<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
------ SECURITIES EXCHANGE ACT OF 934
For the quarterly period ended September 30, 1997
-------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number: 0-21736
-------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84 -1158484
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2060 Broadway, Suite 400
Boulder, Colorado 80302
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 444-0240
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value 2,660,498 shares
- ----------------------------- -----------------------------------
Class Outstanding as of November 12, 1997
<PAGE> 2
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
INDEX TO FORM 10-Q
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Income
for the three and nine months
ended September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 1997 and 1996 3
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,370,628 $4,531,355
Accounts receivable:
Gilpin Hotel Venture 116,718 78,865
Other 14,041 2,071
Income taxes receivable 325,100
Deferred tax asset 79,267 79,267
---------------- ----------------
Total current assets 1,580,654 5,016,658
INVESTMENT IN AND ADVANCES TO
GILPIN HOTEL VENTURE 4,174,629 3,966,645
LAND
Leased to Gilpin Hotel Venture
Casino Ground 1,967,689 1,967,689
Millsite 29 791,801 791,801
Held for development:
Oklahoma 579,049 579,049
Under development:
Millsite 30 and other 1,466,317 1,466,317
Millsite 31 2,418,754 2,418,754
Millsite 32 3,568,234 3,568,234
Millsite 34 1,080,000
---------------- ----------------
Total land 11,871,844 10,791,844
PROJECT DEVELOPMENT COSTS 23,257,236 4,699,513
OTHER ASSETS 149,601 49,335
---------------- ----------------
$41,033,964 $24,523,995
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $3,064,968 $495,786
Notes payable to shareholders 700,000
Current portion of long-term debt 438 124,496
---------------- ----------------
Total current liabilities 3,765,406 620,282
NON CURRENT LIABILITIES
Construction Loan 4,342,000 2,251,639
Convertible notes payable to shareholders 6,750,000 1,500,000
Deferred tax liability 61,506 61,506
---------------- ----------------
Total liabilities 14,918,912 4,433,427
---------------- ----------------
COMMITMENT AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT OPTIONS 137,499
MINORITY INTEREST 6,704,688 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;
2,660,498 and 2,672,043 shares issued and outstanding, respectively 2,660 2,670
Additional paid-in capital 10,326,046 10,470,306
Retained earnings 9,081,658 7,686,593
---------------- ----------------
19,410,364 18,159,569
---------------- ----------------
$41,033,964 $24,523,995
================ ================
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
PART I - FINANCIAL INFORMATION (UNAUDITED) - (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE:
Gilpin Hotel Venture:
Management fees $ 100,080 $ 83,595 $ 262,156 $ 248,297
Rental income 119,879 109,220 339,750 323,690
Parking lot operation 75,000 70,000 225,000 262,608
Interest 22,942 39,528 96,721 142,426
Other 25,000
--------- --------- ---------- ----------
Total revenue 317,901 302,343 948,627 977,020
--------- --------- ---------- ----------
COSTS AND EXPENSES:
Compensation and related costs 203,454 185,099 613,714 536,370
Other general and administrative 101,170 103,157 260,533 353,055
Interest 48,664 168,546
--------- --------- ---------- ----------
Total costs and expenses 304,624 336,920 874,247 1,057,971
EQUITY IN EARNINGS OF JOINT VENTURE 775,187 599,332 1,993,889 1,830,722
--------- --------- ---------- ----------
INCOME BEFORE INCOME TAXES & EXTRAORDINARY ITEM 788,464 564,755 2,068,269 1,749,771
INCOME TAXES (306,250) (225,000) (758,975) (665,000)
--------- --------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM & PUT OPTION 482,214 339,755 1,309,294 1,084,770
EXTRAORDINARY ITEM - EARLY RETIREMENT OF DEBT,
NET OF $51,025 IN INCOME TAXES $ 85,771
COSTS RELATED TO COMMON STOCK SUBJECT TO PUT OPTIONS (3,817) (19,051)
--------- --------- ---------- ----------
NET INCOME ATTRIBUTABLE TO COMMON SHARES $ 482,214 $ 335,938 $1,395,065 $1,065,719
========= ========= ========== ==========
EARNINGS PER COMMON SHARE:
Income before extraordinary item $ 0.18 $ 0.13 $0.49 $0.42
Extraordinary item $0.03
--------- --------- ---------- ----------
Net income $ 0.18 $ 0.13 $0.52 $0.42
========= ========= ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 2,714,463 2,494,484 2,660,371 2,508,031
========= ========= ========== =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
PART I - FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,395,065 $1,084,770
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation & amortization 6,403
Equity in earnings of joint venture (1,166,984) (996,128)
Noncash compensation to directors 6,500
Gain on early retirement of debt (136,796)
Changes in operating assets and liabilities:
Accounts receivable (49,823) (1,735)
Income taxes receivable 325,100 (44,000)
Accounts payable and accrued expenses 136,264 11,010
Other assets (105,678)
---------------- ----------------
Net cash provided by operating activities 410,051 53,917
---------------- ----------------
INVESTING ACTIVITIES:
Land and land improvements (38,110)
Distributions from GHV 959,000 1,921,563
Note receivable Gilpin Gold, Inc. 1,335,971
Payments of project development costs (16,124,804) (1,080,000)
Other (151,762) (313,317)
---------------- ----------------
Net cash (used in) provided by investing activities (15,317,566) 1,826,107
---------------- ----------------
FINANCING ACTIVITIES:
Acquisition of treasury stock and payments upon exercise of put option (137,499) (427,584)
Proceeds from issuance of convertible debt to shareholders 5,250,000
Proceeds from issuance of debt to shareholders 700,000
Proceeds from construction loan 4,342,000
Minority interest contributions to majority-owned subsidiary 3,831,188
Payments on long-term debt (2,238,901) (773,992)
---------------- ----------------
Net cash provided by (used in) financing activities 11,746,788 (1,201,576)
---------------- ----------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (3,160,727) 678,448
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 4,531,355 2,189,648
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,370,628 $2,868,096
================ ================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Items:
Cash paid for interest $282,359 $168,546
================ ================
Cash paid for income taxes $471,776 $659,000
================ ================
Acquisition of treasury stock $412,500
================ ================
Non-Cash Items:
Land contributed to majority-owned subsidiary by minority interest $1,080,000
================ ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. (the Company) was
incorporated in Colorado, on January 10, 1991, to acquire gaming properties for
development, joint venture and operation. The Company completed the
construction of the Gilpin Hotel Casino in Black Hawk, Colorado, in September
1992, and the Casino opened on October 1, 1992. The Gilpin is owned by the
Gilpin Hotel Venture (GHV), in which the Company owns a 50% interest. In
November, 1994, GHV acquired an adjacent casino, which was put 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 (the "Lodge"). The
accompanying consolidated financial statements include the accounts of the LLC
as of September 30, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Consolidated Financial Statements --- In the opinion of
management, the accompanying unaudited consolidated financial statements
reflect all adjustments, consisting only of normal recurring accruals, which
are necessary for the fair presentation of the financial position of the
Company at September 30, 1997, as the results of its operations for the period
then ended. The accompanying unaudited consolidated financial statements
include the accounts of the Company, its wholly owned subsidiary Native
American Management Corp. and its 75% owned subsidiary Black Hawk / Jacobs
Entertainment, LLC. All significant intercompany transactions and balances
have been eliminated in consolidation. The accompanying unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Form 10-K for
the year ended December 31, 1996.
Joint Venture --- The Company accounts for its investment in GHV under
the equity method of accounting. All inter-company transactions have been
eliminated to the extent of the Company's ownership in GHV.
New Accounting Pronouncements --- The Financial Accounting Standards
Board issued Statement of Financial Accounting Standards, ("SFAS") 128,
"Earnings per Share." This Statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to all entities with publicly
held common stock or potential common stock. This Statement replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS
excludes dilution and is computed by dividing earnings available to common
stockholders by the weighted-average number of common shares outstanding for
the period. This Statement is not expected to have a material effect on the
Company's reported EPS amounts. This Statement is effective for the Company's
financial statements for the year ended December 31, 1997.
4
<PAGE> 7
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(CONTINUED)
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was
issued. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general- purpose financial statements. This Statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements. This
Statement requires that a company (a) classify items of other comprehensive
income by their nature in a financial statement, and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the balance
sheet. Reclassifications of financial statements for earlier periods provided
for comparative purposes is required. The Company has not determined the
effect, if any, that SFAS 130 will have on its consolidated financial
statements. This Statement is effective for the Company's financial statements
for the year ended December 31, 1998.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued. This Statement establishes
standards for the way that public companies report selected information about
operating segments in annual financial statements and requires that those
companies report selected information about segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This Statement supersedes SFAS No. 14 "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report information about
major customers and requires that a public company report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. SFAS No. 131 requires that a
public company report a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. However, SFAS No. 131 does not
require the reporting of information that is not prepared for internal use if
reporting it would be impracticable. This Statement also requires that a
public company report descriptive information about the way the operating
segments were determined, the products and services provided by the operating
segments, differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period to
period. The Company has not determined the effect, if any, that SFAS 131 will
have on the disclosures in its financial statements. This Statement is
effective for the Company's financial statements for the year ended December
31, 1998.
Forward looking information --- 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,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In particular, no assurance can be given that the anticipated
results covered by the forward-looking statements concerning GHV or the Lodge
will be achieved or that construction of the Lodge will proceed on schedule or
within budget.
5
<PAGE> 8
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(CONTINUED)
3. GILPIN HOTEL VENTURE
Summarized financial information relating to GHV is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets $ 3,135,202 $ 2,712,283
Gaming facility, net 8,637,540 8,966,878
Goodwill 1,297,353 1,376,136
----------- ------------
$13,070,095 $ 13,055,297
=========== ============
LIABILITIES AND VENTURERS'
INVESTMENTS AND ADVANCES
Current liabilities $ 2,948,317 $ 2,681,137
Long-term debt 4,493,442 5,161,792
Venturers' investments and advances 5,628,336 5,212,368
----------- -----------
$13,070,095 $13,055,297
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Casino $ 7,537,573 $ 6,845,745 $ 21,426,796 $20,454,663
Food and Beverage 875,458 663,417 2,356,922 1,927,887
----------- ----------- ------------ -----------
Total revenues 8,413,031 7,509,162 23,783,718 22,382,550
Less : promotional allowance 599,065 404,587 1,608,247 969,209
----------- ----------- ------------ -----------
Net revenues 7,813,966 7,104,575 22,175,471 21,413,341
=========== =========== ============ ===========
COSTS AND EXPENSES:
Casino operations $ 3,409,569 $ 3,055,944 $ 9,791,124 $ 9,354,000
Cost of food and beverage sales 127,132 119,414 345,355 403,574
Food and beverage operations 540,498 520,268 1,549,198 1,549,235
Marketing, general and administrative 2,303,777 2,295,816 6,741,630 6,807,473
Depreciation and amortization 345,552 310,978 1,016,083 914,052
Interest expense 126,982 129,117 398,113 392,751
----------- ----------- ------------ -----------
Total costs and expenses 6,853,510 6,431,537 19,841,503 19,421,085
----------- ----------- ------------ -----------
NET INCOME $ 960,456 $ 673,038 $ 2,333,968 $ 1,992,256
=========== =========== ============ ===========
</TABLE>
The Company's equity in earnings of GHV as reflected in the consolidated
statements of income has been adjusted for the Company's share of fees and
rentals it receives from GHV. Certain items in the September 30, 1996 financial
information have been reclassified to conform to the September 30, 1997
presentation.
6
<PAGE> 9
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. OTHER MATTERS
Black Hawk/Jacobs Entertainment, LLC (the "LLC") --- During 1994,
the Company signed a joint venture agreement with Jacobs Entertainment, Inc.
(Jacobs) of Cleveland, Ohio to develop a major hotel/casino/parking complex in
Black Hawk, Colorado (hereinafter the "Lodge"). After many changes and
revisions, the current plan for the project is a 50 room hotel/casino, with
approximately 800 slot machines, 20 table games, three restaurants, three bars,
and three floors of underground parking for approximately 450 cars. As a
result of the refinements during the development process, it was decided to
incorporate a two-story overflow parking facility for approximately 200
additional parking spaces on 44,000 square feet of Millsite 30 into the Lodge.
On November 12, 1996, the Company entered into an agreement with
Diversified Opportunities Group, Inc. (Diversified) 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% owner and the manager of the LLC.
In connection with the formation of the LLC, Diversified provided debt and
equity financing to the Company.
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 based upon the London Interbank rate
("LIBOR") plus 3.5% (9.19% at September 30, 1997). Principal payments are due
quarterly beginning at the end of the first quarter after the Lodge is open,
which is presently estimated to be May 30, 1998. See "Liquidity and Capital
Resources" under Management's Discussion and Analysis of Financial Condition
and Results of Operations.
As of September 30, 1997, the Company has contributed approximately
$20,114,065 (including certain land costs) to the LLC which represents 75% of
the total contributed capital and Diversified has contributed approximately
$6,704,688 (including certain land costs) to the LLC which represents the
remaining 25% of contributed capital. As of September 30, 1997, the LLC has
drawn $4,342,000 from it's $40,000,000 construction loan with Wells Fargo Bank.
The Company and Diversified are required to maintain their respective pro rata
share of any additional capital contributions to the LLC, if necessary.
Diversified's ownership in the LLC is reflected as a minority interest in the
accompanying consolidated balance sheet.
Oklahoma property acquisition --- During 1994, the Company acquired a
27,000 square foot parcel of land in downtown Oklahoma City with the intent of
placing the land into tribal trust for the benefit of the Sac and Fox Nation
Indian Tribe for the purpose of operating a 53,000 square foot, high stakes
Indian bingo hall, in a re-development area of downtown Oklahoma City known as
"Bricktown". The Company endeavored to negotiate with the Sac and Fox Nation
Indian Tribe, however, during 1996, negotiations did not progress as the
Company hoped. The exceedingly difficult inter-relationships between the Tribe,
the Bureau of Indian Affairs, and the National Indian Gaming Commission have
caused the Company to reconsider the overall economics of this transaction.
Presently, the Company is pursuing alternative uses of the property or its sale
in which event the Company believes it can recoup its cash cost, however, can
give no assurance in this regard.
5. CAPITALIZED CONSTRUCTION INTEREST
As a result of the construction of the Lodge, the Company began
capitalizing interest expense during 1996. Capitalized interest through
September 30, 1997, totaled approximately $515,722 of which $170,957 is related
to the three months ended September 30, 1997 and $410,347 is related to the
nine months ended September 30, 1997.
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by the financial statements and the notes thereto
included elsewhere in this Report.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
Income before income taxes and extraordinary item for the nine months
ended September 30, 1997 increased, when compared to the comparable period of
1996, by $318,498 or 18%. Total revenue of the Company decreased by $28,393 or
3%. Increased profitability is due to an increase in equity in earnings of the
GHV of $163,167 or 9% and a reduction in total costs and expenses of $183,724
or 17%. Additionally, the Company realized an extraordinary gain on the early
retirement of debt of $85,771 (net of $51,025 in income taxes). The following
is a discussion of the various changes in the components of the Company's
consolidated statements of operations for the nine months ended September 30,
1997, as compared to the nine months ended September 30, 1996.
Revenues
The Company's current period revenue has decreased by $28,393 or 3% as
compared to the comparable period of 1996. The net decrease in the Company's
revenue is comprised of reductions in: parking lot income of $37,608 or 14% and
interest income of $45,705 or 32%; and increases in: management fees of $13,859
or 6%; rental income of $16,060 or 5% and other income of $25,000.
Management fee income is computed based upon 11% of the defined volume
of the various departments of the GHV 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. The current
period costs and expenses of GHV increased by $420,418 or 2% and net revenue
generated by GHV increased by $762,130 or 4%. The management fee earned by the
Company for the current period, after elimination of the amount of such fee
attributable to the Company's 50% interest in the Joint Venture, resulted in an
increase of $13,859 or 6%.
During 1997, the Company has received parking fees from the joint
venture for the use of Millsite 30. During 1996 the Company received parking
fees for the use of Millsite 30, 31 and Millsite 32 on an as needed basis as
parking for the patrons of GHV. During the fourth quarter of 1996 the Company
eliminated parking on Millsite 31 and reduced the parking availability on
Millsite 30 due to the LLC's current construction efforts. Due to the reduction
in available parking for GHV by the Company, parking revenue decreased by
$37,608 or 14% when compared to the prior period. The Company may continue to
rent a portion of Millsite 30 to the GHV, however, only on a month-to-month
basis and as construction scheduling will allow. The agreement for the use of
Millsite 30 for the benefit of GHV, ended on January 1, 1996. Presently, the
Company is charging GHV the same $50,000 monthly fee established in 1995.
During March 1997 the Company gave formal notice to its joint venture partner
in GHV that effective November 1, 1997, parking will no longer be available on
Millsite 30. The Company anticipates a decline in its
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
parking lot operation revenue as a result of the termination of this
agreement and while construction commences on Millsite 30 for the overflow
parking facility for the Lodge.
The Company and its joint venture partner are the co-owners of the
land underlying the GHV. The Joint Venture agreement requires GHV to pay a
monthly land rental fee equivalent to 7% of the net gaming revenues of GHV.
Rental income attributable to the land underlying the GHV is reported after
elimination of the amount of such fees attributable to the Company's 50%
interest in GHV. The Company's rental income for the nine months ended
September 30, 1997, increased by $16,060 or 5%. While net gaming revenues of
GHV for the current quarter were up as compared to the same period last year
(as discussed in more detail below), the overall impact on the Company's rental
income was not material.
The remaining portion of the Company's revenue is the result of
interest it receives on temporary cash investments and consulting services.
During the fourth quarter of 1994 the Company advanced $1,495,000 to an
affiliate of its joint venture partner in order to effectuate the closing for
the purchase of the Pick-A-Dilly casino. The Company earned 10% on this note,
plus a fee for having made the loan to its joint venture partner. The loan was
repaid in the second quarter of 1996, therefore there was no interest income
related to this note for the nine months ended September 30, 1997, whereas,
$20,102 in interest was earned on this note in the comparable period of the
prior year. As the Company expends funds on other projects, interest income
will decrease. During the current period, the Company was retained by a
Colorado casino (who's sole shareholder is an officer, director and shareholder
of the Company) to provide consulting services on a month to month basis, at a
rate of $5,000 per month. As of September 30, 1997, the Company has earned
$25,000 for these consulting services.
Costs and Expenses
Total compensation and related costs for the nine months ended
September 30, 1997, increased by approximately $77,344 or 14%, generally due to
the costs for additional employees of the Company. The decrease in general and
administrative expenses of $92,522 or 26% is principally due to the decreases
in: consulting fees of $17,007 or 100%; shareholder relations costs of $11,424
or 21%; travel and entertainment of $45,081 or 64%; directors fees of $18,500
or 59% and other expenses of $510. Interest expense decreased (resulting from
capitalization) by $168,546. Capitalization of interest during construction
for the nine months ended September 30, 1997 totaled approximately $410,347.
Equity in Earnings of Joint Venture
By virtue of the Company's 50% ownership of GHV, the Company is
required to record its share of the net earnings of GHV, after elimination of
intercompany transactions and other adjustments, as "Equity in Earnings of
Joint Venture." Although the Company receives other revenue from the joint
venture, as discussed above, equity in earnings of the joint venture accounts
for substantially all of the Company's income before income taxes. Summarized
financial information on the joint venture is provided in Note 3 to the
financial statements included within this report.
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the nine months ended September 30, 1997, GHV's total revenues
increased by $1,401,168 or 6%. However, when reduced by an increase in
promotional allowance of $639,038, or 66%, net revenues increased by $762,130
or 4%. The total costs and expenses of GHV increased by $420,418 or 2%.
Accordingly, the net result is an increase in the net income of GHV of
$341,712 or 17%, over the comparable period of the preceding year.
Management attributes the approximate $762,130 increase in net
revenues to an increase in net casino revenue (slot machines, table games and
off track betting) of $972,133 offset by a decrease in net food and beverage
revenue (net of promotional allowance) of $210,003.
The income statement of GHV (see note 3 of the accompanying notes to
consolidated financial statements) includes classification of costs and
expenses by operating departments. When these operating departments are
aggregated, the most significant changes that comprise the net increase in
costs and expenses of $420,418 include, decreases in: labor costs of $917,707
or 15%; bad debts of $105,333 or 34%; legal fees of $77,405 or 45%; parking
fees of $306,065 or 39% and other net decreases of $25,969. These decreases
are offset by increases in: marketing and related costs of $683,990 or 36%;
gaming taxes of $524,299 or 14%; food and beverage costs of goods sold of
$189,723 or 22%; contract labor of $56,865 or 32%; property taxes of $64,570 or
130%; depreciation of $102,030 or 11%; rent of $64,241 or 5%; postage of
$48,763 or 121%; printing expense of $58,516 or 53%; and slot rental expenses
of $59,900 or 102%.
Management attributes GHV performance for the nine months ended
September 30, 1997, to the following: increased traffic flow (due to the
completion of the construction efforts of the Business Improvement District
("BID")); the additional dollars spent on the GHV's marketing programs and
improved operating efficiencies.
A large portion of the GHV's success has been attributed to its
on-site parking. The parking lot entrance is located directly across the street
from GHV and is convenient for GHV's patrons. During most of the second
quarter and part of the third quarter of 1997, GHV experienced reduced
accessibility to its parking lot due to traffic flow constraints imposed by the
construction efforts of the BID. During the third quarter of 1997, however,
the BID completed its construction efforts on main street and GHV's patrons
were able to resume parking without significant inconvenience.
The competitive environment in the City of Black Hawk continues to
change. The principal changes include: expansion by other casinos; increased
parking availability at other establishments; an increased number of gaming
devices; and aggressive marketing campaigns by competing casinos. To compete
with these changes management has implemented additional marketing programs and
has incurred increased costs to implement those programs.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1997, GHV's management has streamlined the existing operations
of the GHV; increased marketing dollars spent on the busing program to offset
the reduction in parking resulting from construction within the city; realigned
marketing programs to provide more benefit to players; enhanced the food and
beverage product; instituted interior design enhancements to the GHV and
concentrated on providing an enjoyable gaming experience for GHV customers.
Management believes with these changes GHV has remained competitive and
improved its operational efficiency when compared to the comparable period of
1996.
In the opinion of management, GHV's operations for the nine months
ended September 30, 1997, are competitive relative to other casinos in Black
Hawk as well as the other two Colorado gaming districts. GHV's adjusted gross
proceeds (AGP) (total gambling receipts less jackpots/winnings, less restocking
moneys for slot machines, plus moneys collected from table games and deposited
with the cashier) averages for gaming devices (slot machines and table games)
remains in excess of the overall gaming AGP averages for the state and the city
of Black Hawk.
Income taxes
The current quarter income tax expense is based upon a combined
federal and state tax rate approximating 37%. 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 for findings, in GHV's 1992, 1993 and 1994,
income tax returns which will increase the amount of taxable income of GHV by
approximately $128,000, $158,000 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 venturers by
approximately $57,000. The findings represent principally temporary differences
which will reverse in future years.
Net income per share of common stock
Results of operations for the nine months ended September 30, 1997,
yielded net income per common share before extraordinary item of $.49; an
extraordinary gain on early retirement of debt, net of estimated income taxes
yielded $.03 per share, for a combined net income per share of $.52 on weighted
average shares outstanding of 2,660,371. Earnings per share for the comparable
period in 1996, was $.42 based on 2,508,031 weighted average shares
outstanding.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED SEPTEMBER 30, 1997 COMPARED TO THE QUARTER ENDED
SEPTEMBER 30, 1996
Generally, no activity occurred during the quarter ended September 30,
1997, that has not otherwise been discussed in the comparison between the
nine-month period of 1997, to the nine month period of 1996, with respect to
the Company's overall operations. However, the following is a more detailed
discussion surrounding some of the factors affecting GHV's operation for the
third quarter of 1997, as compared to the third quarter of 1996.
Equity in earnings of Joint Venture
During the three months ended September 30, 1997, GHV's revenues
increased by $903,869 or 12%. However, when reduced by an increase in
complimentary sales of $194,478 or 48%, net revenues increased by $709,391 or
10%. The total costs and expenses of GHV increased by $421,973 or 7%.
Accordingly, the net result is an increase in the net income of GHV of
$287,418 or 43% over the comparable period of the preceding year.
GHV attributes the approximate $709,391 increase in net revenues
principally to an increase in net Casino revenue (slot machines, table games
and OTB) of $691,828; and an increase in net food and beverage revenue (net of
promotional allowance) of $17,563.
The income statement of GHV, (see note 3 of the accompanying notes to
consolidated financial statements), includes classification of costs and
expenses by operating departments. When these operating departments are
aggregated, the most significant changes that comprise the net increase in
costs and expenses of $421,973 include, decreases in: labor costs of $176,371
or 9% and parking fees of $44,039 or 22% . These decreases are offset by
increases in: marketing and related costs of $81,233 or 11%; gaming taxes of
$271,067 or 22%; food and beverage costs of goods sold of $95,270 or 31%;
contract labor of $19,450 or 26%; depreciation of $34,573 or 11%; rent of
$42,636 or 10%; postage of $13,060 or 78%; printing expense of $39,742 or 111%;
slot rental expenses of $29,655 or 118% and other net increases of $15,697.
Generally, the net increase in expenses that occurred during the third
quarter of 1997 when compared to the third quarter of 1996 is attributable to a
decrease in labor expense offset by increases in marketing expenditures and
other variable costs. The net increase in marketing expenditures is a result of
slot club programs that reward customers based on their level of play
(generally, these expenses increase as revenue increases) and the additional
money spent on busing programs implemented to offset the decrease in parking
availability for the patrons of GHV. The remaining increases in expenses are
primarily a function of increased revenue i.e. gaming taxes and cost of goods
sold. Additionally, the gaming tax rate structure changed in October, 1996, the
result is an additional 2% tax on adjusted gross proceeds (money wagered less
money paid out or "win") when compared to the comparable quarter of 1996.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $410,051 in the first
nine months of 1997 and $53,917 in the first nine months of 1996.
Net cash used in investing activities for the first nine months of
1997, was $15,317,566 and was primarily the result of payments for project
development costs associated with the Lodge totaling $16,124,804 and other
miscellaneous payments of $151,762 which were offset by distributions from GHV
of $959,000. During the first nine months of 1996 the net cash provided by
investing activities totaled $1,826,107 and was primarily the result of
distributions from GHV of $1,921,563 and receivable loan repayments of
$1,335,971 offset principally by project development cost payments totaling
$1,080,000 and other expenditures on projects and land improvements totaling of
$351,427.
The net cash provided by financing activities for the first nine
months of 1997, amounted to $11,746,788 and principally was the result of
proceeds from the issuance of convertible debt to Diversified Opportunities
Group, Ltd. and officers totaling $5,950,000; draws against the Wells Fargo
Bank construction loan totaling $4,342,000 and minority interest contributions
totaling $3,831,188. These increases are offset by the acquisition of common
stock acquired by the Company totaling $137,499 and payments on long-term debt
aggregating $2,238,901. Financing activities used $1,201,576 in the first nine
months of 1996, principally the result of the acquisition of treasury stock and
common stock acquired by Company totaling $427,584 and payments on long-term
debt of $773,992.
The Company's principal sources of capital consist of cash flow
distributions from GHV, cash generated from its rental and management
operations and minority interest contributions to the Company's majority owned
subsidiary. As of September 30, 1997, the Company has working capital of
approximately $616,628 (after eliminating accrued expenses of the LLC of
$2,801,380 to be financed under the Wells Fargo Bank credit facility) as
compared to $4,400,000 at December 31, 1996. During the first nine months of
1997 the Company received $959,000 of distributions from GHV, however, the
required capital contributions of the Company associated with the Lodge has
decreased working capital as compared to December 31, 1996.
During the third quarter of 1997, the Company issued convertible
promissory notes to officers and directors totaling $750,000, with a variable
interest rate based upon the LIBOR plus 2% (7.63% at September 30, 1997), to
meet its funding requirement of the Lodge as required under the terms of the
credit facility agreement. Additionally, the Company issued unsecured notes
payable to Diversified Opportunities Group, Ltd. (DOGL) (an affiliated company
controlled by Jeffrey P. Jacobs, an officer and director) of $550,000 and to an
officer and director of $150,000, payable at approximately 8% per annum, in
order to provide working capital to pursue other potential gaming
opportunities. The Company repaid the loan, plus interest, to DOGL subsequent
to September 30,1997. The convertible notes are at $5.25 per share and are
secured by a second priority lien on 100% of the Company's interest in the LLC.
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company believes its current working capital position and
distributions from GHV, will be sufficient to meet its short term working
capital requirements, which are primarily operating expenses. Any significant
development of other projects by the Company will require additional financing,
other joint venture partners, or both.
The recoupement provision of the GHV agreement provides the Company
with a small amount of working capital in addition to the distributions it
receives from GHV. The Company's joint venture partner is obligated to repay to
the Company a remaining balance of $1,244,000 for its proportionate share of
development costs of the Gilpin Hotel Casino. This balance is to be repaid out
of the joint venture partners share of 40% of the after tax distributions of
GHV, if any (the recoupment account formula).There were no repayments against
the development account during the quarters presented. 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 anticipates arbitration proceedings to commence to collect
the approximate $421,000 balance due to the Company as of September 30, 1997,
as calculated using the recoupment account formula.
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 also issued a convertible promissory note
amounting to $1,500,000. The promissory note is convertible at $5.25 per share
and is secured by a second 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 3.5% and is payable quarterly.
Additionally, the LLC agreement further provides for Diversified to invest an
additional $4,500,000 in convertible notes under the same terms and conditions
as the $1,500,000 of convertible notes. These additional proceeds were received
during the second quarter of 1997.
In December 1996 the LLC gave the contractor "notice to proceed" with
limited construction pending securing of permanent financing. On February 27,
1997 the LLC obtained its excavation / foundation permit from the City of Black
Hawk and on March 27, 1997, effective March 7, 1997, closed its financing with
Wells Fargo Bank for a $40,000,000 construction loan.
Since the commencement of the project, the Company has
contributed its share of the LLC costs, totaling $20,114,065 through September
30, 1997, as well as an additional $297,000 in costs which were incurred prior
to formation of the LLC, out of current working capital and/or funds generated
by operations. Presently the total project costs, including land costs, are
estimated to be $67,800,000.
The Company has contributed $20,114,065 in equity (including land
costs) to the LLC project for its 75% interest. As of September 30, 1997,
$4,432,000 in disbursements have been made under the $40,000,000 construction
loan provided by the lender. As a 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.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
STATUS OF CONSTRUCTION OF THE LODGE CASINO AT BLACK HAWK
The Company believes that the remaining issues surrounding the
construction of the Lodge are minimal and completion of The Lodge Casino at
Black Hawk is anticipated to be May 30, 1998. Any shareholder wishing to view
the weekly status of the project is invited to do so on the world wide web at
www.bhwk.com.
15
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
See the registrant's report on form 10-Q for the quarter ended March 31,
1997, incorporated herein by reference.
PART II - OTHER INFORMATION (CONTINUED)
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Black Hawk Gaming & Development Company, Inc.
---------------------------------------------
Registrant
Date: November 12, 1997 By: /s/ Jeffrey P. Jacobs
--------------------------------------------
Jeffrey P. Jacobs, Co-Chairman of the Board
of Directors and Chief Executive Officer
/s/ Stephen R. Roark
--------------------------------------------
Stephen R. Roark, President and Chief
Financial Officer
17
<PAGE> 20
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH SEPTEMBER 30, 1997 FORM 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,370,628
<SECURITIES> 0
<RECEIVABLES> 130,759
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,580,654
<PP&E> 35,129,080
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,033,964
<CURRENT-LIABILITIES> 3,765,406
<BONDS> 7,450,000
0
0
<COMMON> 2,660
<OTHER-SE> 19,407,704
<TOTAL-LIABILITY-AND-EQUITY> 41,033,964
<SALES> 851,906
<TOTAL-REVENUES> 2,942,516
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 874,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,068,269
<INCOME-TAX> 758,975
<INCOME-CONTINUING> 1,309,294
<DISCONTINUED> 0
<EXTRAORDINARY> 85,771
<CHANGES> 0
<NET-INCOME> 1,395,065
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
</TABLE>
