C> <C> <C>
Federal $642,010 $ 948,665 $1,177,082
State 93,883 136,930 193,200
-------- ---------- ----------
Total $735,893 $1,085,595 $1,370,282
======== ========== ==========
</TABLE>
The Company's income tax expense for the years ended December 31, 1996,
1995 and 1994 varies from the amount expected by applying the Federal tax
rate due to the following items:
<TABLE>
<S> <C> <C> <C>
Expected income tax expense $606,164 $ 972,006 $1,313,790
State income taxes, net of Federal benefit 61,963 90,374 120,876
Other, net 67,766 23,215 (64,384)
-------- ---------- ----------
Total $735,893 $1,085,595 $1,370,282
======== ========== ==========
</TABLE>
F-15
<PAGE> 50
The Company's deferred taxes reflected at December 31, 1996 and 1995 are
comprised of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Current deferred tax assets -
Temporary differences in GHV $ 79,267 $109,867
-------- --------
Noncurrent - deferred tax assets:
Start-up costs capitalized for tax
33,441
Noncurrent deferred tax liabilities -
Temporary differences in GHV (61,506) (14,818)
-------- --------
Noncurrent net deferred tax assets (liabilities) (61,506) 18,623
-------- --------
Net deferred tax assets $ 17,761 $128,490
======== ========
</TABLE>
10. CONTINGENCIES
The Company intends to develop and currently operates through a joint
venture, real property in an area that was once active in the mining
industry. The major portion of Clear Creek and Gilpin Counties, Colorado
have been identified as a federal superfund study area by the
Environmental Protection Agency. A superfund study area is generally an
area adjacent to or impacted by discharge from a designated superfund
site. At present, there are no federal regulations for dealing with
development within a superfund study area. Any liability required for
cleanup of a contaminated site will rest primarily with the current
owner. Moreover, it is possible that expenses for cleanup, if required,
may be greater than is technologically and/or economically feasible at
the present time. The Company, through independent environmental
consultants, has conducted an initial study and a subsequent follow-up
report on its properties and, on that basis, does not believe any
significant environmental problems exist with respect to its properties
which would have a material adverse effect on its financial condition or
results of operations. However, no absolute assurance in this regard can
be given.
In June, 1993 the Company received a conditional use permit from the City
of Black Hawk with respect to its parking facilities on the condition
that $4.00 per space per day (a total of $27,000 per month with respect
to Millsites 29 and 30) be paid to the City into a transportation utility
fund. The Company, GHV, and its joint venture partner did not believe the
fee to be valid and instituted suit against the City. The Company and GHV
also contested the fee (approximately $5,000 per month) with respect to
Millsite 31. During the court proceedings, GHV paid the $4.00 per day fee
to the court and charged the cost to operating expenses. The City filed a
counterclaim, alleging that GHV owed certain one-time parking impact fees
to assist in paying for a municipal parking lot. Parking impact fees are
assessed at the rate of $2,000 per space required as a function of
building size and usage. Under the allegations of the counterclaim, GHV
owed the City $358,000. In December 1995 the District Court ruled against
the plaintiffs essentially upholding both of the fees charged by the
City. The plaintiffs appealed the decision and, in 1996, the District
Court ruling with respect to the permit fees of $4.00 per space per day
was upheld. However, the District Court ruling with respect to the
one-time parking impact fees was not upheld and GHV was not required to
pay the fees to the City. The City has since eliminated the $4.00 per
space per day permit fee and is currently in the process of defining fees
based on the number of devices in a casino.
F-16
<PAGE> 51
The Casino has been investigated by the Colorado Division of Gaming
(Division) regarding certain of its check cashing and debt collection
practices. These practices are being scrutinized in light of Colorado law
that prohibits the extension of credit by gaming licensees to any person
for the purpose of engaging in limited gaming. The statute containing
this prohibition has been ruled unconstitutional in an unrelated action
before the Gilpin County Court, and that decision is being appealed to
higher courts. The Company has not yet been advised as to the status or
possible conclusion of the Division's inquiry into this matter. If an
extension of credit is found to have occurred, the Company could be
subject to criminal and administrative penalties, including fines,
temporary closure of the casino, license suspension or revocation, or
incarceration for individuals involved. However, the Colorado Limited
Gaming Control Commission has scheduled a rule making proceeding to
establish standards for the parameters of "extension of credit" not
otherwise apparent from the face of the gaming statutes or existing
regulations. The Casino and the Company intend to vigorously contest any
actions brought by the Division in the foregoing regard, but the outcome
of this matter is not presently determinable.
The Internal Revenue Service (IRS) has examined GHV's 1992, 1993, 1994
and 1995 income tax returns. GHV and the IRS have reached a settlement of
findings in GHV's 1992, 1993 and 1994 income tax returns which will
increase the amount of taxable income allocated to the Venturers by
approximately $128,000, $62,000 and $200,000, respectively. GHV and the
IRS have also reached a settlement of findings of GHV's 1995 income tax
return which will decrease the amount of taxable income allocated to the
Venturer's by approximately $40,000. The findings represent principally
temporary differences, which will reverse in future years.
11. RELATED PARTIES
During 1994, the Company loaned $1,495,000 to Gilpin Gold, Inc., 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 adjacent to the Casino. The note required monthly
interest payments beginning in December 1994 through February 1995.
Beginning in March 1995, payments were increased to include principal
payments. The original due date of the note was November 7, 1995,
however, the Company extended the due date to June 7, 1996. During 1995
the Company received payments of $159,000 on the note. The remaining
outstanding principal balance was paid in full in 1996.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of the Company's
financial instruments is made in accordance with the requirements of
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts
have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment
is required to interpret market data in order to develop the estimates of
fair value. Accordingly, the estimates herein are not necessarily
indicative of
F-17
<PAGE> 52
the amounts the Company could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
1996 1995
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 4,531,355 4,531,355 $2,189,648 $2,189,648
Notes receivable - Gilpin Gold Inc. 1,335,971 1,335,971
Liabilities:
Debt 3,876,135 3,876,135 3,179,635 3,179,635
</TABLE>
The estimation methodologies utilized by the Company are summarized as
follows:
CASH AND CASH EQUIVALENTS/NOTES RECEIVABLE - GILPIN GOLD INC. - For these
short-term instruments, the carrying amount is a reasonable estimate of
fair value.
DEBT - The fair value of long-term debt is estimated using the rates
currently offered for similar borrowings.
13. IMPAIRMENT WRITEDOWN
As of December 31, 1996, it was determined that the carrying amount of
certain assets may not be recoverable and an impairment loss should be
recognized. The carrying value of assets to be held and used in
operations for which an impairment loss was recognized are comprised of
$345,417 for costs incurred to obtain a gaming license in Mexico and
$147,575 for costs incurred to develop and test market a new casino game.
As of December 31, 1996, events had occurred in Mexico which led
management to believe that the likelihood of obtaining a gaming license
in Mexico was remote, and therefore, all costs incurred to date were not
likely to be recoverable. The test marketing of the new casino game has
not been successful and as of December 31, 1996, management decided to
discontinue the test marketing at the Casino and therefore determined
that the costs incurred to develop and test market the new game are not
likely to be recoverable. The fair value of the assets was estimated
using the present value of estimated expected future cash flows in order
to determine the amount of the impairment loss. As of December, 31, 1996,
the estimated expected future cash flows was deemed to approximate zero
given the current market conditions. The aggregated impairment loss
recognized during the year ended December 31, 1996, was $492,992.
14. SUBSEQUENT EVENTS
On March 27, 1997, the LLC closed financing, effective March 7, 1997,
with Wells Fargo Bank for a $40,000,000 construction loan. The loan has a
five year term, with a variable interest rate of LIBOR plus 3.5% (9% at
December 31, 1996). Principal payments are due quarterly beginning at the
end of the first quarter after the project is open, which is presently
estimated to be May 15, 1998.
* * * *
F-18
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Venturers of
Gilpin Hotel Venture:
We have audited the accompanying balance sheets of Gilpin Hotel Venture as of
December 31, 1996 and 1995, and the related statements of income, venturers'
investments and advances, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Venture's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Gilpin Hotel Venture as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------
DELOITTE & TOUCHE LLP
March 14, 1997
Denver, Colorado
F-19
<PAGE> 54
GILPIN HOTEL VENTURE
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash $ 2,213,704 $ 2,000,490
Accounts receivable (Note 3) 105,102 145,722
Inventories 197,929 181,199
Prepaid expenses and other 195,548 103,641
----------- -----------
Total current assets 2,712,283 2,431,052
GAMING FACILITY:
Building and improvements 7,132,861 7,011,735
Equipment 4,898,106 4,211,062
----------- -----------
12,030,967 11,222,797
Accumulated depreciation (3,064,089) (2,010,867)
----------- -----------
Total gaming facility 8,966,878 9,211,930
GOODWILL, net of accumulated amortization of
$199,512 and $94,469 for 1996 and 1995, respectively 1,376,136 1,481,178
----------- -----------
TOTAL $13,055,297 $13,124,160
=========== ===========
LIABILITIES AND VENTURERS' INVESTMENTS
AND ADVANCES
CURRENT LIABILITIES:
Accounts payable (Notes 3 and 4) $ 432,583 $ 292,903
Fees and rents payable to venturers (Note 3) 152,879 180,625
Gaming taxes payable 360,231 385,720
Other accrued expenses 988,936 975,695
Current portion of long-term debt 746,508 433,037
----------- -----------
Total current liabilities 2,681,137 2,267,980
LONG TERM DEBT (Note 6) 5,161,792 3,860,561
COMMITMENTS AND CONTINGENCIES (Note 7)
VENTURERS' INVESTMENTS AND ADVANCES (Note 3) 5,212,368 6,995,619
----------- -----------
TOTAL $13,055,297 $13,124,160
=========== ===========
</TABLE>
See notes to financial statements.
F-20
<PAGE> 55
GILPIN HOTEL VENTURE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Casino $26,783,094 $28,051,162 $28,036,568
Food and beverage, including
promotional allowances 2,560,428 2,626,549 2,667,346
----------- ----------- -----------
Total revenues 29,343,522 30,677,711 30,703,914
Less promotional allowances 1,392,001 1,143,271 1,395,929
----------- ----------- -----------
Net revenues 27,951,521 29,534,440 29,307,985
COSTS AND EXPENSES (Notes 3, 4, 5, 7 and 8):
Casino operations 11,840,235 12,341,928 12,260,993
Cost of food and beverage sales 510,485 684,286 635,219
Food and beverage operations 2,089,224 2,071,241 1,936,937
Marketing, general and administrative 9,396,004 9,788,366 8,972,070
Depreciation and amortization 1,228,045 1,130,349 617,482
Write-off of advance to casino 303,387
Interest expense 527,654 332,427 10,552
----------- ----------- -----------
Total costs and expenses 25,591,647 26,348,597 24,736,640
----------- ----------- -----------
NET INCOME $ 2,359,874 $ 3,185,843 $ 4,571,345
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 56
GILPIN HOTEL VENTURE
STATEMENTS OF VENTURERS' INVESTMENTS AND ADVANCES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
BLACK HAWK GAMING
& DEVELOPMENT GILPIN
COMPANY, INC. VENTURES, INC. TOTAL
<S> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 $ 4,298,926 $ 916,187 $ 5,215,113
Distributions (1,950,000) (1,950,000) (3,900,000)
(Recoupment) payment of
advances among Venturers (302,406) 302,406
Net income 2,285,673 2,285,672 4,571,345
----------- ----------- -----------
BALANCE,
DECEMBER 31, 1994 4,332,193 1,554,265 5,886,458
Advances 123,318 123,318
Distributions (1,100,000) (1,100,000) (2,200,000)
(Recoupment) payment of
advances among Venturers (90,163) 90,163
Net income 1,592,922 1,592,921 3,185,843
----------- ----------- -----------
BALANCE,
DECEMBER 31, 1995 4,858,270 2,137,349 6,995,619
Distributions (2,071,563) (2,071,562) (4,143,125)
Net income 1,179,937 1,179,937 2,359,874
----------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 $ 3,966,644 $ 1,245,724 $ 5,212,368
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 57
GILPIN HOTEL VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,359,874 $ 3,185,843 $ 4,571,345
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,228,045 1,130,349 617,199
Loss on disposal of assets 27,775 51,931
Write-off of advance to casino 303,387
Changes in operating assets and liabilities:
Accounts receivable 40,620 35,356 (165,741)
Inventories (16,730) (103,697) (21,459)
Prepaid expenses and other (91,907) 32,399 (34,445)
Accounts payable and accrued expenses 7,537 325,681 151,581
----------- ----------- -----------
Net cash provided by operating activities 3,555,214 4,657,862 5,421,867
----------- ----------- -----------
INVESTING ACTIVITIES:
Additions to gaming facility (653,500) (1,668,417) (1,243,664)
Proceeds from sale of equipment 87,073 187,539
----------- ----------- -----------
Net cash used in investing activities (566,427) (1,480,878) (1,243,664)
FINANCING ACTIVITIES:
Distributions to Venturers (4,143,125) (2,200,000) (3,900,000)
Proceeds from long-term debt 2,125,000
Advances by Venturers 123,318
Payments on long-term debt and note payable (757,448) (614,490) 99,269
----------- ----------- -----------
Net cash used in financing activities (2,775,573) (2,691,172) (3,999,269)
----------- ----------- -----------
NET INCREASE IN CASH 213,214 485,812 178,934
CASH, BEGINNING OF PERIOD 2,000,490 1,514,678 1,335,744
----------- ----------- -----------
CASH, END OF PERIOD $ 2,213,704 $ 2,000,490 $ 1,514,678
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 532,086 $ 328,332 $ 10,552
Noncash investing and financing activities:
Note payable incurred for purchase of casino 4,500,000
Notes payable incurred for acquisition
of slot machines 247,150 507,357
</TABLE>
See notes to financial statements.
F-23
<PAGE> 58
GILPIN HOTEL VENTURE
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. BUSINESS
Gilpin Hotel Venture (GHV) was formed on March 1, 1992 to lease and
engage in the joint development of the Gilpin Hotel property located in
Black Hawk, Colorado. GHV is owned equally by Black Hawk Gaming &
Development Company, Inc. (BHWK) and by Gilpin Ventures, Inc. (GVI).
During September 1992, GHV completed funding and development of its
limited-stakes gaming and restaurant facility and obtained its gaming
license. The casino and restaurant opened for business on October 1,
1992.
2. SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories are valued at the lower of cost, determined on
a first-out basis (FIFO), or market.
GAMING FACILITY - The gaming facility is recorded at cost, including
capitalized interest, as incurred by the venturer which funded
development. In addition, GHV capitalized $60,000 of interest during 1994
related to borrowings on the acquired casino and construction in
progress. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets.
GOODWILL - The excess of GHV's cost over fair value of certain casino
assets acquired in 1994 is being amortized by the straight-line method
over 15 years. No amortization was recorded during 1994, as operations of
the acquired casino did not commence until January 1995. See Note 4. GHV
periodically reviews the value of its goodwill to determine if an
impairment has occurred. GHV measures the potential impairment of
recorded goodwill by the undiscounted value of expected future operating
cash flows in relation to its net capital investment in the acquired
casino. Based on its review, GHV does not believe that an impairment of
its goodwill has occurred.
CASINO REVENUE - Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses.
PROMOTIONAL ALLOWANCES - Complimentary sales to customers are classified
as promotional allowances and are calculated at the retail value of such
sales. The costs associated with complimentary sales are classified as
casino expenses and are calculated based on food and beverage gross
margin applied to the retail value of complimentary sales. Complimentary
sales amounted to $1,392,001, $1,143,271 and $1,395,929 in 1996, 1995,
and 1994, respectively. The cost of complimentary sales amounted to
$661,038, $607,574 and $762,746 in 1996, 1995 and 1994, respectively, and
are included in casino operations costs and expenses in the statements of
income.
TAXES AND LICENSES - Federal and state income taxes have not been
provided in the financial statements, as they are the responsibility of
the venturers. State and local gaming taxes and licenses paid in advance
are deferred and amortized over the period of benefit. State gaming taxes
based on revenue are accrued as incurred. State gaming tax expense, which
is included in casino operations in the statements of income, was
$4,164,274, $4,476,573 and $4,496,690, for 1996, 1995 and 1994,
respectively.
F-24
<PAGE> 59
USE OF ESTIMATES - The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods.
Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - During 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 requires that
long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable and establishes guidelines for determining recoverability
based on future net cash flows from the use of the asset and for the
measurement of the impairment loss. Impairment loss is calculated as the
difference between the carrying amount of the asset and its fair value.
Any impairment loss is recorded in the period in which the recognition
criteria are first applied and met. GHV adopted SFAS 121 during the year
ended December 31, 1996. Adoption of SFAS 121 did not have a material
effect on the financial position or results of operations of GHV.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1995
and 1994 financial statements to conform to the classifications used in
1996.
3. JOINT VENTURE AND OTHER AGREEMENTS
BHWK is the appointed manager of GHV, with the exception of certain
extraordinary actions which require the consent of both joint venture
partners.
BHWK provided all funds for the development, refurbishing and the
start-up of operations of the gaming facility which opened in 1992.
One-half of the development funds expended by BHWK ($3,328,400) are
recoupable out of 40% of GHV's net profits, as defined, attributable to
GVI, after allowing for GVI's income taxes on such net profits; total
recoupments were $90,163 and $302,406 in 1995 and 1994, respectively.
Certain development costs are in dispute as of December 31, 1996,
therefore, there were no recoupments received during 1996. No recoupments
will occur at any time there are net losses.
Under the terms of the joint venture agreement, the land underlying the
gaming facility is leased by GHV from BHWK and an affiliate of GVI for a
monthly rental fee of 7% of gross gaming revenues, as defined. Rental
fees in 1996, 1995 and 1994 were $1,745,056, $1,816,230 and $1,892,250,
respectively. BHWK manages the gaming facility pursuant to a management
agreement. BHWK receives a management fee of 11% of the defined annual
net profits from gaming, plus 3% of the adjusted gross sales and 10% of
the defined annual net profits of the food and beverage operations. In
addition, an affiliate of GVI receives a management fee based upon the
greater of 1% of the defined annual net profits from gaming or $25,000
annually for services it provides to GHV. Management fees for 1996, 1995
and 1994 were $684,707, $831,235 and $943,034, respectively. The term of
the management agreement is initially for five years with six five-year
renewals. The agreement may be terminated if BHWK falls below certain
performance levels. The joint venture agreement also provides for the
payment of fees to BHWK for use of its land for parking for GHV's casino.
Such parking fees were $645,214, $715,094 and $600,000 for 1996, 1995 and
1994, respectively.
F-25
<PAGE> 60
4. ACQUISITION
On November 7, 1994, GHV acquired certain casino assets consisting of a
building and related casino equipment and miscellaneous other assets
valued at $2,829,768, for $100,000 in cash and a $4,500,000 note payable
financed by the seller. Goodwill of $1,575,648 was recorded by GHV. In
addition, BHWK and an affiliated company of GVI each acquired a 50%
interest in the land underlying the acquired casino. The acquired casino
property was next to GHV's casino, and was temporarily closed to complete
interior modifications and a structure to join it with GHV's operating
casino. The construction was completed and the adjacent structure was
opened for business in late January 1995.
5. OPERATING LEASES
In October 1994, GHV exercised provisions of certain gaming equipment
operating leases and purchased the equipment in exchange for a $357,000
note payable. The outstanding balance was repaid in full during 1995.
Total rent under operating leases was $548,668 in 1994. GHV was not a
lessee under any operating leases in 1996 and 1995.
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable; payments of $164,501, including principal and interest at 8% per
annum due quarterly through January 2005 when the remaining principal and
interest balance is due; secured by first deed of trust on the acquired
casino's building and equipment $3,860,561 $4,192,936
Note payable; payments of $40,863, including principal and
interest at 11% per annum due monthly through 2001 when
the remaining principal and interest balance is due; secured
by equipment 1,800,589
Note payable; payments of $11,519, including principal and
interest at 11% per annum due monthly beginning January
1997 through December 1998 when the remaining principal
and interest balance is due; secured by equipment 247,150
Note payable; paid in November 1996 100,662
---------- ----------
5,908,300 4,293,598
Less current portion 746,508 433,037
---------- ----------
Total $5,161,792 $3,860,561
========== ==========
Scheduled principal payments on long-term debt at December 31 are as follows:
1997 $ 746,508
1998 848,883
1999 791,147
2000 871,362
2001 910,753
Thereafter 1,739,647
----------
Total $5,908,300
==========
</TABLE>
F-26
<PAGE> 61
7. COMMITMENTS AND CONTINGENCIES
On October 6, 1994, GHV entered into an agreement with Cloverleaf Kennel
Club (Cloverleaf) of Loveland, Colorado to provide off-track betting on
dog and horse races via simulcast. The term of the agreement between GHV
and Cloverleaf is for five one-year options commencing October 1, 1994
through September 30, 1999. GHV pays Cloverleaf an annual fee of $40,000
in return for 50% of the net revenues derived from pari-mutual wagering
at the casino. GHV is responsible for all costs of operating the
facility.
The Internal Revenue Service (IRS) has examined GHV's 1992, 1993, 1994
and 1995 income tax returns. GHV and the IRS have reached a settlement of
findings in GHV's 1992, 1993 and 1994 income tax returns which will
increase the amount of taxable income allocated to the Venturers by
approximately $128,000, $62,000 and $200,000, respectively. GHV and the
IRS have also reached a settlement of findings in GHV's 1995 income tax
return which will decrease the amount of taxable income allocated to the
Venturers by approximately $40,000. The findings represent principally
temporary differences, which will reverse in future years.
GHV operates in an area that was once active in the mining industry. The
major portion of Clear Creek and Gilpin Counties, Colorado have been
identified as a federal superfund study area by the Environmental
Protection Agency. A superfund study area is generally an area adjacent
to or impacted by discharge from a designated superfund site. At present,
there are no federal regulations for dealing with development within a
superfund study area. Any liability required for cleanup of a
contaminated site will rest primarily with the current owner. Moreover,
it is possible that expenses for cleanup, if required, may be greater
than is technologically and/or economically feasible at the present time.
GHV, through independent environmental consultants, has conducted an
initial study and a subsequent follow-up report on its properties and, on
that basis, does not believe any significant environmental problems exist
with respect to its properties which would have a material adverse effect
on its financial condition or results of operations. However, no absolute
assurance in this regard can be given.
In June, 1993 the BHWK received a conditional use permit from the City of
Black Hawk with respect to its parking facilities on the condition that
$4.00 per space per day (a total of $27,000 per month with respect to
Millsites 29 and 30) be paid to the City into a transportation utility
fund. BHWK, GHV, and its joint venture partner do not believe the fee is
valid and instituted suit against the City. BHWK and GHV also contest the
fee (approximately $5,000 per month) with respect to its recently
acquired Millsite 31. During the court proceedings, GHV paid the $4.00
per day fee to the court and charged the cost to operating expenses. The
City filed a counterclaim, alleging that certain one-time parking impact
fees to assist in paying for a municipal parking lot were also owed.
Parking impact fees are assessed at the rate of $2,000 per space required
as a function of building size and usage. Under the allegations of the
counterclaim, GHV owed the City $358,000. In December 1995 the District
Court ruled against the plaintiffs essentially upholding both of the fees
charged by the City. The plaintiffs appealed the decision and, in 1996,
the District Court ruling with respect to the permit fees of $4.00 per
space per day was upheld. However, the District Court ruling with respect
to the one-time parking impact fees was not upheld and GHV was not
required to pay the fees to the City. The City has since eliminated the
$4.00 per space per day permit fee and is currently in the process of
defining fees based on the number of devices in the casino. GHV does not
intend to protest the fees.
GHV has been investigated by the Colorado Division of Gaming ("Division")
regarding certain of its check cashing and debt collection practices.
These practices are being scrutinized in light of Colorado law that
prohibits the extension of credit by gaming licensees to any person for
the purpose of engaging in
F-27
<PAGE> 62
limited gaming. The statute containing this prohibition has been ruled
unconstitutional in an unrelated action before the Gilpin County Court,
and that decision is being appealed to higher courts. GHV has not yet
been advised as to the status or possible conclusion of the Division's
inquiry into this matter. If an extension of credit is found to have
occurred, GHV could be subject to criminal and administrative penalties,
including fines, temporary closure of the casino, license suspension or
revocation, or incarceration for individuals involved. However, the
Colorado Limited Gaming Control Commission has scheduled a rule making
proceeding to establish standards for the parameters of "extension of
credit" not otherwise apparent from the face of the gaming statutes or
existing regulations. GHV intends to vigorously contest any actions
brought by the Division in the foregoing regard, but the outcome of this
matter is not presently determinable.
GHV is involved in various legal actions in the normal course of
business. Management believes that the ultimate liability, if any, with
respect to these matters will not materially affect the financial
position of GHV.
8. RELATED PARTIES
GHV paid $538,243 and $265,068 in 1995 and 1994, respectively, to an
affiliated entity for the interior modifications and completion of a
structure joining the casino acquired in 1994 with GHV's operating
casino.
During 1993, GHV advanced $269,946 to a casino in Central City for the
purpose of marketing and developing an exclusive slot-player facility
catering to specifically identified customers of GHV. An additional
$33,441 was advanced in 1994. During 1993 such casino was affiliated with
an officer and director of BHWK. As of December 31, 1993, the officer and
director terminated his affiliation with such casino. During 1994, GHV
wrote-off its advances to the casino and terminated the relationship due
to the casino's continued poor operating performance.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of GHV's financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments." The estimated fair value amounts have been
determined by GHV using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data in order to develop the estimates of fair value.
F-28
<PAGE> 63
Accordingly, the estimates herein are not necessarily indicative of the
amounts GHV could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
1996 1995
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C>
Assets - Cash $ 2,213,704 $ 2,213,704 2,000,490 2,000,490
Liabilities - Debt 5,908,300 5,908,300 4,293,598 4,293,598
</TABLE>
The estimation methodologies utilized by GHV are summarized as follows:
DEBT - The fair value of long-term debt is estimated using the rates
currently offered for similar borrowings.
* * * * *
F-29
<PAGE> 64
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
NOT APPLICABLE
-33-
<PAGE> 65
Item 10. Directors and Executive Officers of the Registrant.
The following sets forth certain information with respect to each of the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position(s) Held
---- --- ----------------
<S> <C> <C>
Robert D. Greenlee 55 Co-Chairman of the Board and Treasurer
Jeffrey P. Jacobs 43 Co-Chairman of the Board and Chief Executive
Officer
Stephen R. Roark 49 President, Chief Financial Officer and a Director
Frank B. Day 63 Vice President, Secretary and a Director
J. Patrick McDuff 48 A Director
Robert H. Hughes 56 A Director
Martin S. Winick 46 A Director
</TABLE>
ROBERT D. GREENLEE graduated from Iowa State University with a degree in
Radio & Television Broadcasting in 1963 and entered graduate school where he
obtained a Master's Degree in Journalism & Mass Communication in 1965. In 1970,
Mr. Greenlee and two partners who owned The Graphic Corporation, formed an
independent advertising agency which became known as Fultz, LaCasse & Greenlee.
The firm grew to be one of the largest agencies in the State of Iowa. In 1975,
Mr. Greenlee purchased an AM radio station in Boulder, Colorado, and in 1977
acquired a companion FM station. From 1975 through 1988 Mr. Greenlee was
President of Centennial Wireless, Inc., which operated the stations and
successfully competed in the Denver-Boulder radio market. The stations were
sold to a national group owner of stations in 1988. Mr. Greenlee was involved
in other broadcast properties during this time through the present having owned
partial interest in other commercial broadcast stations.
Mr. Greenlee is President of Centennial Investment & Management Company,
Inc., a private investment and consulting firm located in Boulder, Colorado.
From September, 1991 to September 1995, Mr. Greenlee was President of the
Company. Mr. Greenlee is active in local government activities and has served
as an elected member of the Boulder City Council since August 1982. He is past
Chairman of the six county Scientific and Cultural Facilities District. Mr.
Greenlee is also a director of Rock Bottom Restaurants, Inc., a publicly traded
company.
JEFFREY P. JACOBS, from 1995 to present, served as Chairman and Chief
Executive Officer of Jacobs Entertainment, Inc., a company based in Cleveland,
Ohio that has investments in other gaming companies and ventures, including the
Company, Colonial Downs, Inc., a horse-racing track and the Holiday Inn
Boardwalk Hotel and Casino, Inc. in Las Vegas. From 1975 to present, he has
also served as President and Chief Executive Officer of Jacobs Investments,
Inc., a company engaged in the development, construction and operation of
residential and commercial real estate and entertainment projects in Ohio. Mr.
Jacobs also served in the Ohio House of
-34-
<PAGE> 66
Representatives from 1982 until 1986. He is also Chairman and Chief Executive
Officer of Colonial Downs, Inc. and a director of Holiday Inn Boardwalk Hotel &
Casino, Inc.
STEPHEN R. ROARK, has been employed as chief financial officer of the
Company since August 1993. He was elected President of the Company in September
1995. Prior to that time he has been an independent consultant in the Denver
area rendering financial and accounting assistance to companies in the public
marketplace. Mr. Roark has 20 years accounting experience having served as a
partner with a large local accounting firm and as a partner with a national
accounting firm. Mr. Roark was with Hanifen, Imhoff and Prudential Securities,
Inc. for three years and is a member of the American Institute of Certified
Public Accountants and the Colorado Society of Certified Public Accountants.
Mr. Roark obtained his B.S.B.A. in Accounting from the University of Denver in
1973.
FRANK B. DAY, Chairman of the Board of Rock Bottom Restaurants, Inc., a
publicly traded company, has been employed since January 1980 as President of
Concept Restaurants, Inc., and Managing General Partner of the Hotel Boulderado
in Boulder, Colorado since August 1982. Concept Restaurants, Inc. owns or
operates over twenty full service restaurants in Colorado front range
communities. From 1959 to present, Mr. Day has owned and operated food service
and hospitality facilities in Illinois, Michigan, Wisconsin, and Colorado. He
attended Harvard University from 1950 to 1956 and received B.A. and M.B.A.
degrees. Mr. Day is also an active real estate investor and is active in many
civic and nonprofit organizations, having served as a director of the Boulder
Chamber of Commerce (September 1988 to September 1991) and Downtown Boulder,
Inc. (from June 1987 to June 1990).
J. PATRICK MCDUFF, has been President, Chief Executive Officer and
director of Vectra Bank of Boulder since July 1987. From 1972 through July
1987, Mr. McDuff worked for IntraWest Bank of Boulder, ending his employment as
Senior Vice President and Senior Loan Officer. He attended the University of
Arkansas from 1966 to 1972 and received a B.S.B.A. degree in Finance and
Commercial Banking. Mr. McDuff is also active in many civic and non-profit
organizations, having served as a director of Boulder Center Y.M.C.A. (from
January 1987 to December 1992), Boulder Valley Rotary Club (from April 1985 to
June 1988) and Longs Peak Council of the Boy Scouts of America (from January
1991 to March 1993). Mr. McDuff serves as a director of Vectra Bank of Boulder,
a wholly owned subsidiary of Vectra Banking Corporation, a publicly traded
company.
ROBERT H. HUGHES, has served as Chief Financial Officer of Jacobs
Investments, Inc. since 1993. Mr. Hughes was a partner in charge of the audit
department of the Cleveland office of the accounting firm of Deloitte & Touche
LLP until his retirement in 1991. Mr. Hughes is a certified public accountant.
MARTIN S. WINICK, has been in the investment banking/brokerage business
with Cowen & Co. (1981-1990); Dean Witter Reynolds (1990-1992); Rodman &
Renshaw (1992-1995); and Mesirow Financial (1995 to present). Mr. Winick serves
on the Board of Directors of publicly traded Paul-Son Gaming Corp., a leading
manufacturer of table games and supplies.
-35-
<PAGE> 67
The Board of Directors has three committees whose members are as
follows:
<TABLE>
<CAPTION>
Executive Audit Compensation
--------- ----- ------------
<S> <C> <C>
Jeffrey P. Jacobs Robert D. Greenlee Frank B. Day
Robert D. Greenlee Robert H. Hughes J. Patrick McDuff
Stephen R. Roark J. Patrick McDuff Martin S. Winick
</TABLE>
The Company entered into three year employment agreements with Messrs.
Jacobs and Roark on November 12, 1996. Each agreement contains customary terms
and conditions and provides annual salaries of $150,000 and $125,000,
respectively, for Messrs. Jacobs and Roark. Mr. Jacobs is also entitled to
receive a bonus of 2.5% of the Company's pre-tax net income exceeding
$2,880,000 in any fiscal year during the term of his employment agreement.
Directors are elected at each annual meeting of the Company's
shareholders. The next such meeting will be held in June 1997. Officers are
appointed by the directors and serve at the pleasure of the Board or until
their death, incapacity or resignation. All directors except Messrs. Jacobs and
Roark receive $1,000 and $500 per Board and Committee meeting attended,
respectively. Effective January 1, 1997, this compensation will be paid in the
form of restricted Common Stock of the Company valued at the market price on
the meeting date.
There are no family relationships between or among any directors or
executive officers and except as set forth in their respective resumes, and,
except as set forth in the above resumes, none serve as a director of any
company required to file reports under the Securities Exchange Act of 1934 or
which is registered under the Investment Company Act of 1940.
-36-
<PAGE> 68
Item 11. Executive Compensation.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------- ------------------------------------
Awards Payouts
-----------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Compen- Stock Options/ LTIP Compen-
Year Salary Bonus sation Award(s) SARs Payouts sation
Name of ($) ($) ($) ($) (#) ($) ($)
Officer/Director (b) (c) (d) (e) (f) (g) (h) (i)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert D. Greenlee 1994 75,000 -- -- -- 22,500(3) -- 6,500
--------------------------------------------------------------------------------------------------
1995 75,000 -- -- -- 50,000(3) -- 3,500
--------------------------------------------------------------------------------------------------
1996 75,000 -- -- -- 40,000 -- 6,500
- ------------------------------------------------------------------------------------------------------------------------------
Jeffrey P. Jacobs 1994 -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
1995 -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------------
1996 12,500(2) -- -- -- 60,000(1) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Stephen R. Roark 1994 100,000 -- -- -- 52,500(3) -- 6,500
--------------------------------------------------------------------------------------------------
1995 112,500 25,000 -- -- 50,000(3) -- 4,000
--------------------------------------------------------------------------------------------------
1996 125,000 -- -- -- 35,000 -- 6,500
- ------------------------------------------------------------------------------------------------------------------------------
Frank B. Day 1994 27,872 -- -- -- 22,500(3) -- 5,500
--------------------------------------------------------------------------------------------------
1995 -- -- -- -- 15,000(3) -- 4,000
--------------------------------------------------------------------------------------------------
1996 -- -- -- -- 20,000 -- 6,500
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include options to purchase 90,000 shares which were granted to
certain designees of Mr. Jacobs who disclaims beneficial ownership in
both the options and underlying shares.
(2) One month's compensation.
(3) Repriced in 1996 and included in the number of securities underlying
options/SARs granted in 1996.
-37-
<PAGE> 69
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------
Percent of Potential Realizable Value Alternative to
Number of Total at Assumed Annual Rates (f) and (g):
Securities Options/ of Stock Price Appreciation Grant Date
Underlying SARs for Option Term Value
Options/ Granted to
SARs Employees Exercise on ---------------------------- ------------------
Granted in Fiscal Base Price Expiration Grant Date
Name (#) Year ($/Sh) Date 5% ($) 10% ($) Present Value $
(a) (b) (c) (d) (e) (f) (g) (h)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert D. Greenlee 112,500(1) 18.5% 6.19 1999-2001 109,766 230,500 --
- -----------------------------------------------------------------------------------------------------------------------------------
Jeffrey P. Jacobs 60,000 9.9% 5.63 2006 114,782 260,402 --
- -----------------------------------------------------------------------------------------------------------------------------------
Stephen R. Roark 137,500(1) 22.6% 5.63 2004-2006 263,043 596,754 --
- -----------------------------------------------------------------------------------------------------------------------------------
Frank B. Day 57,500(1) 9.5% 6.19 1999-2001 56,103 117,811 --
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes options granted in 1996 and options which were repriced in 1996
(see table below).
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Number of
Securities Value of
Underlying Unexercised
Shares Unexercised in-the-Money
Acquired Options/SARs Options/SARs
on Value at FY-End (#) at FY-End ($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert D. Greenlee -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Jeffrey P. Jacobs -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Stephen R. Roark -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Frank B. Day -- -- -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Ten Year Option/SAR Repricings
- ------------------------------------------------------------------------------------------------------------------------------------
Length of Original
Number of Securities Market Price of Exercise Price Option Term
Underlying Options/ Stock at Time of at Time of New Remaining at
SARs Repriced or Repricing or Repricing or Exercise Date of
Amended Amendment Amendment Price Repricing or
Name Date (#) ($) ($) ($) Amendment
(a) (b) (c) (d) (e) (f) (g)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert D. Greenlee November 12, 1996 72,500 5.625 7.45 to 11.00 6.19 3 to 4 years
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen R. Roark November 12, 1996 102,500 5.625 6.75 to 10.00 5.625 8 to 9 years
- ------------------------------------------------------------------------------------------------------------------------------------
Frank B. Day November 12, 1996 37,500 5.625 7.45 to 11.00 6.19 3 to 4 years
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-38-
<PAGE> 70
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of March 1, 1997, the number and
percentage of shares of the Company's common stock held of record by officers,
directors, individually and as a group and by holders of more than 5% of such
common stock:
<TABLE>
<CAPTION>
Beneficially Owned
----------------------------------
Note
Name Shares Options(1) Conversions(2) Percentage(4)
---- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Robert D. Greenlee 405,133 112,500 57,143 20.22%
2060 Broadway, Suite 400
Boulder, Colorado 80302
Jeffrey P. Jacobs 190,476(3) 60,000 1,142,857(3) 35.96%
Diversified Opportunities Group Ltd.
c/o Jacobs Entertainment Ltd.
425 Lakeside Avenue
Cleveland, Ohio 44114
Stephen R. Roark --- 137,500 28,571 5.85%
2060 Broadway, Suite 400
Boulder, Colorado 80302
Frank B. Day 403,089 57,500 57,143 18.58%
2060 Broadway, Suite 400
Boulder, Colorado 80302
J. Patrick McDuff --- 10,000 .37%
1375 Walnut
Boulder, Colorado 80302
Robert H. Hughes --- 15,000 .56%
Diversified Opportunities Group Ltd.
c/o Jacobs Entertainment Ltd.
425 Lakeside Avenue
Cleveland, Ohio 44114
Martin S. Winick --- 15,000 .56%
Mesirow Financial, Inc.
30050 Chagrin Boulevard
Pepper Pike, Ohio 44124
Officers and Directors as 998,698 407,500 1,285,714 61.67%
a group (seven persons)
</TABLE>
- ------------------
(1) Represents shares underlying options.
(2) Represents shares which may be acquired on conversion at $5.25 per share
of certain promissory notes held by Messrs. Greenlee ($300,000), Jacobs
($6,000,000), Roark ($150,000) and Day ($300,000). See Item 1 "Business--
Purchase Agreement" above.
(3) These shares and shares which may be acquired on conversion of certain
notes are held by Diversified Opportunities Group, Ltd., an affiliate of
Mr. Jacobs, and are therefore deemed beneficially owned by him.
(4) All percentages are computed in accordance with Rule 13d-3 adopted under
the Securities Exchange Act of 1934.
-39-
<PAGE> 71
Item 13. Certain Relationships and Related Transactions.
Reference is made to "Business--Purchase Agreement" under Item 1 above
which describes certain transactions between the Company and Diversified
Opportunities Group Ltd. ("DOGL") an affiliate of Jeffrey P. Jacobs, the
Company's Chief Executive Officer and Co-Chairman of its Board of Directors. In
general the Purchase Agreement provided: (i) that DOGL would purchase 190,476
shares of the Company's Common Stock for $5.25 per share (a total of
$1,000,000); (ii) that DOGL would loan the Company up to an additional
$6,000,000 which loan is convertible into 1,142,857 shares of the Company's
Common Stock (at $5.25 per share); (iii) that Mr. Jacobs would become Co-
Chairman of the Board, Chief Executive Officer of the Company and have the
right to appoint three of the Company's seven member Board. The Purchase
Agreement further provides that Mr. Jacobs has the right to appoint five of the
Company's nine member Board when Jacobs and his affiliates own 820,000 or more
shares of the Company's Common Stock.
The Purchase Agreement also requires that Messrs. Greenlee, Roark and Day,
officers and directors of the Company, must loan $300,000, $150,000 and
$300,000, respectively, to the Company when DOGL has funded the entire balance
of its notes, or $6,000,000. The notes of Messrs. Greenlee, Roark and Day are
convertible into shares of the Company's Common Stock at $5.25 per share.
Reference is made to "Business--LLC Agreement" under Item 1 above which
describes certain transactions between the Company and DOGL and BH
Entertainment Ltd. ("BH"), both affiliates of Jeffrey P. Jacobs. Among other
things, the LLC Agreement provides for the formation of Black Hawk/BH
Entertainment LLC (the "LLC"), a Colorado limited liability company owned 75%
by the Company and 25% by BH and organized for the purpose of developing and
operating the Black Hawk/Jacobs Project described in Items 1 and 2 above. The
Company is obligated to contribute land and cash valued at $15 million dollars
for its equity in the LLC and BH is obligated to contribute land and cash
valued $5 million dollars for its 25% interest. The Company and BH will share a
management fee of 5% of adjusted gross proceeds from future gaming operations
of the LLC and will share profits and losses on a 75%-25% basis. An affiliate
of Mr. Jacobs received a $600,000 project development fee from the LLC in
consideration for various pre-development and development services. Finally,
Mr. Jacobs and other affiliates are to receive an annual credit enhancement fee
of 2% of the amount so guaranteed for guaranteeing the LLC's multi million
dollar credit facility. The LLC Agreement also provides that future gaming
opportunities coming to the attention of the Company or Mr. Jacobs and his
affiliates will be offered for further joint ventures on a basis where the
Company can maintain a 51% interest in any such future gaming ventures.
The agreements described above were negotiated at arm's length between the
Company and Mr. Jacobs and his affiliates prior to Mr. Jacobs' affiliation with
the Company and are deemed by management of the Company to be fair and in the
best interests of the Company and its shareholders.
In the third quarter of 1996, the Company entered into an agreement with
Mr. Greenlee wherein Mr. Greenlee undertook to use his best efforts, in his
sole discretion, to acquire a gaming concession in Mexico. During the fourth
quarter of 1996, the Company terminated its efforts to acquire a gaming
concession in Mexico. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further details. The Company then
entered into an agreement with Mr. Greenlee whereby the Company allowed Mr.
Greenlee to continue to pursue this potential opportunity at Mr. Greenlee's
sole cost and expense. Although no consideration was
-40-
<PAGE> 72
paid by Mr. Greenlee to the Company with respect to the agreement, if Mr.
Greenlee's efforts prove successful, the Company will have a right of first
refusal to negotiate an acquisition of all or a part of Mr. Greenlee's
interest, negotiate to act as a manager of any such concession, or both. There
can be no assurance that Mr. Greenlee's efforts will be successful.
In March 1997, Messrs. Jacobs and Greenlee posted personal letters of
credit in the approximate amount of $1,200,000 each in favor of the City of
Black Hawk. The letters of credit were required to guarantee performance of the
Black Hawk/Jacobs Project under the terms of a Subdivision Improvement
Agreement with the City of Black Hawk. The Black Hawk/Jacobs Project agreed to
pay all out-of-pocket transaction costs incurred by Messrs. Jacobs and Greenlee
and to pay additional consideration to be negotiated.
-41-
<PAGE> 73
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a. (1) Financial Statements.
See Item 8 hereof
(2) Financial Statement Schedules--None
b. Reports on Form 8-K Filed During the Registrant's Fourth Fiscal
Quarter:
DATE OF
FILING EXHIBIT
------- -------
September 3, 1996 Item 5. Other Events--Delay in closing of Jacobs
agreement until November 1, 1996.
December 4, 1996 Item 5. Other Events--Reported closing of Amended
and Restated Purchase Agreement and several
ancillary agreements with Jacobs' affiliates.
December 30, 1996 Item 5. Other Events--Extended "A" and "B" Warrants
to June 30, 1997.
c. Exhibits Filed Herewith or Incorporated by Reference to Previous
Filings with the Securities and Exchange Commission:
(1) The following exhibits were included with the initial
filing of the Company's Registration Statement #33-57342
effective May 15, 1993 and are hereby incorporated by
reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
1.1 Form of Underwriting Agreement
1.2 Form of Agreement Among Underwriters
1.3 Form of Selected Dealer's Agreement
1.4 Consulting Agreement--Walford
1.5 Underwriter's Warrant
3.1 Articles of Incorporation of the Registrant and Amendments
thereto
3.2 Bylaws of the Registrant
4.1 Designation of Rights of Preferred Stockholders
4.2 Form of 14% Convertible Promissory Note
5 Form of Opinion of and Consent of Jones & Keller, P.C.
10.1 Shareholders Agreement and Form of Voting Trust with Stock Option
Grants
10.2 Note Payable--Southwest State Bank
10.3 Gilpin Hotel and Millsite 29 Purchase Agreement
10.4 Millsite 30 Purchase Agreement and Related Documents
10.5 Homesite Placer Purchase Agreement and Related Documents
10.6 Copy of Colorado Gaming License
</TABLE>
-42-
<PAGE> 74
<TABLE>
<S> <C>
10.7 Copy of Black Hawk, Colorado Liquor License
10.8 Gilpin Hotel Joint Venture Agreement
10.9 Gilpin Hotel Development, Management and Consulting Agreement
10.10 Gilpin Hotel Ground Lease Agreement
10.11 Equipment Lease Agreements
</TABLE>
- -------------------
(2) Filed as Exhibits to Amendment No. 1 of the Company's
Registration Statement, identified above, were the
following which are also incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
1.1 Revised Form of Underwriting Agreement
1.2 Revised Form of Agreement Among Underwriters
1.3 Revised Form of Selected Dealer's Agreement
1.4 Termination of Walford Agreement
1.5:1 Revised Underwriter's Warrant
1.5A Underwriter's Class A Warrant
1.5B Underwriter's Class B Warrant
4.3A Class A Warrant Certificate
4.3B Class B Warrant Certificate
</TABLE>
- -------------------
(3) Filed as exhibits to Reports on Form 8-K of the Company are the
following, which are incorporated by reference:
DATE OF FILING EXHIBIT
-------------- -------
March 1, 1994 Item 5. Other Events--Contract to purchase
Millsite 31.
August 10, 1994 Item 5. Other Events--Completion of contract
to purchase Bricktown and substantially
completed contract to purchase "Maverick
Poker" n/k/a Prospector JackPot Poker.
September 6, 1994 Item 5. Other Events--Entered into two
option agreements, through the Gilpin Hotel
Venture, to purchase land, buildings and
equipment of Dolly's Casino, Inc.
October 6, 1994 Item 5. Other Events--Entered into an
agreement, through the Gilpin Hotel Venture,
with Cloverleaf Kennel Club.
November 14, 1994 Item 2. Acquisition or Disposition of Assets
(Dolly's Casino, Inc. Pro Forma Financial
Statements).
December 30, 1994 Item 5. Other Events--Jacobs Entertainment,
Inc. Joint Venture and Purchase of Millsite
32.
-43-
<PAGE> 75
March 24, 1995 Item 5. Other Events--Entered into amendment
of Jacobs Entertainment, Inc./Black Hawk
Gaming Joint Venture agreement.
June 5, 1995 Item 5. Other Events--Extended Class A and
Class B Warrants to December 31, 1996.
September 3, 1996 Item 5. Other Events--Delay in closing of
Jacobs agreement until November 1, 1996.
December 4, 1996 Item 5. Other Events--Reported closing of
Amended and Restated Purchase Agreement and
several ancillary agreements with Jacobs'
affiliates.
December 30, 1996 Item 5. Other Events--Extended "A" and "B"
Warrants to June 30, 1997.
(4) Filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
21 List of Subsidiaries
27 Financial Data Schedule
</TABLE>
d. Financial Statement Schedules Required Pursuant to Regulation S-X filed
herewith:
None
-44-
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Boulder, State of Colorado on March 27, 1997.
BLACK HAWK GAMING &
DEVELOPMENT COMPANY, INC.
By:/s/ Robert D. Greenlee
-------------------------------------
Robert D. Greenlee, Co-Chairman
/s/ Jeffrey P. Jacobs
--------------------------------------
Jeffrey P. Jacobs, Co-Chairman and
Chief Executive Officer
/s/ Stephen R. Roark
------------------------------------
Stephen R. Roark, President
and Chief Financial and
Accounting Officer
-45-
<PAGE> 77
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 27, 1997.
Signature Title
--------- -----
/s/ Robert D. Greenlee Director
-----------------------------------
Robert D. Greenlee
/s/ Jeffrey P. Jacobs Director
-----------------------------------
Jeffrey P. Jacobs
/s/ Stephen R. Roark Director
-----------------------------------
Stephen R. Roark
/s/ Frank B. Day Director
-----------------------------------
Frank B. Day
/s/ J. Patrick McDuff Director
-----------------------------------
J. Patrick McDuff
/s/ Robert H. Hughes Director
-----------------------------------
Robert H. Hughes
/s/ Martin S. Winick Director
-----------------------------------
Martin S. Winick
-46-
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
21 List of Subsidiaries
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
1. Native American Management Corporation. A corporation chartered under the
auspices of the Sac and Fox Indian Nation; owned by the registrant.
2. Black Hawk/Jacobs Entertainment LLC, a Colorado limited liability company;
owned 75% by the registrant.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
FINANCIAL STATEMENTS INCLUDED IN FORM 10-K AS OF AND FOR THE YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FOOTNOTES AND
DISCLOSURES RELATED THERETO AND CONTAINED WITHIN THE 1996 FORM 10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,531,355
<SECURITIES> 0
<RECEIVABLES> 485,303
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,016,658
<PP&E> 19,507,337
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,523,995
<CURRENT-LIABILITIES> 620,282
<BONDS> 24,523,995<F1>
0
0
<COMMON> 2,670
<OTHER-SE> 18,156,899
<TOTAL-LIABILITY-AND-EQUITY> 24,523,995
<SALES> 0
<TOTAL-REVENUES> 3,519,522<F2>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,612,428
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,260
<INCOME-PRETAX> 1,782,834
<INCOME-TAX> 735,893
<INCOME-CONTINUING> 1,046,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,046,941
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<FN>
<F1>INCLUDED IN BONDS, MORTGAGES IS APPROXIMATELY $1,800,000 OF MINORITY INTEREST
IN JOINT VENTURE.
<F2>TOTAL REVENUES INCLUDE EQUITY IN EARNINGS OF JOINT VENTURE TOTALING $2,255,635
</FN>
</TABLE>
