<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1998
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934--N/A
Commission File No. 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 Identification No.)
incorporation or organization)
Box 21, 240 Main Street, Black Hawk, Colorado 80422
(Address of principal executive offices) (Zip code)
(303) 582-1117
(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
(Title of Class)
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 19, 1999, was approximately $16,000,000 based upon the
reported closing sale price of such shares on the NASDAQ National Market System
for that date. As of March 19, 1999, there were 4,087,346 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: -NONE-
The exhibit index appears on page E-1.
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BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
1998 Annual Report on Form 10-K
Table of Contents
<TABLE>
<CAPTION>
Item Description Page
- ---- ----------- ----
<S> <C>
Item 1. Business ...................................................................................... 1
Item 2. Properties .................................................................................... 6
Item 3. Legal Proceedings ............................................................................. 13
Item 4. Submission of Matters to a Vote of Security Holders ........................................... 14
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters .......................................................... 15
Item 6. Selected Financial Data ....................................................................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................................. 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk ..................................... 27
Item 8. Financial Statements and Supplementary Data ................................................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................................................. 27
Item 10. Directors and Executive Officers Of the Registrant ............................................ 28
Item 11. Executive Compensation ........................................................................ 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management ....................................................................... 34
Item 13. Certain Relationships and Related Transactions ................................................ 36
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .............................................................. 37
</TABLE>
<PAGE> 3
Item 1. Business.
A. GENERAL.
The Company is an owner, developer and operator of gaming properties in
Black Hawk, Colorado. The Company, owns the Gilpin Hotel Casino which it
developed and has operated since 1992. Along with its strategic partner, Jacobs
Entertainment Ltd., the Company developed and co-manages The Lodge Casino at
Black Hawk ("The Lodge Casino"), a $74 million hotel/casino/parking complex
completed in the second quarter of 1998. The Company owns, through a limited
liability company, a 75% interest in The Lodge Casino and affiliates of Jacobs
Entertainment own 25%. The Gilpin Hotel Casino and The Lodge Casino are
sometimes referred to herein collectively as the "Casinos."
The Gilpin Hotel Casino was the Company's first casino project. The
37,000 square foot facility is located in the heart of the Black Hawk gaming
district. Originally built in the 1860s, the Gilpin Hotel is one of the oldest
in Colorado, however, no hotel or lodging facilities are offered by the casino.
The Gilpin Hotel Casino commenced operations in October 1992, and was expanded
through the acquisition of an adjacent casino in late 1994. It now offers
customers approximately 455 slot machines, 9 table games, two restaurants and
four bars.
The Lodge Casino, completed during the second quarter of 1998, is also
located in the heart of the Black Hawk gaming district. The Lodge Casino is one
of Colorado's largest casinos; the 250,000 square foot facility has
approximately 50,000 square feet of casino space, 50 hotel rooms, three
restaurants, four bars and parking for approximately 600 cars.
Casino gaming in Colorado is restricted to the three towns of Black
Hawk, Central City and Cripple Creek and two Native American gaming facilities
located in the southwest corner of the state. The Black Hawk market primarily
attracts drive-in or "day trip" customers from such key population centers as
Denver, Boulder, Fort Collins and Golden, Colorado and Cheyenne, Wyoming. These
population centers are located within a 100-mile radius of Black Hawk. The
population within this 100-mile radius has experienced steady growth from a
population of approximately 2.8 million in 1990 to 3.2 million in 1998. Casino
owners in Black Hawk and Central City estimate that about 80% of the gaming
customers come from the greater Denver metropolitan area. The Denver
metropolitan population base is projected to increase steadily through 2015.
Adjusted gross proceeds from gaming in the Black Hawk market have grown from $56
million in 1992, the first full year of gaming operations, to $272 million in
1998.
According to the Colorado Gaming Commission, the Colorado gaming
industry's adjusted gross proceeds have grown from approximately $23 million in
1991 to $479 million in 1998. The Company believes that the Colorado market
continues to offer significant growth opportunities for newer and larger gaming
establishments with amenities such as the hotel facilities offered by The Lodge
Casino. At present, Black Hawk has no significant lodging facilities other than
those offered by The Lodge Casino. The Company's strategy focuses on increasing
revenues and earnings through efforts that are designed to increase its market
share and enhance its operational efficiencies, as well as to participate in
other gaming jurisdictions as a manager or owner of casino properties.
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B. ACTIVITIES DURING 1998.
ACQUISITION OF JOINT VENTURE. An agreement was entered into in late
December 1997 between the Company and Gilpin Ventures, Inc. ("GVI"), the
Company's joint venture partner in the Gilpin Hotel Casino. The Agreement
provided for the Company's purchase of all of GVI's issued and outstanding
common stock from its shareholders and a consulting agreement with an affiliate
of GVI. GVI's only business interest was its 50% interest in the Gilpin Hotel
Casino including all personal property, gaming machines, licenses, permits and
other property. In addition, the joint venture distributed to the GVI
shareholders GVI's share of profits, rents and management fees through Closing.
Also, the Company acquired from Gilpin Gold, Inc., an affiliated company of GVI,
all of that company's right, title and interest in land underlying the Gilpin
Hotel Casino and other parcels located across the street from that casino, which
provides parking for the Casino. The total purchase price for the acquisitions
was $10,000,000.
In connection with the acquisitions described above, the Company
entered into a Credit Agreement with Wells Fargo Bank, National Association
("Wells Fargo"). Some of the more important terms of the Credit Agreement are:
(i) the facility under the Credit Agreement is a three
year reducing revolving line of credit in the amount
of $20 million. Approximately $13.5 million was drawn
down at closing to fund the acquisitions described
above and to pay existing mortgage debt against the
property purchased;
(ii) approximately $2 million was used to pay certain
equipment debt, to pay for the third story of a
parking garage under construction across Main Street
from the Gilpin Hotel Casino, and for working
capital;
(iii) the facility bears interest at the rate of 75 basis
points over prime (approximately 8 1/2% currently);
(iv) beginning January 1, 1999, the maximum credit line
available will be reduced by $500,000 per quarter
until April 24, 2001 when the outstanding balance of
the facility will be due;
(v) the Credit Agreement contains a number of affirmative
and negative covenants which, among other things,
requires the Company to maintain certain financial
ratios and refrain from certain actions without Wells
Fargo's concurrence; and
(vi) substantially all of the assets of the Gilpin Hotel
Casino, GVI and the Company (except its 75% interest
in The Lodge Casino) are pledged as security for
repayment of the credit facility. The Credit
Agreement also contains customary events of default
provisions.
THE LODGE CASINO. In December 1994, the Company and Jacobs
Entertainment entered into a joint venture agreement to develop and operate a
major casino/hotel/parking complex on land contributed to the venture by the
Company and Jacobs Entertainment in Black
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Hawk, Colorado. In November 1996, the joint venture was reorganized into a
limited liability company named Black Hawk/Jacobs Entertainment LLC ("LLC") and
Jacobs Entertainment assigned its interests in the LLC to Black Hawk
Entertainment Ltd. ("BHE") and Diversified Opportunities Group Ltd. ("DOGL"),
both affiliates of Jacobs Entertainment. The Company presently owns 75% of the
LLC's membership interests, BHE owns 24% and DOGL owns 1%.
The casino portion of The Lodge Casino opened on June 24, 1998 with
approximately 50,000 square feet of casino space featuring approximately 800
slot machines and 20 table games (blackjack and poker), three restaurants, four
bars and three floors of underground parking for approximately 400 cars. A
50-room hotel facility and an overflow parking garage for approximately 200
additional parking spaces opened in mid August and during the first week of
November 1998, respectively.
In connection with the construction and financing of The Lodge Casino,
the LLC entered into a Construction and Reducing Revolving Credit Agreement with
Wells Fargo which is anticipated to convert to a term loan in April 1999. Some
of the more important terms of this agreement are:
(i) the facility under the agreement is a five year
reducing line of credit in the amount of $40 million
of which $37.5 million has been drawn under the
agreement as of the date hereof;
(ii) the facility bears interest at the Libor rate plus 3%
(approximately 8 1/2% at present);
(iii) beginning April 1, 1999, the maximum credit line
available will be reduced by $1,175,000 per quarter
until March 7, 2002 when the outstanding balance will
be due;
(iv) the agreement contains a number of affirmative and
negative covenants which, among other things,
requires the Company to maintain certain financial
ratios and refrain from certain actions without Wells
Fargo's concurrence; and
(v) all of the assets of the LLC are pledged as security
for repayment of the facility. Jeffrey P. Jacobs,
Chief Executive Officer of the Company and certain of
his affiliates have personally guaranteed the loan.
See Item 13 below.
OTHER ACTIVITIES. The Company has reported its intention to diversify
its operations to include gaming operations outside Colorado as part of its
growth strategy. During 1998 the Company pursued a significant development
opportunity in St. Croix, U.S. Virgin Islands. It also filed an application for
a gaming license which it chose to withdraw in January 1999 after having been
unsuccessful in negotiating certain economic development issues with the U.S.
Virgin Islands Casino Control Commission. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Several other potential projects and acquisitions in Mississippi and
Nevada were identified and analyzed in 1998, however each was rejected for
differing, primarily economic, reasons. The Company will continue to identify
and review various opportunities as part of its strategic plan to grow by
geographic diversification.
C. 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.
<TABLE>
<CAPTION>
Average Average
Adjusted AGP Average Average AGP
Gross Per Number of Number of Per Device
State of Colorado(1) Proceeds(3) Casino(4) Casinos(5) Devices(6) Per Day
- -------------------- ----------- --------- ---------- ---------- -------
Calendar
Year
- --------
<S> <C> <C> <C> <C> <C>
1991(2) $ 23,129,000 $ 965,000 24 2,166 $118
1992 179,984,000 3,327,000 56 7,814 63
1993 259,879,000 4,025,000 65 10,619 67
1994 325,685,000 5,442,000 60 11,575 77
1995 384,343,000 6,661,000 58 12,665 83
1996 410,565,000 7,203,000 57 12,872 87
1997 430,650,000 7,975,000 52 13,361 88
1998 479,200,000 9,695,000 49 13,626 99
<CAPTION>
Average Average
Adjusted AGP Average Average AGP
Gross Per Number of Number of Per Device
City of Black Hawk Proceeds(3) Casino(4) Casinos(5) Devices(6) Per Day
- ------------------ ----------- --------- ---------- ---------- -------
Calendar
Year
- --------
<S> <C> <C> <C> <C> <C>
1991(2) $ 6,561,000 $ 1,640,000 4 448 $162
1992 56,201,000 4,223,000 14 2,033 75
1993 112,140,000 5,303,000 21 3,658 84
1994 173,703,000 8,635,000 20 4,563 104
1995 195,856,000 10,171,000 19 4,848 111
1996 220,200,000 11,589,000 19 5,176 117
1997 234,631,000 12,295,000 19 5,417 119
1998 272,008,000 15,326,000 18 5,864 129
</TABLE>
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GILPIN HOTEL CASINO
The Company commenced gaming operations through its joint venture
interest in the Gilpin Hotel Casino on October 1, 1992. Information concerning
the casino follows:
<TABLE>
<CAPTION>
Average
Adjusted Average AGP
Calendar Gross Number of Per Device
Year Proceeds(3) Devices(6) Per Day
---- ----------- ---------- -------
<S> <C> <C> <C>
1992 $ 2,927,000 (7) 293 $110
1993 25,060,000 286 240
1994 28,036,000 286 269
1995 28,051,000 499 (8) 154
1996 26,783,000 488 150
1997 28,322,000 497 156
1998 28,938,000 485 163
</TABLE>
THE LODGE CASINO
The Lodge Casino commenced gaming operations on June 24, 1998.
Information concerning the casino follows:
<TABLE>
<CAPTION>
Average
Adjusted Average AGP
Calendar Gross Number of Per Device
Year Proceeds(3) Devices(6) Per Day
---- ----------- ---------- -------
<S> <C> <C> <C>
1998 (from June 24) $27,781,000 829 $176
</TABLE>
- ------------------
(1) Limited stakes gaming totals for Colorado include Black Hawk, Central City
and Cripple Creek and commenced October 1, 1991.
(2) Limited stakes gaming began in October 1991; thus the 1991 results reflect
gaming activities from October through December.
(3) Adjusted gross proceeds is most easily defined as the amount of money
wagered less the amount paid out in prizes.
(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 and table games reported by
licensees for the calendar year.
(7) The Gilpin Hotel Casino was completed in September 1992; hence, results are
for the last three months of 1992.
(8) Includes expansion of the Gilpin Hotel Casino completed in January 1995.
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Item 2. Properties.
GILPIN HOTEL CASINO. The Gilpin Hotel Casino was the Company's first
casino project. The 37,000 square foot facility is located in the heart of the
Black Hawk gaming district. Originally built in the 1860s, the Gilpin Hotel is
one of the oldest in Colorado, however, no hotel or lodging facilities are
offered by the casino. Construction of the casino property began in February
1992 and was completed in September 1992. The Gilpin Hotel Casino commenced
operations in October 1992, and was expanded through the acquisition of an
adjacent casino in late 1994. It now offers customers approximately 455 slot
machines and 9 table games, two restaurants and four bars.
THE LODGE CASINO. The Lodge Casino, opened on June 24, 1998 and is also
located in the heart of the Black Hawk gaming district. The 250,000 square foot
facility has approximately 50,000 square feet of casino space, 50 hotel rooms,
three restaurants, four bars and parking for 600 cars. The Company and
affiliates of Jacobs Entertainment Ltd. have established a jointly owned entity
to develop, own and operate The Lodge Casino. The Company owns 75% of this
entity and the Jacobs' affiliates own the remaining 25%.
EMPLOYEES. The Gilpin Hotel Casino employs approximately 260 and The
Lodge Casino employs approximately 600 full-time persons including cashiers,
dealers, food and beverage service personnel, facilities maintenance, security,
valet, accounting, marketing, and personnel services. A manual has been provided
to 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 full-time employees along
with training and job advancement opportunities. Relations with employees are
deemed by management to be good. Although the gaming labor market is tight in
Colorado and will become more so with the opening of new casinos in Black Hawk,
the Company believes good quality employees can be recruited and retained
primarily because of the work atmosphere, competitive wages and fringe benefits
offered by the Company.
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, determined
that the convenience of parking was a significant factor in many patrons'
decision to visit a casino. In the last two years, several competitors have
developed or arranged for convenient parking in or near their casinos which has
diminished the advantage previously enjoyed by the Gilpin Hotel Casino. Now that
The Lodge Casino is fully completed, the Company has parking availability for
approximately 600 cars at The Lodge Casino and 200 cars at the Gilpin Hotel
Casino.
GAMING EQUIPMENT. The Lodge Casino presently has 835 gaming devices and
24 table games. The Gilpin Hotel Casino operates with 455 slot machines and 9
table games. 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 maximum wager pursuant to state law is $5.00 per device. The
Company believes the Casinos have a competitive 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.
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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 Casinos employ
these internal controls and paperwork systems to insure compliance with
regulations. The Casinos are also required to obtain an annual audit report from
an independent certified public accounting firm, which in turn is required to
make certain unannounced inspections. There are approximately 264 video cameras
throughout the Gilpin Hotel Casino and 357 throughout The Lodge Casino with
taping devices in place to record all gaming activity at all times. These tapes
and live action play are monitored and reviewed by both security personnel and
Gaming Commission employees to insure the integrity of gaming operations. The
Casinos employ a controller who is responsible for an accounting staff of 19
people. The controller is also responsible for all internal operational
accounting matters.
Additionally, the Casinos employ a full-time compliance officer who
reports directly to the Vice President of Gaming Operations. The compliance
officer's job is to ensure the Casinos comply with the Internal Control Minimum
Procedures as established by the Colorado Division of Gaming.
SUPPORT SYSTEMS. The Casinos utilize computerized slot data tracking
systems which allow them to track individual play, payouts, and develop mailing
lists for special events and contest play. The systems also provide management
with a variety of other useful marketing information. Computer based point of
sale accounting and data tracking systems monitor the popularity of all food and
beverage items and offers management controls on food and beverage sales.
COMPETITION. Competition in the Black Hawk and Central City gaming
market, which forms the primary gaming market in Colorado, is intense. The
Casinos are located in Black Hawk on opposite sides of Main Street. Due to their
proximity, the Casinos compete for some of the same customers from the Denver
metropolitan area. Further, there are 29 other casinos operating in Black Hawk
and Central City as of December 31, 1998 and approximately 18 casinos operating
in Cripple Creek as of that date. As of December 31, 1998, there were 19 casinos
and approximately 7,300 gaming devices (slot machines, blackjack and poker
tables) in Black Hawk. The Isle of Capri Casino, which opened for business on
December 29, 1998, increased the number of gaming devices in Black Hawk by
approximately 1,100. The Riviera Casino, Hyatt Black Hawk Hotel & Casino and the
Black Hawk Mardi Gras LLC, are currently under development and are expected to
increase the number of gaming devices in Black Hawk by approximately 3,000.
Therefore, when the competitive projects open, which is expected during 1999,
the increased competition may adversely affect the Company's operations in Black
Hawk and, accordingly, may have a material adverse effect on the Company's
consolidated results of operations and financial position in the future. Other
large, well financed companies may enter the Black Hawk and other Colorado
markets through the purchase and/or expansion of existing facilities.
Central City is located adjacent to Black Hawk and currently provides
the primary competition to the gaming establishments in Black Hawk, with 12
casinos and 3,200 gaming devices as of December 31, 1998. Black Hawk has
historically enjoyed an advantage over Central City in large part because access
to the area by State Highway 119 (currently the only major access to Black Hawk
from the Denver metropolitan area and Interstate 70) requires
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customers to drive by and, in part, through Black Hawk to reach Central City. An
attempt by Central City to obtain financing for an additional roadway, commonly
referred to as the Southern Access, providing new, direct access to Central City
from Interstate 70 through the formation of a general improvement district was
delayed and, in late 1997, ended, by litigation challenging Central City's
actions in forming the general improvement district. Central City has acquired
portions of the right-of-way and is taking renewed steps toward formation of an
entity to construct the road, and it is likely that Central City will continue
pursuing financing for the alternate route by other means. The additional
roadway, if constructed as currently proposed, would make it possible for
certain traffic which currently passes through Black Hawk to proceed directly to
Central City from Interstate 70. Even if the new route was constructed,
motorists driving from the Denver metropolitan area would still have the option
of choosing to go either to Black Hawk or Central City. The Black Hawk Casino
Owners' Association has recently undertaken a study to determine the feasibility
of an access route by tunnel from Interstate 70.
The Company believes that the primary competitive factors in the Black
Hawk-Central City market are location, availability and convenience of parking,
number and types of slot machines and gaming tables, types and pricing of
amenities, name recognition, and overall atmosphere. The Company believes the
Casinos generally compete favorably based on these factors. The Company also
believes the 50 room hotel at The Lodge Casino provides a small competitive
advantage since hotel facilities are extremely limited in Black Hawk.
Any expansion of limited gaming within Colorado but outside of Native
American lands will require the approval, by statewide majority vote, of an
amendment to the Colorado constitution. The six initiatives to expand gaming to
other locales in the state which have appeared on ballots since 1992 have all
been defeated by at least a 2-to-1 margin. In addition, bills have been
introduced in the state legislature to authorize or expand gaming in Colorado in
various forms, including, for example, the expansion of the state lottery by the
use of video lottery terminals (terminals which look and play much like slot
machines) at horse and dog racing tracks. A proposal for expansion of gaming at
horse and dog racing tracks was passed by the legislature but vetoed by the
Governor in 1997, its first year of introduction. This proposal failed to emerge
from committee consideration during the 1998 legislative session. The Company
expects that another bill to authorize video lottery terminals will be
introduced in the 1999 state legislative session, with substantial financial
backing. In the opinion of the Company, video lottery, if legalized throughout
Colorado, would have a material adverse impact on the gaming industry in Black
Hawk. Other legislative proposals also are possible. For example, Senate Bill
69, introduced in the 1998 state legislative session but defeated on the Senate
floor, would have given the State Historical Society the right to approve
certain, but not all, site designs for casinos. Finally, expansion of other
existing forms of gaming, such as bingo or pull tab machines in bingo
establishments, could be approved by the state legislature or other applicable
regulatory authority, which could adversely affect the amount of gaming which
might otherwise occur within Black Hawk.
Under the U.S. Indian Gaming Regulatory Act of 1988, various classes of
gaming activities are lawful on Native American lands if such lands are located
in a state that permits such gaming for any purpose by any person, organization
or entity. In addition to other conditions, the act requires that gaming
activities be conducted in conformance with a tribal-state compact entered into
by the tribe with the state. The Director of the State Department
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of Revenue has executed agreements allowing for limited stakes gaming with the
Ute Mountain Ute Tribe and the Southern Ute Tribe. No assurance can be given
that such agreements will continue to provide for gaming limitations in the
future. Unlike casinos operating in Black Hawk, Central City and Cripple Creek,
casinos operating within the reservations are not subject to the taxes imposed
by the Gaming Commission, and may be operated 24-hours a day. The reservations
are located in the southwestern portion of Colorado.
In August 1996, President Clinton signed a bill creating the National
Gambling Impact and Policy Commission to conduct a comprehensive study of all
matters relating to the economic and social impact of gaming in the United
States. The legislation provides that, not later than two years after the
enactment of such legislation, the commission is to issue a report to the
President and Congress containing its findings and conclusions, together with
recommendations for legislation and administrative actions. Any such
recommendations, if enacted into law, could adversely impact the gaming industry
and have a material adverse effect on the Company's business or results of
operations. It is currently anticipated that the report will be issued in the
spring of 1999.
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 and companies nationwide,
including casinos in Nevada, Atlantic City and Mississippi, 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, gaming on Indian
reservations, charitable gaming and parimutuel wagering, among others, and
competes for entertainment dollars generally with other forms of entertainment.
The 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 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.
GAMING REGULATION AND LICENSING. The State of Colorado created the
Colorado Division of Gaming within the Department of Revenue to license,
implement, regulate and supervise the conduct of limited stakes gaming. The
Division, under the supervision of the Gaming Commission, has been granted broad
power to ensure compliance with Colorado law and regulations adopted thereunder
(collectively, the "Colorado Regulations"). The Division may inspect, without
notice, premises where gaming is being conducted; may seize, impound or remove
any gaming device; may examine and copy all of a licensee's records; may
investigate the background and conduct of licensees and their employees; and may
bring disciplinary actions against licensees and their employees. The Division
may also conduct detailed background checks of persons who loan money to or
invest money in a licensee.
It is illegal to operate a gaming facility without a license issued by
the Gaming Commission. The Gaming Commission is empowered to issue five types of
gaming and gaming-related-licenses. The licenses are revocable and
non-transferable. The failure or inability of the Company, the Gilpin Hotel
Casino, The Lodge Casino, or associated persons
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to maintain necessary gaming licenses would have a material adverse effect on
the operations of the Company.
The Gaming Commission closely regulates the suitability of persons
owning or seeking to renew an interest in a gaming license or permit, and the
suitability of a licensee or permittee can be adversely affected by persons
associated with the license or permittee. Additionally, any person or entity
having any direct interest in the Company or any casino directly or indirectly
owned by the Company may be subject to administrative action, including personal
history and background investigations. The actions of persons associated with
the Company, such as its management or employees, could jeopardize any licenses
held by the Company in Colorado.
The Casinos were granted retailer/operator licenses concurrently with
their openings. The licenses are subject to continued satisfaction of
suitability requirements. The current license for the Gilpin Hotel Casino
expires on September 30, 1999 and the license for The Lodge Casino expires on
May 14, 1999. There can be no assurance that the Casinos can successfully renew
their licenses in a timely manner from year to year.
All persons employed by the Company who are involved, directly or
indirectly, in gaming operations in Colorado also are required to obtain various
forms of gaming licenses. Key licenses are issued to "key employees," which
include any executive, employee or agent of a licensee having the power to
exercise a significant influence over decisions concerning any part of the
operations of a licensee. At least one key license holder must be on the
premises of each Colorado casino at all times. Messrs. Jacobs, Roark, Cook and
Politano, among others, hold associated key licenses for the Company. All of the
Company's directors are required to become associated key licensees.
As a general rule, under the Colorado Regulations, it is a criminal
violation for any person to have a legal, beneficial, voting or equitable
interest, or right to receive profits, in more than three retail/operator gaming
licenses in Colorado. The Company has an interest in two such licenses.
Accordingly, any expansion opportunities that the Company may have in Colorado
are limited. In addition, this limitation may affect the ability of certain
persons to own the Company's stock. Under the Colorado Regulations, the
definition of an "interest" in a licensee excludes ownership of less than 5% of
a publicly traded company such as the Company.
If the Gaming Commission determines that a person or entity is not
suitable to own a direct or indirect voting interest in the Company, the Company
may be sanctioned unless the person or entity disposes of its voting interest.
Sanctions may include the loss of a casino license. In addition, the Colorado
Regulations prohibit a licensee or any affiliate of a licensee from paying
dividends, interest or other remuneration to any person found to be unsuitable,
or recognizing the exercise of any voting rights by any person found to be
unsuitable. The Colorado Regulations require an operating casino licensee to
include in its corporate charter provisions which permit the repurchase of the
voting interests of any person found to be unsuitable. The Company's Articles of
Incorporation have been amended to include the required provisions.
10
<PAGE> 13
The Gaming Commission has the power to require the Company to suspend
or dismiss officers, directors and other key employees or sever relationships
with other persons who refuse to file appropriate applications or who are found
to be unsuitable to act in such capacities, and may have such power with respect
to any entity which is required to be found suitable under the Colorado
Regulations.
A person or entity may not sell, lease, purchase, convey, acquire or
pledge an interest in an entity licensed to conduct limited stakes gaming in
Colorado without the prior approval of the Gaming Commission, except for a less
than 5% interest in a publicly traded corporation.
The Gaming Commission also has the right to request information from
any person directly or indirectly interested in, or employed by, a licensee, and
to investigate the moral character, honesty, integrity, prior activities,
criminal record, reputation, habits and associations of (i) all persons licensed
pursuant to the Colorado Limited Gaming Act, (ii) all officers, directors and
stockholders of a licensed privately held corporation, (iii) all officers,
directors and stockholders holding either a five percent (5%) or greater
interest or a controlling interest in a licensed publicly traded corporation,
(iv) all general partners and all limited partners of a licensed partnership,
(v) all persons which have a relationship similar to that of an officer,
director or stockholder of a corporation (such as members and managers of a
limited liability company), (vi) all persons supplying financing or loaning
money to any licensee connected with the establishment or operation of limited
gaming, and (vii) all persons having a contract, lease or ongoing financial or
business arrangement with any licensee, where such contract, lease or
arrangement relates to limited gaming operations, equipment, devices or
premises.
Colorado casinos may operate only between 8:00 a.m. and 2:00 a.m., and
may permit only individuals 21 years or older to gamble in the casino. Slot
machines, black jack and poker are the only permitted games, with a maximum
single wager of $5.00. Colorado casinos may not extend credit to gaming patrons.
The Colorado Regulations restrict the percentage of space a casino may use for
gaming to 50% of any floor and 35% of the overall square footage of the building
in which the casino is located. Effective July 1 of each year, Colorado
establishes the gross gaming revenue tax rate for the ensuing twelve months.
Under the Colorado Constitution, the rate can be increased to as much as 40% of
adjusted gross proceeds. Colorado has both raised and lowered gaming tax rates
since they were initially set in 1991. Currently, the maximum gaming tax rate is
20%. See "Taxation" below.
The Company believes that it is presently in material compliance with
all applicable gaming rules and regulations.
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 or its casino 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 renewable, are revocable and are not
transferable. The Liquor Agencies have broad powers to limit, condition, suspend
or revoke any liquor license. Any such disciplinary action could, and any
failure to renew or other revocation of any of its
11
<PAGE> 14
liquor licenses would, have a material adverse effect upon the operations of the
Company and its casinos.
Under Colorado law, it is a criminal violation for any person or entity
to own a direct or indirect interest in more than one type of alcoholic beverage
license or more than three gaming tavern liquor licenses. The Casinos have
gaming tavern liquor licenses. Accordingly, the Company's expansion
opportunities in Colorado are limited by such licensing restriction.
TAXATION. Gaming operators in Colorado are subject to state and local
taxes and fees in addition to ordinary federal and state income taxes. Black
Hawk has imposed an annual license fee, currently $750, for each gaming device
installed in a casino. Colorado currently levies an annual device fee of $75 for
each gaming device installed in a casino. In addition, Colorado has a gross
gaming revenue tax (gross gaming revenue being generally defined as the total
amount wagered less the total amount paid out in prizes and is also called
"adjusted gross proceeds") as follows:
<TABLE>
<CAPTION>
Annual
Tax as Percentage of Amount of
Adjusted Gross Proceeds Adjusted Gross Proceeds
----------------------- -----------------------
<S> <C>
2% $ 0 - 2,000,000
4% 2,000,001 - 4,000,000
14% 4,000,001 - 5,000,000
18% 5,000,001 - 10,000,000
20% 10,000,001 and above
</TABLE>
Both of the Company's casinos are subject to the 20% rate. Under the Colorado
Constitution, the Commission could increase the top rate to as much as 40%.
Pursuant to a more recent tax limitation amendment to the Colorado Constitution,
however, neither the state nor any local government may increase a tax rate
without an affirmative vote of the people; therefore, there is some question as
to whether the Gaming Commission could constitutionally increase the state tax
levied on gross gaming revenues without such a vote.
12
<PAGE> 15
Item 3. Legal Proceedings.
The Company and the LLC (owner and developer of The Lodge Casino) and
other LLC members were defendants in an action for trespass brought in late
January 1998 by a company which claimed to have succeeded to rights of heirs of
certain shareholders of a company which was dissolved under Colorado law in
1942. The action alleged that the long defunct company had certain reversionary
rights to a strip of land included within the boundaries of The Lodge Casino
project. The Company, the LLC, other LLC members and certain title insurance
companies entered into a joint defense of the action with all parties reserving
their respective rights. The action was dismissed without prejudice on January
3, 1999. A trustee was appointed by the court on December 22, 1998 to represent
the interests, if any, ostensibly represented by the plaintiff, and may file an
action similar to that described above. If so, the Company intends to vigorously
defend the action and to institute and pursue counterclaims.
The Company is also involved in routine litigation arising in the
ordinary course of the Casinos' business. These matters are believed by the
Company to be covered by appropriate insurance policies.
13
<PAGE> 16
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to shareholders during the fourth quarter of
the fiscal year covered by this Report to a vote of security holders through the
solicitation of proxies or otherwise.
14
<PAGE> 17
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "BHWK." The following table sets forth for the calendar periods
indicated the high and low closing sales prices of the Common Stock as reported
on the Nasdaq National Market:
<TABLE>
<CAPTION>
1997 High Low
---- ------- ---
<S> <C> <C>
First Quarter $ 6 $ 4
Second Quarter 6-7/8 3-7/8
Third Quarter 9 4-5/8
Fourth Quarter 9 6-1/2
1998
----
First Quarter $10-1/2 $ 6-5/8
Second Quarter 13-1/2 9-1/4
Third Quarter 13-1/2 9-1/4
Fourth Quarter 9-3/4 5-1/4
</TABLE>
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. The Company intends to follow a policy of retaining any
earnings either to repay borrowings under the Company's credit facilities, to
finance future growth and acquisitions or for general corporate purposes. Both
the Company and the LLC (owner of The Lodge Casino) are parties to credit
agreements which require each to maintain certain financial ratios. These
covenants, in effect, restrict the Company's ability to pay dividends.
On March 12, 1999, the last reported sale price of the Common Stock
reported on the Nasdaq National Market was $6-3/8 per share. As of March 12,
1999, there were approximately 200 holders of record of the Common Stock and the
Company estimates, based upon information provided by brokers, that it has in
excess of 1,600 beneficial owners of its Common Stock.
15
<PAGE> 18
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 Consolidated Financial Statements and the related Notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Net revenues $ 50,153,331 $ 1,260,291 $ 1,263,887 $ 1,493,655 $ 1,411,310
Costs and expenses 45,635,758 1,382,055 1,736,688 1,420,742 1,040,370
Equity in earnings of
joint venture 1,017,789 2,812,858 2,255,635 2,785,929 3,493,149
Net income 3,212,024 1,706,321 1,046,941 1,773,247 2,493,807
Net income per common share:
Basic .80 .64 .41 .62 1.00
Diluted .75 .48 .39 .55 1.00
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets $ 12,423,754 $ 1,267,043 $ 5,016,658 $ 3,816,199 $ 4,177,418
Noncurrent assets 89,638,346 48,036,487 19,507,337 16,452,122 15,593,263
Total assets 102,062,100 49,303,530 24,523,995 20,268,321 19,770,681
Current liabilities 11,717,110 3,110,232 620,282 850,500 762,801
Convertible note payable
to shareholder -- -- 1,500,000
Long-term debt 51,978,057 12,897,174 2,251,639 2,376,655 3,189,084
Common stock subject to
put options -- -- 137,499 666,667 986,000
Minority interest 7,541,523 6,704,688 1,793,500
Shareholders' equity 30,825,410 26,591,436 18,159,569 16,374,499 14,832,796
</TABLE>
16
<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 and the Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to its gaming operations and future economic performance of the
Company. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that might
adversely affect the Company's operating results in the future in a material
way: intensity of competition, levels of gaming activity in general and in Black
Hawk in particular, ability of the Company and the LLC to meet its debt
obligations, regulatory compliance, taxation levels, effects of national and
regional economic and market conditions, labor and marketing costs, success of
the Company's diversification plans, legal claims and the contingencies
associated with year 2000 compliance.
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.
INTRODUCTION
The Company had two significant events during the year ended December
31, 1998: (1) the acquisition on April 24, 1998 of the other half of the Gilpin
Hotel Casino and related land and (2) the opening of The Lodge Casino on June
24, 1998; both of which significantly impacted the financial reporting of the
Company. As a result of these two events, the consolidated statements of income
for the year ended December 31, 1998 are not comparable to the same period of
1997. Specifically, the activity of the Gilpin Hotel Casino was reported under
the equity method of accounting through April 23, 1998, and by consolidation
after April 23, 1998. Additionally, the consolidated statements of income
reflect the operational activity of The Lodge Casino beginning on the opening
day of the casino (June 24, 1998) through December 31, 1998. Historically, by
virtue of the Company's previous 50% ownership of the Gilpin Hotel Casino, the
Company was required to record its share of the net earnings of the Gilpin Hotel
Casino, after elimination of intercompany transactions and other adjustments, as
"Equity in Earnings of Joint Venture." Although the Company received management
fees and rental revenue from the joint venture, equity in earnings of the joint
venture accounted for substantially all of the Company's income before income
taxes. As a result of the acquisition of the other half of the Gilpin Hotel
Casino, the Company no longer receives rental income from the ground lease or
parking fees or management fees from the Gilpin Hotel Casino. As a result of its
100% ownership of the Gilpin Hotel Casino after April 23, 1998, the Company
consolidates all of the operations of the Gilpin Hotel Casino and thereby
recognizes all of the revenues and expenses of the Gilpin Hotel Casino and the
Gilpin Hotel Casino no longer incurs the related expenses of rent from the
ground lease, parking or management fees.
17
<PAGE> 20
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31,
1997
Results of operations--Black Hawk Gaming & Development Company, Inc.
The Company reported net income of $3,212,000 for the year ended
December 31, 1998 compared to $1,706,000 for the same period in 1997. The
increase in net income for the current year over the comparable year of 1997 is
principally the result of the impact of The Lodge Casino operations (net of the
minority interest) which commenced operations on June 24, 1998, and the
additional 50% of operating results from the Gilpin Hotel Casino beginning April
24, 1998.
The significant increases in revenues and costs and expenses of the
Company in 1998 compared to 1997 are directly a result of consolidation of the
Gilpin Hotel Casino and the opening of The Lodge Casino.
In December 1998, the Company determined that certain costs incurred in
the pursuit of a gaming license in the U.S. Virgin Islands on the island of St.
Croix may not be recoverable and an impairment loss should be recognized. This
determination was based upon the Company's inability to reach an agreement with
respect to certain development issues with the Virgin Islands Casino Control
Commission. The impairment loss recognized during the year ended December 31,
1998 was $610,000.
Results of operations--The Lodge Casino
The Lodge Casino at Black Hawk opened on June 24, 1998, hence, there
are no comparisons to the prior years presented and the current year
consolidated statements of income include the operating results of The Lodge
Casino from June 24, 1998.
The Company opened the casino portion of The Lodge Casino, with
approximately 800 slot machines, 20 table games, three restaurants, four bars,
and three floors of underground parking for approximately 400 cars. A 50-room
hotel facility and an overflow parking garage for approximately 200 additional
parking spaces opened mid August and the first week of November 1998,
respectively.
During the year ended December 31, 1998, The Lodge Casino's total
revenues were $32,008,000. However, when reduced by promotional allowances of
$2,237,000, net revenues were $29,771,000. The Lodge Casino's total costs and
expenses were $27,927,000 which resulted in pretax income of $1,844,000 (before
elimination of minority interest and inter-company transactions).
The Lodge Casino's revenues by operating department for 1998 were as
follows: casino operations of $27,781,000 or 93% of net revenues; food and
beverage operations of $1,249,000 or 5% (net of promotional allowances of
$2,231,500); hotel operations of $358,000 or 1% (net of promotional allowances
of $5,500) and other income of $383,000 or 1%.
18
<PAGE> 21
The Lodge Casino's total costs and expenses before eliminating
inter-company transactions were $27,927,000 or 94% of net revenue for 1998.
Costs and expenses by operating department before elimination of inter-company
transactions were as follows: casino operations of $9,856,000 or 33%; food and
beverage operations of $3,651,000 or 12%; hotel operations of $315,000 or 1%;
marketing, general and administrative expenses of $9,438,000 or 32%;
depreciation and amortization of $1,341,000 or 5%; interest expense of
$1,614,000 or 5%; and non-recurring pre-opening costs of $1,712,000 or 6%.
In the opinion of management, The Lodge Casino's operating costs and
expenses are generally comparable to industry averages. However, management has
established a goal to continue to pursue cost reductions and to pursue benefits
yet to be realized from economies of scale as the efficiencies of the
operational aspects of the Gilpin Hotel Casino and The Lodge Casino are
improved.
Results of operations--Gilpin Hotel Casino
During the year ended December 31, 1998, the Gilpin Hotel Casino's
total revenues increased by $734,000 or 2%, from approximately $31,554,000 in
1997 to $32,288,000 in 1998. However, when reduced by an increase in promotional
allowances of $163,000 or 7%, net revenues increased by $571,000 or 2%. Total
costs and expenses of the Gilpin Hotel Casino decreased by $1,224,000 or 5% from
approximately $25,974,000 to $24,750,000 in 1997 and 1998, respectively. The net
result is an increase in the pretax income of the Gilpin Hotel Casino, after a
small extraordinary item of $73,000 from a gain on the early retirement of debt,
of $1,868,000 or 56% after extraordinary items. However, when the statements of
income for the years ended December 31, 1998 and 1997 are adjusted for
management fees, parking and rent that would not have been incurred during 1998
and 1997 had the Company entered into the transaction to acquire the other half
of the Gilpin Hotel Casino on January 1, 1998 and 1997, respectively, income
before extraordinary items would have decreased by $449,000 or 7%.
Management attributes the increase in casino revenues to the success of
the ongoing plan of target marketing to the slot player club of the Gilpin Hotel
Casino, the continuing breakfast promotion and the overall increase in customer
traffic through the casino. The Business Improvement District (BID) was
completed and thereby provided for a full year of increased traffic in 1998 as
compared to 1997 when the BID project was still in process and patrons had
difficulty entering the casino due to the construction activity.
The net increase in costs and expenses, after adjusting for management
fees, parking and rent that would not have been incurred during 1998 and 1997
had the Company entered into the transaction to acquire the other half of the
Gilpin Hotel Casino on January 1, 1998 and 1997, respectively, was $1,020,000 or
4% for 1998 as compared to 1997. This increase was primarily the result of: (1)
increases in food and beverage operations of $170,000 or 7%, principally as a
result of increased labor costs, (2) increases in marketing, general and
administrative operations of $380,000 or 4%, principally as a result of
increased promotional pay-outs based on customer participation, (3) increased
interest expense of $390,000 or 75%, due to the Wells Fargo revolving line of
credit, which financed the acquisition of the other half of the Gilpin Hotel
Casino, and (4) increase in depreciation and amortization of $147,000 or
19
<PAGE> 22
11%. These increases were offset by a decrease in casino operations of $67,000
or 1% principally due to the discontinuance of costs associated with operating
the poker room.
A large part of the Gilpin Hotel Casino's success has been attributed
to its on site parking. During 1997 and into 1998, management increased spending
on busing programs in order to compensate for the reduction in parking
availability due to The Lodge Casino's ongoing construction as well as the
construction of the upstream parking garage for the benefit of The Lodge Casino
and the Gilpin Hotel Casino. Additionally, with the completion of the Business
Improvement District's redesign and upgrade of Main Street in the City of Black
Hawk and the related infrastructure improvements, the Gilpin Hotel Casino has
gained a permanent bus stop, located directly in front of the casino.
The upstream parking garage for The Lodge Casino received a temporary
certificate of occupancy during the first week of November 1998, and the total
parking availability for the Gilpin Hotel Casino now approximates 200 cars and
total parking for The Lodge Casino now approximates 600 cars.
It is management's plan to continue focusing on target marketing to the
existing customer base of the Gilpin Hotel Casino and to attempt to increase the
repeat business of new customers. Additionally, the Company is working to
enhance the product offered at the Gilpin Hotel Casino in order to continue to
provide customers with a user-friendly gaming environment coupled with the
newest in gaming technology.
In the opinion of management, the Gilpin Hotel Casino's operations for
1998 are competitive relative to other casinos in Black Hawk as well as the
other two Colorado gaming districts. The Gilpin Hotel Casino's adjusted gross
proceeds (which is the difference between amounts wagered by customers and the
amount paid out in prizes) averages for gaming devices (slot machines and table
games) remains higher than the overall gaming averages for the state and the
city of Black Hawk.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996
Income before income taxes and extraordinary item for 1997 increased,
when compared to 1996, by $908,300 or 51%. Total revenue of the Company
decreased by $3,600 or less than 1% for 1997 as compared to 1996. Increased
profitability in 1997 is due to an increase in equity in earnings of the Gilpin
Hotel Casino of $557,200 or 25% and a reduction in total costs and expenses of
$354,600 or 20%. Costs and expenses in 1996 included impairment write-downs
discussed below under "Costs and Expenses." Additionally, the Company realized
an extraordinary gain in 1997 on the early retirement of debt of $85,800 (net of
$51,000 in 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, 1997, as compared to the year ended December 31, 1996.
20
<PAGE> 23
Revenues
The Company's 1997 revenues decreased by $3,600 or less than 1% as
compared to 1996. This decrease is comprised of reductions in: parking lot
income of $22,600 or 7% and interest income of $63,750 or 34%; offset by
increases in: management fees of $54,800 or 17%; and rental income of $27,950 or
6%.
Management fee income is computed based upon 11% of the defined volume
of the various departments of the Gilpin Hotel Casino operations reduced by
defined expenses. Usually, as the volume of business of the Gilpin Hotel Casino
increases or decreases, the management fee earned by the Company will fluctuate
accordingly. The total costs and expenses of the Gilpin Hotel Casino for 1997 as
compared to 1996 increased by $382,000 or 1% while net revenue generated by the
Gilpin Hotel Casino increased by $1,376,000 or 5% as compared to 1996. The
management fee earned by the Company for 1997, after elimination of the amount
of such fee attributable to the Company's 50% interest in the Gilpin Hotel
Casino resulted in an increase of $54,800 or 17% as compared to 1996.
During 1997, the Company received parking fees from the joint venture
for the use of Millsite 30. During 1996 the Company received parking fees for
the use of Millsites 30, 31 and, on an as needed basis, Millsite 32, as parking
for the patrons of the Gilpin Hotel Casino. During the fourth quarter of 1996
the Company eliminated parking on Millsite 31 and reduced the parking
availability on Millsite 30 in order to facilitate the construction requirements
of the LLC. As a result of the loss of available parking for the Gilpin Hotel
Casino, the Company's parking revenue for 1997 decreased by $22,600 or 7% when
compared to the prior year. The agreement for the use of parking on all of
Millsite 30 for the benefit of the Gilpin Hotel Casino, ended on January 1,
1996, however, the Company charged the Gilpin Hotel Casino a $50,000 monthly fee
for all of 1997.
The Company and an affiliate of its joint venture partner were the
co-owners of the land underlying the Gilpin Hotel Casino in 1997 and 1996. The
Joint Venture agreement required the Gilpin Hotel Casino to pay a monthly land
rental fee equivalent to 7% of net gaming revenues. Rental income attributable
to the land underlying the Gilpin Hotel Casino is reported after elimination of
the amount of such fees attributable to the Company's 50% interest in the Gilpin
Hotel Casino. The Company's rental income for the year ended December 31, 1997,
increased by $27,950 or 6%. While net gaming revenues of the Gilpin Hotel Casino
for the year to date 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.
Costs and expenses
Total compensation and related costs increased for 1997 as compared to
1996 by approximately $189,500 or 25%, generally as a result of increases in
costs for additional employees of the Company of approximately $78,400 or 10%
and amortization of compensatory stock options vested in the amount of $111,100.
General and administrative expenses for 1997 increased by $73,100 or 20% as
compared to 1996 generally due to an increase in the overall activity of the
Company. The Company recognized impairment write-downs in 1996 of $493,000, as a
result of the abandonment of its efforts to secure a gaming license in
21
<PAGE> 24
another potential gaming jurisdiction and for costs incurred to develop and test
market a new casino game. The Company incurred no such costs in 1997.
Equity in earnings of joint venture
By virtue of the Company's 50% ownership of the Gilpin Hotel Casino,
generally accepted accounting principles required the Company in 1997 and 1996
to record its share of the net earnings of the Gilpin Hotel Casino, after
elimination of intercompany transactions and other adjustments, as "Equity in
Earnings of Joint Venture." Although the Company received other revenue from the
joint venture, as discussed above, Equity in Earnings of Joint Venture accounts
for substantially all of the Company's income before income taxes.
During 1997, the Gilpin Hotel Casino's total revenues increased by
$2,210,500 or 8% as compared to 1996. However when reduced by an increase in
promotional allowances of $834,100 or 60%, net revenues for 1997 increased by
$1,376,300 or 5%. The total costs and expenses of the Gilpin Hotel Casino
increased by $382,200 or 1% in 1997 as compared to 1996. Accordingly, the net
result was an increase in the net income of the Gilpin Hotel Casino for 1997 of
$994,100 or 42%, over 1996. Early in 1997 the Company, as manager of the Gilpin
Hotel Casino, embarked on a program of containing costs at the Gilpin Hotel
Casino level while investing additional dollars into various direct marketing
and promotional campaigns. The Company focused on its existing customer base and
marketed directly to those individuals. The Company believes this strategy paid
off in terms of overall performance of the Gilpin Hotel Casino for 1997 as
compared to 1996.
The Statements of Income of the Gilpin Hotel Casino include
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 $382,200 include decreases in 1997 as
compared to 1996 in: labor costs of $992,700 or 12%; bad debts of $121,000 or
32%; legal fees of $110,700 or 49%; parking fees of $314,300 or 33%; poker food
costs of $96,500 and other net decreases of $22,900. These decreases are offset
by increases in 1997 as compared to 1996 in: marketing and related costs of
$655,700 or 21%; gaming taxes of $630,300 or 15%; food and beverage costs of
goods sold of $300,000 or 26%; property taxes of $76,800 or 64%; depreciation of
$87,900 or 7%; rent of $111,800 or 6%; management fees of $117,800 or 17% and
slot rental expenses of $60,000 or 81%.
The additional dollars spent on the Gilpin Hotel Casino's marketing
programs and improved operating efficiencies resulted in an increase in traffic
flow to the Gilpin Hotel Casino and helped in overcoming the disruption to
traffic caused by the construction efforts of the Business Improvement District
(BID).
A large portion of the Gilpin Hotel Casino's success has been
attributed to the availability of on-site parking. The parking lot entrance is
located directly across the street from the Gilpin Hotel Casino and is
convenient for the Gilpin Hotel Casino's patrons. During most of the second
quarter and part of the third quarter of 1997, the Gilpin Hotel Casino
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
22
<PAGE> 25
construction efforts on Main Street and the Gilpin Hotel Casino's patrons were
able to regain the accessibility to the parking without significant
inconvenience.
OTHER MATTERS
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards requiring that all derivative instruments be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. The accounting provisions for qualifying hedges allow gains and losses
recognized related to a hedged item in the income statement to be offset by the
related derivative's gains and losses, and requires the Company to formally
document, designate, and assess the effectiveness of transactions that qualify
for hedge accounting. The Company is not required to adopt SFAS No. 133 until
January 1, 2000. The Company has not determined the impact on its financial
statements of adopting SFAS No. 133.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $11,904,000
in 1998 versus $496,000 in 1997. The principal reason for the increase in cash
provided by operating activities is due to increased net income, an increase in
depreciation and amortization and an increase in accounts payable and accrued
expenses. As a result of the acquisition of the other half of the Gilpin Hotel
Casino and the opening of The Lodge Casino, the Company's cash flow from
operating activities includes the operations of the Gilpin Hotel Casino and The
Lodge Casino. The Company has previously reported the cash flow from the Gilpin
Hotel Casino as cash from investing activities when it received cash
distributions, however in the future these amounts will be reported as cash
generated from operating activities.
23
<PAGE> 26
Net cash used in investing activities for 1998 was $37,696,000. Uses of
funds included payments of: project development costs associated with The Lodge
Casino and equipment purchases at the Gilpin Hotel Casino totaling $30,648,000;
the acquisition of the other half of the Gilpin Hotel Casino and related land
for $10,000,000 and payments in pursuit of a St. Croix gaming license and
facility of $606,000. These uses are offset by cash of the Gilpin Hotel Casino
as of the date of acquisition of $1,726,000; pre-acquisition distributions from
the Gilpin Hotel Casino of $1,168,000 and net proceeds from the sale of land of
$593,000 and other investing activities of $71,000. Net cash used in investing
activities for 1997 was $23,670,000 and was primarily the result of: payments
for project development costs associated with The Lodge Casino totaling
$24,838,000, which were offset by distributions from the Gilpin Hotel Casino of
$1,259,000.
The net cash provided by financing activities during 1998 was
$35,615,000. Sources of funds included: draws against The Lodge Casino's
construction loan of $23,293,000; draws against the Gilpin Hotel Casino's line
of credit of $26,583,000; minority interest contributions of $617,000 and net
proceeds from the exercise of warrants of $895,000. These sources were offset by
payments on long-term debt and notes payable of $15,223,000; payments on notes
payable to shareholders of $300,000 and distributions to minority interest owner
in The Lodge Casino of $250,000. The net cash provided by financing activities
for 1997 amounted to $19,707,000 and was principally the result of proceeds from
the issuance of convertible debt totaling $5,250,000; proceeds from notes
totaling $850,000; draws against the construction loan of $12,897,000 and
minority interest contributions of $3,831,000. These increases were offset
principally by payments on long-term debt aggregating $2,239,000 and note
repayments of $550,000.
As of December 31, 1998 the Company had working capital of
approximately $3,002,000 as compared to $489,000 at December 31, 1997 after
adding back accrued building costs payable, which will be funded by The Lodge
Casino's construction loan of $2,295,000 and $2,332,000 for 1998 and 1997,
respectively.
In order to complete the acquisition of the other half of the Gilpin
Hotel Casino and related land, the Company entered into a Credit Agreement with
Wells Fargo Bank, National Association ("Wells Fargo"). Some of the more
important terms of the Credit Agreement are: (1) the facility is a three year
reducing revolving line of credit in the amount of $20 million (approximately
$13.5 million was drawn at closing to fund the acquisitions described above and
to pay existing mortgage debt against the property purchased); (2) the facility
was also used to pay certain equipment debt, to pay for the third story of the
parking garage across Main Street from the Gilpin Hotel Casino, and for working
capital; (3) the facility bears interest at the rate of 75 basis points above
the prime rate, which approximates 8.5% at December 31, 1998; (4) beginning
January 1, 1999, the maximum credit line available will be reduced by $500,000
per quarter until April 24, 2001, when the outstanding balance of the facility
will be due; (5) the Credit Agreement contains a number of affirmative and
negative covenants which, among other things, requires the Company to maintain
certain financial ratios and refrain from certain actions without Wells Fargo's
concurrence; and (6) substantially all of the assets of the Gilpin Hotel
Venture, GVI and the Company (except the Company's 75% interest in The Lodge
Casino) are pledged as security for repayment of the credit facility. The Credit
Agreement also contains customary events of default provisions.
24
<PAGE> 27
The Company believes its current working capital position, continuing
profits from its casino operations, as well as the remaining balance on the
revolving line of credit discussed above will be sufficient to meet the
Company's short-term cash requirements which are operating expenses and interest
payments on indebtedness. However, any significant development of other projects
by the Company will more than likely require additional financing over and above
the availability remaining on the credit facility, other joint venture partners,
or both.
YEAR 2000 ISSUE
The "Year 2000" issue potentially affects virtually all companies and
organizations. Specifically, the Year 2000 issue is the result of many existing
computer programs using only two digits to identify a year in the date field.
These programs were designed and developed without considering the impact of the
change in the upcoming century. If not corrected, many computer applications
could fail or create erroneous results at the Year 2000.
During 1997 the Company began assessing the impact of the "Year 2000"
issue on its operations. The Company has evaluated the Year 2000 problem at both
the Gilpin Hotel Casino and The Lodge Casino. This evaluation included both
computer-related systems and non-computer-related systems. An outline of the
Year 2000 compliance plan includes the following phases with their completion
dates:
o Initial assessment and impact analysis--Completed September 30, 1998
o Inventory and detailed assessment--Completed September 30, 1998
o Solution design and budget determination--Completed October 31, 1998
o Budget approval--December 31, 1998
o Conversion and testing phase--June 30, 1999 (estimated)
o Final assessment--July 31, 1999 (estimated)
The Company has determined that approximately 15% of the various
computer-related systems and non-computer-related systems are non-compliant and
will need to be modified or replaced so they will function properly with respect
to dates in the year 2000 and beyond.
The total estimated cost to achieve complete Year 2000 compliance is
estimated to be $150,000. Of this amount, $100,000 had been spent or committed
at March 1, 1999. This expenditure is expected to replace all date-related
systems within the casinos that are not Year 2000 compliant.
Management believes its Year 2000 solution will address all
non-compliance issues found during its Year 2000 assessment. However, if the
solution designs are not implemented, or if a Year 2000 compliance issue was not
revealed during the Company's assessment, operations could be disrupted which
could have a material adverse effect on its financial condition. The Company has
received written assurances from the primary supplier of its slot machines that
they are not date sensitive and that the Year 2000 issue for the majority of the
Company's revenue producing assets is moot, however, the Company can give no
assurance in this regard. The Company faces such issues as the possibility that,
among other things, electrical and gas power are not available to the Black Hawk
community. In the unlikely event
25
<PAGE> 28
that power is not available to the community, the Company has back-up gas driven
generators which will run for approximately 15 to 20 hours between refills. If
the Company is unable to secure food and beverage products after exhausting its
two day inventory levels, it will attempt to secure food and beverage products
from retail outlets. Additionally, if the Company were to lose the use of any of
its surveillance equipment as a result of the Year 2000 rollover, it may be
required to close the casino until the matter is resolved, but the Company does
not believe such an event would go unresolved for longer than 24 hours.
Although the Company has confirmed the Year 2000 compliance of most of
its vendors, no assurance can be given that its vendors will, in fact, be fully
compliant. The Information Systems Department personnel will be on the property
during the time of the Year 2000 rollover to assist and solve any date related
issues that may occur. Additionally, in the days following the rollover, the
accounting department will compare all computer-related data with a paper trail
backup. This comparison should give management confidence that the data was
processed correctly.
Management believes that the most reasonably-likely worst case scenario
is that the Year 2000 rollover would provide unreliable computer data to many of
the Company's operating departments such as casino operations, food and
beverage, hotel, accounting, finance, facilities, and administration. In the
unlikely event that the Company's efforts to avoid this most reasonably-likely
worst case scenario are not 100% successful, a contingency plan will be
implemented. The Company is presently studying its capabilities to manually
operate each of the departments referenced above in parallel with their
respective automated procedures for at least one week before and one week after
the Year 2000 rollover to determine the reliability of all data received. A more
detailed contingency plan will be developed based on actual testing results and
continued assessments of outside risks. Additionally, the Company is contacting
all key vendors regarding their Year 2000 problems and this ongoing
communication may alert the Company to possible future problems.
26
<PAGE> 29
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
The Company's primary exposure to market risks relates to its long-term
debt, all of which is variable rate debt. Thus, the Company is exposed to
interest rate risk on this debt, which totaled approximately $52 million at
December 31, 1998. If market interest rates increase, the Company's cash
requirements for interest would also increase. Conversely, if market interest
rates decrease, the Company's cash requirements for interest would decrease.
At December 31, 1998 the Company has partially hedged its exposure to
interest rate risk via its participation in an interest rate swap, under which
it receives a variable interest payment and pays a fixed interest payment
(settled net) on a notional amount of $35 million. This has reduced the
Company's exposure to interest rate risk to approximately $17 million of debt
not hedged with the interest rate swap.
The annual increase (decrease) in cash requirements for interest, after
considering the impact of the interest rate swap agreement, should market
interest rates increase (decrease) by 10% compared to the interest rate levels
at December 31, 1998, would be approximately $120,000 ($120,000).
Item 8. Financial Statements and Supplementary Data.
See pages F-1 through F-21 attached hereto.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
NOT APPLICABLE
27
<PAGE> 30
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS AND OFFICERS. 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>
Jeffrey P. Jacobs 45 Chairman of the Board and Chief Executive Officer
Stephen R. Roark 51 President, Chief Financial Officer and a Director
Antone R. Cook 55 Vice President of Gaming Operations
Stanley Politano 49 Vice President, Secretary and Treasurer
Frank B. Day 65 Vice President and a Director
J. Patrick McDuff 50 A Director
Robert H. Hughes 58 A Director
Timothy Knudsen 45 A Director
</TABLE>
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 gaming companies and ventures, including the
Company and Colonial Downs Holdings, Inc., which operates a horse-racing track
and satellite wagering facilities. 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 Representatives from 1982 until 1986. He is also
Chairman and Chief Executive Officer of Colonial Downs Holdings, Inc. which is a
reporting company under the Securities Exchange Act of 1934. Mr. Jacobs became
Chief Executive Officer and Co-Chairman of the Company on November 12, 1996 and
became Chairman on December 31, 1997.
STEPHEN R. ROARK, has been employed as Chief Financial Officer of the
Company since August 1993. Mr. Roark became a director of the Company in 1994.
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.
28
<PAGE> 31
ANTONE R. COOK, has been employed by the Company as Vice President of
Gaming Operations since April 25, 1998 and supervises overall gaming operations
at the Gilpin Hotel Casino and The Lodge Casino. From February 1, 1996 until
April 25, 1998 he was General Manager of the Gilpin Hotel Casino. He was Casino
Manager of Binions Horseshoe Hotel & Casino from November 1994 until January 31,
1996. For the 30 years prior thereto, he was associated with several casinos and
gaming ventures, primarily in Las Vegas, Nevada and held many staff, supervisory
and management positions. Mr. Cook holds gaming licenses in Colorado, South
Dakota and Nevada.
STANLEY POLITANO, has been Vice President of the Company since August
1994. He was appointed Secretary and Treasurer of the Company in April 1998. He
received his B.S. degree in Business, majoring in finance, from the University
of Colorado in 1972. He has 22 years of experience in the securities industry,
working in both retail and wholesale capacities. He has worked for Rauscher
Pierce Securities Corporation and Prudential-Bache Securities, Inc. and was a
vice president with E.F. Hutton & Company, Inc. and Hanifen Imhoff Securities
Corporation. He has served as Treasurer for Mission Corps International, a
non-profit organization.
FRANK B. DAY, Chairman of the Board, Chief Executive Officer and
President 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 twelve 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). Mr. Day has been
a director of the Company since 1992.
J. PATRICK MCDUFF, has been the Northern Region President for Vectra
Bank Colorado since October 1996. Prior to assuming those duties he was
President, Chief Executive Officer and director of one of Vectra's subsidiary
banks from July 1987 through October 1996. 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's employer, Vectra Bank Colorado, is a wholly owned subsidiary
of Zions Bancorporation, a reporting company under the Securities Exchange Act
of 1934. Mr. McDuff became a director of the Company in 1994.
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
29
<PAGE> 32
is a certified public accountant. Mr. Hughes serves as a member of the Board of
Directors of Colonial Downs Holdings, Inc., a reporting company under the
Securities Exchange Act of 1934. Mr. Hughes has been a director of the Company
since November 12, 1996.
TIMOTHY KNUDSEN, has been associated with Knudsen, Gardner & Howe, a
Cleveland, Ohio based marketing communications agency for 21 years. He was
elected President of the agency in 1984. Mr. Knudsen holds a B.S. degree in
Marketing from Dyke Business College and has studied toward an advanced degree
at Cleveland State University. Mr. Knudsen was elected as a director of the
Company in February, 1998.
The Board of Directors has two committees whose members are as follows:
<TABLE>
<CAPTION>
Audit Compensation
----- ------------
<S> <C>
Robert H. Hughes Frank B. Day
J. Patrick McDuff Timothy Knudsen
</TABLE>
OTHER MATTERS. The Company entered into three year employment
agreements with Messrs. Jacobs, Roark and Politano on November 12, 1996. Each
agreement contains customary terms and conditions and provides minimum base
annual salaries of $150,000, $125,000 and $100,000 respectively, for Messrs.
Jacobs, Roark and Politano. Effective September 1, 1998, Mr. Jacobs' salary was
increased to $300,000 per year and effective November 1, 1998 Messrs. Roark's
and Politano's salaries were increased to $160,000 and $106,000 per year,
respectively. 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. Messrs. Roark and Politano are eligible for
bonuses at the discretion of the Board of Directors. Effective February 1, 1999,
the Company entered into a three year employment agreement with Antone R. Cook
which provides for a salary of $250,000 per year and a bonus, to be determined
by the Board of Directors, of not less than $25,000 per year.
Directors are elected at each annual meeting of the Company's
shareholders. The next such meeting will be held in July 1999. 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, one-half of this compensation has been paid in the
form of restricted Common Stock of the Company valued at the market price on the
meeting date and one-half in cash.
There are no family relationships between or among any directors or
executive officers 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.
The number of shares of Common Stock held by each of the Company's
directors and executive officers is set forth under Item 12 hereof.
30
<PAGE> 33
Item 11. Executive Compensation.
The following table sets forth information regarding the compensation
paid by the Company for services rendered in all capacities to the Company
during 1996, 1997 and 1998 with respect to (i) the Chief Executive Officer, and
(ii) the other named executive officer of the Company whose total annual
compensation for 1998 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ ----------------------------------------
Awards Payouts
----------------------------------------
Securities
Other Under-
Annual Restricted lying All Other
Compen- Stock Options/ LTIP Compen-
Year Salary Bonus sation Award(s) SARs Payouts sation
Name of ($) ($) ($) ($) (#) ($) ($)
Officer/Director (b) (c) (d) (e) (f) (g) (h) (i)
- ---------------- ---- ------- ------ ------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey P. Jacobs 1996 12,500(1) -- -- -- 70,000(2) -- --
Chief Executive Officer ---- ------- ------ ------- -------- -------- ------- ---------
1997 150,000 -- -- -- -- -- --
---- ------- ------ ------- -------- -------- ------- ---------
1998 200,000 50,000
---- ------- ------ ------- -------- -------- ------- ---------
Stephen R. Roark 1996 125,000 -- -- -- 35,000 -- 6,500
President ---- ------- ------ ------- -------- -------- ------- ---------
1997 130,000 -- -- -- 15,000 -- --
---- ------- ------ ------- -------- -------- ------- ---------
1998 138,000 35,000 -- --
---- ------- ------ ------- -------- -------- ------- ---------
Antone R. Cook(3) 1998 175,000 35,000 -- -- -- -- --
Vice President
---- ------- ------ ------- -------- -------- ------- ---------
Stanley Politano 1996 87,000 -- -- -- 15,000 -- --
Vice President ---- ------- ------ ------- -------- -------- ------- ---------
1997 91,000 -- -- -- 10,000 -- --
---- ------- ------ ------- -------- -------- ------- ---------
1998 102,000 15,000 -- -- -- -- --
---- ------- ------ ------- -------- -------- ------- ---------
</TABLE>
(1) One month's compensation.
(2) Does not include options to purchase 85,000 shares which were granted
to certain designees of Mr. Jacobs who disclaims beneficial ownership
in both the options and underlying shares.
(3) Mr. Cook was promoted to Vice President of Gaming Operations on April
24, 1998 when the Company acquired the other one-half interest in the
Gilpin Hotel Casino. Prior thereto he was employed by the Gilpin Hotel
Venture as General Manager.
31
<PAGE> 34
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, 300,000 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 March 5, 1999, there were 29,150 shares available for future grants
under the 1994 Plan and 94,300 shares were available for the future grants under
the 1996 Plan.
Both Plans are managed by the Board of Directors' Compensation
Committee. The Plans provide that the Board may grant incentive stock options
and restricted stock options as it deems appropriate. Each Plan terminates after
ten years.
Under the Plans, the Directors' Compensation Committee may either
recommend granting of qualified incentive stock options ("ISOs") as defined in
Section 422 of the Internal Revenue Code or non-qualified stock options. In the
case of ISOs, the exercise price of the option may not be less than the fair
market value of the Common Stock on the date on which the option is granted,
unless the employee is a ten percent shareholder, in which case the exercise
price must equal 110% or more of the fair market value of the Common Stock on
the date the option is issued. For purposes of the Plans, the "fair market
value" of a share of Common Stock on any date is deemed to be the last sales
price on that date or the average of the bid and asked prices quoted in the
over-the-counter market on that date, unless the Common Stock becomes traded on
a national securities exchange, in which case the "fair market value" equals the
average of the highest and lowest price at which the Common Stock traded on that
exchange on that date. In the case of non-qualified options, the exercise price
may not be less than the fair market value, as determined above, of a share of
Common Stock on the date that the option is granted.
Finally, the Board may issue restricted stock options that will vest
upon the occurrence of certain conditions recommended by the Compensation
Committee. Generally, restricted stock is issued subject to the participant
remaining employed by the Company for a period of time. Restricted stock options
may also be subject to the fulfillment of certain individual or corporate
performance criteria within a specified period of time.
Options may be exercised during any period as recommended by the
Compensation Committee at the time of the grant, or at such earlier time as the
Compensation Committee may subsequently determine. Options must expire on the
earlier of ten years (five years in the case of an incentive option granted to a
ten percent shareholder) from the date of the grant, or the date recommended by
the Compensation Committee at the time of the grant. If a grant or award of
options under the Incentive Plan expires, terminates or is forfeited, the shares
subject to such award or grant will become available for further award or grant
under the Plan. Options acquired under the Plan are not transferable except by
will or the laws of descent and distribution.
32
<PAGE> 35
There were no grants of options during 1998 to the Executive Officers
named in the table above.
No options were exercised by the Executive Officers named in the table
above during 1998. The following table provides information regarding
unexercised stock options held by the Executive Officers named above as of
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
Shares Options/SARs Options/SARs
Acquired at Fiscal Year End (#) at Fiscal Year End ($)
on Value ---------------------- ----------------------
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- ----------------- -------- -------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Jeffrey P. Jacobs -- -- 46,667/23,333 104,767/52,382
-------- -------- -------------- ---------------
Stephen R. Roark -- -- 130,833/21,667 292,820/46,842
-------- -------- -------------- ---------------
Antone R. Cook(1) -- -- 24,200/47,100 53,728/37,189
-------- -------- -------------- ---------------
Stanley Politano -- -- 58,333/11,667 130,357/24,992
-------- -------- -------------- ---------------
</TABLE>
(1) Includes options to purchase 30,000 shares granted on February 1, 1999 at
$8.38 per share; the shares vest equally over three years beginning in the
year 2000.
33
<PAGE> 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of March 5, 1999 for: (a)
each of the Company's directors and its Executive Officers; (b) all Directors
and Executive Officers as a group; (c) each person known by the Company to be a
beneficial owner of more than 5% of the Common Stock. All information with
respect to beneficial ownership by the Company's Directors, Executive Officers
or beneficial owners has been furnished by the respective Director, Officer or
beneficial owner, as the case may be. Unless indicated otherwise, each of the
stockholders has sole voting and investment power with respect to the shares of
Common Stock beneficially owned.
<TABLE>
<CAPTION>
Percentage of
Beneficially Owned Common Stock
------------------------------- ---------------------
Name Shares Options(1) Beneficially Owned(3)
---- ---------- ---------- ---------------------
<S> <C> <C> <C>
Jeffrey P. Jacobs 1,333,333(2) 46,667 33.7
Diversified Opportunities Group Ltd.
c/o Jacobs Entertainment Ltd.
425 Lakeside Avenue
Cleveland, Ohio 44114
Stephen R. Roark 28,571 130,833 3.8
240 Main Street
Black Hawk, Colorado 80422
Antone R. Cook 3,500 24,200 *
240 Main Street
Black Hawk, Colorado 80422
Stanley Politano 619 58,333 1.4
240 Main Street
Black Hawk, Colorado 80422
Frank B. Day 440,966 50,833 12.0
248 Centennial Parkway, Suite 100
Louisville, Colorado 80302
J. Patrick McDuff 785 12,167 *
1375 Walnut
Boulder, Colorado 80302
Robert H. Hughes 776 10,000 *
Diversified Opportunities Group Ltd.
c/o Jacobs Entertainment Ltd.
425 Lakeside Avenue
Cleveland, Ohio 44114
Timothy Knudsen 373 -- --
213 Vista Circle
North Olmstead, Ohio 44070
Robert D. Greenlee 483,113 12.0
2060 Broadway, Suite 400
Boulder, Colorado 80302
Officers and Directors as 1,808,923 333,033 50.9
a group (six persons)
</TABLE>
34
<PAGE> 37
- ------------------
*less than 1%
(1) Represents shares underlying options which are exercisable within 60 days.
(2) These shares are held by Diversified Opportunities Group, Ltd., an affiliate
of Mr. Jacobs, and are therefore deemed beneficially owned by him.
(3) All percentages are computed in accordance with Rule 13d-3 adopted under the
Securities Exchange Act of 1934.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Based on a
review of the record, the Company believes that all reports on Forms 3 and 4
have been timely filed by its officers and directors.
35
<PAGE> 38
Item 13. Certain Relationships and Related Transactions.
In March 1997, and in February 1998, Mr. Jacobs posted a personal
letter of credit in the approximate amount of $1,200,000, in favor of the City
of Black Hawk. The letter of credit was required by the City to guarantee
performance of certain City improvements related to the Black Hawk/Jacobs
Entertainment LLC ("LLC") project (The Lodge Casino) under the terms of a
Subdivision Improvement Agreement with the City. The LLC agreed to pay all
out-of-pocket transaction costs incurred by Mr. Jacobs and a facility fee in the
approximate amount of one-quarter of one percent of the amount so guaranteed. In
1998, the Company reimbursed Mr. Jacobs $9,372, which represented the fee
charged by his individual bank issuing the letter of credit. In addition, during
1997 Mr. Jacobs received a facility fee of $6,018 for posting the letter of
credit. Upon expiration of the letter of credit in February 1998 it was required
to be renewed by the City for an additional six month term.
Reference is made to Item 1 above which describes the formation of
Black Hawk/Jacobs Entertainment LLC, a Colorado limited liability company owned
75% by the Company, 24% by BH and 1% by DOGL, affiliates of Mr. Jacobs and
organized for the purpose of developing and operating The Lodge Casino described
in Items 1 and 2 above. The Company and BH share a management fee of 5% of
adjusted gross gaming proceeds for the gaming operations of the LLC in the ratio
of 60% to the Company and 40% to BH during the first year and 50%-50%
thereafter, and share profits and losses on a 75%-25% basis. During the year
ended December 31, 1998, BH received $556,885 in management fees from the LLC
which covered the period from commencement of gaming activities at The Lodge
Casino (June 24, 1998) through year's end. Mr. Jacobs and other affiliates
receive an annual credit enhancement fee of 2% of the amount so guaranteed for
personally guaranteeing the LLC's $40 million credit facility. Fees of $36,625
were charged by Mr. Jacobs' affiliates in 1997 in this regard, of which $18,312
was paid in the first quarter of 1998 with the balance to be paid over a two
year period. Fees of $546,487 were charged by them for the year ended December
31, 1998 for the continuing guarantees. 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.
In order to assist the Company in its efforts to research, develop,
perform due diligence and possibly acquire new gaming opportunities, it entered
into a one year agreement with Premier One Development Company, Inc. ("Premier")
effective October 1, 1997. Premier is an affiliate of Mr. Jacobs and it employs
several people to perform the services set forth above. The amount paid or
accrued by the Company during calendar 1998 for these services was $225,000.
This agreement was renewed on October 1, 1998 through March 31, 1999 and will
require a payment of $56,250 for the first quarter of 1999 and may be renewed
thereafter.
The agreements described above were negotiated at arm's length between
the Company and Mr. Jacobs and his affiliates and other officers and directors
and are deemed by management of the Company to be fair and in the best interests
of the Company and its shareholders.
36
<PAGE> 39
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
------ -------
-none-
(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
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>
37
<PAGE> 40
- -------------------
(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:
<TABLE>
<CAPTION>
DATE OF
FILING EXHIBIT
------ -------
<S> <C>
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.
</TABLE>
38
<PAGE> 41
<TABLE>
<S> <C>
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.
March 27, 1997 Item 5. Other Events--Wells Fargo Bank Loan
November 20, 1997 Item 5. Other Events--Letter of Intent re: GHV acquisition.
January 1, 1998 Item 2. Acquisition of Gilpin Ventures, Inc.--Definitive Agreement.
Item 5. Other Events--Conversion of notes by officers.
April 28, 1998 Item 2. Acquisition of Gilpin Ventures, Inc.--Closing.
Item 5. Other Events--Wells Fargo Credit Agreement.
June 1, 1998 Item 7. Pro Forma Financial Statements--GVI acquisition.
July 24, 1998 Item 5. Other Events--Filing of St. Croix Casino license.
</TABLE>
(4) Filed herewith:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.98-1 Employment Agreement--Antone R. Cook
27 Financial Data Schedule
</TABLE>
d. Financial Statement Schedules Required Pursuant to Regulation S-X filed
herewith:
None
39
<PAGE> 42
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, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
March 15, 1999
F - 1
<PAGE> 43
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,887,602 $ 1,065,274
Accounts receivable:
Gilpin Hotel Venture 96,076
Other 164,077 15,032
Inventories 554,493
Prepaid expenses 478,866
Deferred income tax 338,716 90,661
------------- -------------
Total current assets 12,423,754 1,267,043
LAND 15,235,092 11,871,844
------------- -------------
GAMING FACILITIES:
Building and improvements 57,690,399
Equipment 15,427,185
Accumulated depreciation (6,384,357)
Construction in process 31,534,512
------------- -------------
Total gaming facilities 66,733,227 31,534,512
OTHER ASSETS:
Goodwill, net of amortization of $538,499 6,374,370
Investment in and advances to Gilpin Hotel Venture 4,384,648
Other assets 1,029,985 187,138
Deferred income tax 265,672 58,345
------------- -------------
TOTAL $ 102,062,100 $ 49,303,530
============= =============
</TABLE>
See notes to consolidated financial statements. (Continued)
F - 2
<PAGE> 44
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,048,273 $ 477,786
Notes payable to shareholders 300,000
Construction costs payable 2,295,198 2,332,008
Current portion of long-term debt 373,639 438
------------ ------------
Total current liabilities 11,717,110 3,110,232
LONG-TERM DEBT:
Revolving line of credit 15,806,305
Construction loan 36,171,752 12,897,174
------------ ------------
Total liabilities 63,695,167 16,007,406
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,541,523 6,704,688
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value; 10,000,000 shares authorized;
none issued and outstanding
Common stock; $.001 par value; 40,000,000 shares authorized;
4,087,346 and 3,947,496 shares issued and outstanding, respectively 4,087 3,947
Additional paid-in capital 18,216,385 17,194,575
Retained earnings 12,604,938 9,392,914
------------ ------------
Total stockholders' equity 30,825,410 26,591,436
------------ ------------
TOTAL $102,062,100 $ 49,303,530
============ ============
</TABLE>
See notes to consolidated financial statements. (Concluded)
F - 3
<PAGE> 45
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Casino revenue $ 47,116,406
Food and beverage revenue 5,914,804
Hotel revenue 363,381
Gilpin Hotel venture - management fees
and rental income 342,385 $ 1,135,855 $ 1,075,699
Interest and other 224,527 124,436 188,188
------------ ------------ ------------
Total revenues 53,961,503 1,260,291 1,263,887
------------ ------------ ------------
Promotional allowances 3,808,172
------------ ------------ ------------
Net revenues 50,153,331 1,260,291 1,263,887
------------ ------------ ------------
COSTS AND EXPENSES:
Casino operations 15,553,942
Food and beverage operations 5,338,311
Hotel operations 315,388
Marketing, general and administrative 17,331,409 1,382,055 1,119,436
Interest 2,387,205 124,260
Depreciation and amortization 2,436,890
Pre-opening 1,662,275
Impairment writedown 610,338 492,992
------------ ------------ ------------
Total costs and expenses 45,635,758 1,382,055 1,736,688
------------ ------------ ------------
MINORITY INTEREST (469,442)
EQUITY IN EARNINGS OF JOINT VENTURE 1,017,789 2,812,858 2,255,635
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 5,065,920 2,691,094 1,782,834
INCOME TAXES 1,900,088 1,070,544 735,893
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 3,165,832 1,620,550 1,046,941
------------ ------------ ------------
EXTRAORDINARY ITEM - EARLY
RETIREMENT OF DEBT, NET OF INCOME
TAXES OF $27,129 and $51,025 46,192 85,771
------------ ------------ ------------
NET INCOME $ 3,212,024 $ 1,706,321 $ 1,046,941
============ ============ ============
</TABLE>
See notes to consolidated financial statements. (Continued)
F - 4
<PAGE> 46
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.79 $ 0.61 $ 0.41
Extraordinary item 0.01 0.03
-------- -------- -------
Basic earnings per share $ 0.80 $ 0.64 $ 0.41
======== ======== =======
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.74 $ 0.46 $ 0.39
Extraordinary item 0.01 0.02
-------- -------- -------
Diluted earnings per share $ 0.75 $ 0.48 $ 0.39
======== ======== ========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F - 5
<PAGE> 47
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 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 shares 3,000 (15,085)
Retirement of treasury
shares (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 2,672,043 2,670 10,470,306 7,686,593
Exercise of put options 137,499 12,500 (137,499)
Retirement of treasury
shares (12,500) (13) (137,499) (12,500) 137,499
Stock issued for
compensation 2,239 4 15,246
Conversion of notes
payable to
shareholders, net
of deferred costs 1,285,714 1,286 6,597,956
Compensation under non-
qualified stock
options 111,067
Net income 1,706,321
------ ----- ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
DECEMBER 31, 1997 3,947,496 3,947 17,194,575 9,392,914
Stock issued for
compensation 1,284 1 16,250
Sale of shares, net
of issuance costs 138,566 139 894,494
Compensation under non-
qualified stock
options 111,066
Net income 3,212,024
------ ----- ------------ ------------ ------------ ------------ ------------ ------------
BALANCES,
DECEMBER 31, 1998 0 $ 0 4,087,346 $ 4,087 $ 18,216,385 $ 12,604,938 0 $ 0
====== ===== ============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE> 48
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,212,024 $ 1,706,321 $ 1,046,941
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in earnings of joint venture (675,405) (1,677,003) (1,179,937)
Depreciation and amortization 2,436,890
Minority interest 469,442
Gain on sale of equipment (12,766)
Gain on sale of land (14,280)
Gain on early retirement of debt (73,321) (136,796)
Noncash compensation 127,317 126,304
Deferred taxes (349,911) (131,245) 92,106
Impairment writedown 610,338 492,992
Other 11,833 (7,118)
Changes in operating assets and liabilities:
Accounts receivable 8,333 (30,173) 54,410
Inventories (384,030) 325,100 (279,733)
Prepaid expenses and other assets (262,559) (14,575)
Accounts payable and accrued expenses 6,811,660 316,613 448,266
------------ ------------ -----------
Net cash provided by operating activities 11,903,732 496,379 667,927
------------ ------------ -----------
INVESTING ACTIVITIES:
Construction and equipping of gaming facility (30,647,641) (24,837,605) (3,724,357)
Distributions from joint venture 1,168,407 1,259,000 2,071,562
Purchase of joint venture interest and land (10,000,000)
Cash acquired in joint venture acquisition 1,726,062
Investment in St. Croix gaming project (606,388)
Collection of note receivable 1,335,971
Proceeds from the sale of land, net of costs to sell 593,329
Other 70,013 (91,316) (410,841)
------------ ------------ -----------
Net cash used in investing activities (37,696,218) (23,669,921) (727,665)
------------ ------------ -----------
FINANCING ACTIVITIES:
Proceeds from construction loan 23,292,891 12,897,174
Proceeds from revolving line of credit 26,583,076
Proceeds from issuance of convertible debt to shareholders 5,250,000 1,500,000
Minority interest contributions to majority-owned subsidiary 617,393 3,831,188 1,496,000
Payments on long-term debt and revolving line of credit (15,223,179) (2,238,901) (803,500)
Distributions to minority interest owner (250,000)
Proceeds from issuance of notes payable to shareholders 850,000
Payment on notes payable to shareholders (300,000) (550,000)
Acquisition of treasury stock and payments upon
exercise of put option (137,499) (565,085)
Sale of common shares, net of issuance costs 894,633 774,030
Other (194,501)
------------ ------------ -----------
Net cash provided by financing activities 35,614,814 19,707,461 2,401,445
------------ ------------ -----------
</TABLE>
(Continued)
F - 7
<PAGE> 49
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 9,822,328 $(3,466,081) $2,341,707
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,065,274 4,531,355 2,189,648
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $10,887,602 $ 1,065,274 $4,531,355
=========== =========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized
($1,333,218, $547,730 and $124,366 in 1998, 1997
and 1996, respectively) $ 1,864,395 $ 248,626
Cash paid for income taxes 2,566,876 $ 759,776 838,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Land contributed by minority interest owner $ 1,080,000
Conversion of convertible notes payable to shareholders
to common stock, net $ 6,597,956
</TABLE>
See notes to consolidated financial statements. (Concluded)
F - 8
<PAGE> 50
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. (the Company) is an owner,
developer and operator of gaming properties in Black Hawk, Colorado.
Through April 23, 1998, the Company owned a 50% interest in the Gilpin
Hotel Venture (GHV), which owned the Gilpin Hotel Casino, which the
Company developed and has managed since 1992. On April 24, 1998, the
Company acquired the other 50% interest in GHV and related land for $10
million (see Note 3). 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 casino/hotel/parking complex in Black Hawk,
Colorado (The Lodge Casino at Black Hawk). During the second quarter of
1998, the Company completed the development of the casino portion of The
Lodge Casino at Black Hawk (the Lodge), which opened for business on June
24, 1998. On August 17, 1998, the hotel portion of the project opened and
on November 6, 1998, the parking garage opened. The total cost of the
casino/hotel/parking complex was approximately $74 million (see Note 4).
The Company operates in a single business segment, casino gaming. Through
December 31, 1998, all of the Company's gaming operations have been
concentrated in Black Hawk, Colorado.
2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The accompanying financial statements at December 31,
1998, include the accounts of the Company, its subsidiaries, including the
75% owned subsidiary Black Hawk/Jacobs Entertainment LLC and, beginning
on April 24, 1998, the Company's 100% ownership interest in the GHV. Prior
to April 24, 1998, the Company accounted for its 50% interest in GHV under
the equity method of accounting. All intercompany transactions and
balances have been eliminated in consolidation. All intercompany
transactions between the Company and GHV have been eliminated to the
extent of the Company's 50% ownership in GHV for all periods presented
prior to April 24, 1998.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
GOODWILL - Goodwill represents the excess purchase price over net
identifiable assets acquired related to the Company's acquisition of the
50% interest in GHV and related land, plus pre-existing goodwill of GHV.
Amortization is provided on goodwill by the straight-line method over 15
years.
DEPRECIATION - Depreciation is provided on building and improvements and
equipment by the straight-line method over the estimated useful lives of
the assets (39 years for building and improvements and 5 - 7 years for
equipment).
LONG-LIVED ASSETS - The Company periodically evaluates the value of
long-lived assets and related goodwill for potential impairment. If an
impairment is indicated, based on estimated undiscounted future cash flows
that are less than the carrying value of the asset, such impaired assets
are written down to their estimated fair value. As of December 31, 1997,
management determined that there was no impairment of the Company's
F - 9
<PAGE> 51
long-lived assets. See Note 14 for discussion of the impairment losses
recorded during the years ended December 31, 1998 and 1996.
CAPITALIZED INTEREST - The Company began capitalizing interest expense in
1996 due to the construction of The Lodge casino/hotel/parking complex.
Total interest incurred during the years ended December 31, 1998, 1997 and
1996 was $3,720,000, $548,000, and $248,000, respectively. Interest
capitalized during the years ended December 31, 1998, 1997 and 1996
totaled approximately $1,333,000, $548,000, and $124,000, respectively.
Interest costs incurred subsequent to the opening of the Lodge have been
expensed.
STOCK ISSUED FOR SERVICES - Common stock was issued to directors in 1998
and 1997 for services and was valued at the market value as of the date
awarded. Included in marketing, general and administrative expenses in the
consolidated statements of income for the years ended December 31, 1998
and 1997 is $16,251 and $15,250, respectively, of expenses related to
stock issued for services. The Company did not issue stock for services
during 1996.
EARNINGS PER COMMON SHARE - The following table shows the computation of
basic and diluted earnings per share for the years ended December 31,
1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------- ------------------------------------- ------------------------------------
INCOME SHARES EARNINGS INCOME SHARES EARNINGS INCOME SHARES EARNINGS
(NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE (NUMERATOR) (DENOMINATOR) PER SHARE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $3,212,024 $1,706,321 $1,046,941
Accretion
of discount
on common
stock
subject
to put
options (20,816)
----------
Basic
earnings
per share:
Income
available to
common
stockholders 3,212,024 4,016,007 $0.80 1,706,321 2,664,403 $0.64 1,026,125 2,529,801 $0.41
===== ===== =====
Effect of
dilutive
securities:
Stock
options,
warrants and
convertible
debt 240,804 872,320 71,440
--------- --------- ---------
Diluted
earnings
per share $3,212,024 4,256,811 $0.75 $1,706,321 3,536,723 $0.48 $1,026,125 2,601,241 $0.39
========== ========= ===== ========== ========= ===== ========== ========= =====
</TABLE>
EMPLOYEE STOCK COMPENSATION PLANS - The Company uses the intrinsic value
method to account for stock options and similar stock-based employee
compensation plans. 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. Options granted to non-employees are valued
at estimated fair value and charged to operations as earned.
DERIVATIVE FINANCIAL INSTRUMENT - The Company is party to an interest rate
swap agreement, the purpose of which is to manage the Company's exposure
to fluctuations in interest rates. The Company does not enter into
derivative transactions for trading purposes. The interest rate swap is
designated, and is effective, as a hedge of the underlying debt obligation
and is not marked to market. Net amounts owed or receivable under the swap
are included in interest expense. If a contract accounted for as a hedge
were to be terminated early, any resultant gain (loss) would be deferred
and recognized over the original term of the contract.
F - 10
<PAGE> 52
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.
RECLASSIFICATIONS - Certain reclassifications have been made in the 1997
and 1996 financial statements to conform to the classifications used in
1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that all derivative instruments be recorded
in the balance sheet as either an asset or liability measured at its fair
value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting
criteria are met. The accounting provisions for qualifying hedges allow
gains and losses recognized related to a hedged item in the income
statement to be offset by the related derivative's gains and losses, and
requires the Company to formally document, designate, and assess the
effectiveness of transactions that qualify for hedge accounting. The
Company is not required to adopt SFAS No. 133 until January 1, 2000. The
Company has not determined the impact on its financial statements of
adopting SFAS No. 133.
3. GILPIN HOTEL VENTURE
In May 1991, the Company entered into an agreement to purchase a one-half
interest in undeveloped land and an historic hotel property known as the
Gilpin Hotel, both located in Black Hawk, Colorado. Simultaneously, the
Company entered into a joint venture agreement (the Agreement) to form GHV
with Gilpin Ventures, Inc. (GVI), 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, the Gilpin Hotel Casino
(the Gilpin). The Gilpin opened for business in October 1992. Each party
owned 50% of GHV. Under the terms of the Agreement, the Company was the
manager of the joint venture.
Through April 23, 1998, the land and improvements were leased by GHV from
the Company and an affiliate of GVI for a fee, as defined in the
Agreement, and the Company operated the Gilpin facility for a fee pursuant
to a management agreement. In addition, the Company charged GHV a monthly
fee for the use of land owned by the Company for parking for the benefit
of casino customers. As construction activities related to The Lodge
reduced the amount of land available for GHV parking, the Company reduced
the monthly parking fee to GHV. The Company's equity in earnings of GHV as
reflected in the statements of income for the period January 1, 1998 to
April 23, 1998, and for the years ended December 31, 1997 and 1996 has
been adjusted for elimination of the Company's share of fees and rentals
it received from GHV.
On December 31, 1997, the Company entered into an agreement with GVI, its
joint venture partner in GHV, and affiliates of GVI, which provided for
the termination of all agreements between the Company, GVI and its
affiliates, and GHV and the sale of all of GVI's and its affiliates'
interests in GHV, related land and contracts.
On April 24, 1998, the Company acquired the 50% interest in GHV and
related land for $10,000,000. The Company borrowed $10,000,000 under a
$20,000,000 revolving line of credit with Wells Fargo Bank to finance the
acquisition. The acquisition has been accounted for by the Company under
F - 11
<PAGE> 53
the purchase method of accounting and GHV's results of operations from
April 24, 1998, to December 31, 1998, are included in the accompanying
financial statements.
The Company obtained an appraisal of the assets of GHV at the date of
acquisition and the purchase price has been allocated accordingly. The
total purchase price, including $429,000 of transaction costs, was
allocated to the 50% interest in GHV as follows:
<TABLE>
<S> <C>
Cash $ 863,000
Land 3,900,000
Building, furniture, fixtures and equipment 3,430,000
Other assets 329,000
Goodwill 5,224,000
Notes payable and other liabilities (3,317,000)
------------
Total purchase price $ 10,429,000
============
</TABLE>
The Company recorded as additional goodwill the excess of its
pre-acquisition investment in GHV over its proportionate share of GHV
pre-acquisition net equity.
Summarized balance sheet information of GHV at December 31, 1997, is as
follows:
<TABLE>
<S> <C>
Current assets $ 3,554,824
Gaming facility 8,463,887
Goodwill 1,270,879
-----------
Total $13,289,590
===========
Current liabilities $ 2,957,496
Long-term debt 4,283,720
Venturers' investments and advances 6,048,374
-----------
Total $13,289,590
===========
</TABLE>
Summarized income statement information of GHV for the period January 1,
1998, through April 23, 1998, and the years ended December 31, 1997 and
1996, during which GHV was accounted for under the equity method, is as
follows:
<TABLE>
<CAPTION>
JANUARY 1, 1998
TO APRIL 23, 1998 1997 1996
<S> <C> <C> <C>
Net revenues $ 9,948,008 $ 29,327,886 $ 27,951,521
Operating costs (5,252,437) (14,998,848) (14,439,944)
Marketing, general and administrative
expenses (2,828,288) (9,138,439) (9,396,004)
Depreciation and amortization (366,731) (1,315,897) (1,228,045)
Interest (149,743) (520,696) (527,654)
----------- ------------ ------------
Net income $ 1,350,809 $ 3,354,006 $ 2,359,874
=========== ============ ============
</TABLE>
F - 12
<PAGE> 54
In connection with the Company's acquisition of the other 50% interest in
GHV and related land in April 1998, the Company terminated the land lease,
management fee, and parking fee arrangements as provided for in the joint
venture agreement.
Pro forma financial information for the Company, assuming the acquisition
had occurred on January 1, 1997 and 1998, respectively, is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net revenues $ 59,759,000 $ 29,452,000
Net income 3,856,000 3,184,000
Earnings per share:
Basic 0.96 1.20
Diluted 0.91 0.90
</TABLE>
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
casino/hotel/parking structure complex in Black Hawk, Colorado, named The
Lodge Casino at Black Hawk. Construction of the 250,000 square foot
project began in January 1997. The casino portion of the project was
completed and opened for business on June 24, 1998. As a result of the
refinements during the development process, it was decided to incorporate
a three-story overflow parking structure into The Lodge project. Two
stories of the overflow parking structure provide parking for The Lodge
and the third-story of the structure provides parking for the Gilpin Hotel
Casino. The hotel portion of the project and the garage were completed
during August 1998 and November 1998, respectively.
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. In connection with the
formation of the LLC, Diversified provided debt and equity financing to
the Company as discussed further in Note 7.
F - 13
<PAGE> 55
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
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 GHV equipment $ 1,172,363
Revolving credit facility; interest payments at the prime rate
(7.75% at December 31, 1998) plus 0.75% due quarterly beginning April 1999
and continuing through April 2001 when the remaining principal and interest
balance is due; secured by assets of GHV, GVI and the Company (excluding the
Company's 75% interest in the Black Hawk/Jacobs
Entertainment LLC) 15,007,143
Construction credit facility; converts to a term note payable
upon satisfaction of certain requirements which is presently estimated to be
April 1999; principal payments of $1,175,000 due quarterly beginning January
1, 2000, and continuing through March 2002 when the remaining principal and
interest is due; interest accrues at the quarterly average London Interbank
Offering Rate (LIBOR) (5.28% for the quarter ended December 31, 1998) plus
3.50%; secured by the assets of the LLC and is personally guaranteed by an
officer, director, and major stockholder of the Company
and certain of his affiliates 36,171,752 $12,897,174
Other notes payable 438 438
----------- -----------
52,351,696 12,897,612
Less current portion 373,639 438
----------- -----------
Total $51,978,057 $12,897,174
=========== ===========
</TABLE>
Scheduled principal payments at December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 $ 373,639
2000 5,078,252
2001 20,128,053
2002 26,771,752
-----------
Total $52,351,696
===========
</TABLE>
The Company has entered into a revolving credit facility providing for
maximum borrowings of $20,000,000 and containing a number of affirmative
and negative covenants which, among other things, require the Company to
maintain certain financial ratios and refrain from certain actions without
the approval of the lender. As of December 31, 1998, the Company is in
compliance with all such debt covenants. Beginning January 1, 1999, the
maximum credit line available will be reduced by $500,000 per quarter
until April 24, 2001, when the outstanding balance of the facility will be
due.
F - 14
<PAGE> 56
The construction credit facility provides for maximum borrowings of
$40,000,000. The terms of the construction loan include certain general
and financial covenants. As of December 31, 1998, the Company is in
compliance with all such debt covenants.
During 1997, the Company repaid debt totaling $2,350,023, including
accrued interest of $25,383, in advance of the due date of the debt which
resulted in an extraordinary gain of $85,771, net of income taxes of
$51,025.
During 1998, the Company repaid debt of GHV totaling $3,557,595, including
accrued interest of $62,827, in advance of the due date of the debt which
resulted in an extraordinary gain of $46,192, net of income taxes of
$27,129.
6. WARRANTS
The Company issued warrants to purchase shares of common stock to the
underwriters of its initial public offering. The warrants were exercisable
at any time during the period of four years commencing May 1994. On May
12, 1998, the warrants were exercised and 105,598 shares were issued at a
price of $7.99 per share.
7. COMMON STOCK
In connection with the LLC agreement entered into in 1996, the Company
issued 190,476 shares of its common stock to Diversified for $1,000,000
and issued $1,500,000 of convertible debt. Further, after approval by the
Company's shareholders in 1997, Diversified purchased an additional
$4,500,000 convertible note and certain officers and directors of the
Company purchased $750,000 in convertible notes. All of the notes were
converted to 1,285,714 shares of common stock on December 30, 1997.
On December 30, 1994, the Company purchased Millsite 32 in Black Hawk,
Colorado, 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 could 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 two years. During 1996 and 1995,
the holder put 50,000 and 37,500 shares to the Company for $550,000 and
$412,500, respectively. In January 1997, the final 12,500 shares were put
back to the Company for $137,499.
Common stock reacquired 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.
F - 15
<PAGE> 57
8. STOCK OPTIONS
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 for
300,000 shares of common stock. The 1996 Plan provides for the grant of
stock options, including incentive stock options and non-qualified stock
options for 500,000 shares of common stock. At December 31, 1998, there
were 32,150 shares available for future grants under the 1994 Plan and
124,300 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>
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
Granted 35,000 $ 5.81 $ 5.81
----------
Outstanding at
December 31, 1997 642,500 $ 5.63 - $ 6.19 $ 5.79
Granted 31,000 $ 7.75 - $ 8.38 $ 8.35
Exercised (98,000) $ 5.63 - $ 6.19 $ 6.12
Forfeited (29,950) $ 5.63 - $ 6.19 $ 6.13
----------
Outstanding at
December 31, 1998 545,550 $ 5.63 - $ 8.38 $ 5.86
==========
</TABLE>
Options granted under the 1994 Plan generally vest proportionately over
three years on June 30 following the grant date. Options granted 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, 1998 was 396,367. These
stock options have a weighted average exercise price of $5.71 per share.
On November 12, 1996, all options outstanding were canceled and reissued
based on the then-current market price. This transaction resulted in the
cancellation and reissuance of 307,500 options.
F - 16
<PAGE> 58
As discussed in Note 1, the Company follows the intrinsic value method to
account for stock options issued to employees, generally resulting in no
compensation expense since options are granted at market price. Had
compensation cost for the Company's plans been determined based on the
fair value of the options at the grant date, the Company's net income and
income per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Net income - as reported $ 3,212,024 $ 1,706,321 $ 1,046,941
Net income - pro forma $ 3,026,556 $ 1,437,388 $ 761,134
Income per share - as reported:
Basic $ 0.80 $ 0.64 $ 0.41
Diluted $ 0.75 $ 0.48 $ 0.39
Income per share - pro forma:
Basic $ 0.75 $ 0.54 $ 0.30
Diluted $ 0.71 $ 0.41 $ 0.29
</TABLE>
The weighted average fair value of the stock options granted was $3.79 in
1998, $3.19 in 1997, and $3.52 in 1996. 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
1998, 1997, and 1996: risk-free interest rate of 5.50%, 5.50%, and 6.00%,
respectively; expected dividend yield of 0%; expected life of three to six
years; and expected volatility of 60.63%, 73.88%, and 19.68%,
respectively. The outstanding stock options at December 31, 1998, have a
weighted average remaining contractual life of 6.96 years.
On November 12, 1996, the Company issued options for 85,000 shares of
common stock to non-employees which vest one-third on each anniversary
date of the grant. The fair value of the options was $333,200, which is
being amortized to operations over the vesting period. The consolidated
financial statements for the years ended December 31, 1998 and 1997
reflect compensation expense of $111,066 and $111,067, respectively,
related to the vesting of the non-qualified options.
9. INCOME TAXES
Income tax expense includes the following current and deferred provisions
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current $2,249,999 $ 939,299 $643,787
Deferred (349,911) 131,245 92,106
---------- ---------- --------
Total $1,900,088 $1,070,544 $735,893
========== ========== ========
</TABLE>
F - 17
<PAGE> 59
Income tax expense includes the following federal and state components for
the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal $1,681,237 $ 929,031 $642,010
State 218,851 141,513 93,883
---------- ---------- --------
Total $1,900,088 $1,070,544 $735,893
========== ========== ========
</TABLE>
The Company's income tax expense for the years ended December 31, 1998,
1997 and 1996 varies from the amount expected by applying the Federal tax
rate due to the following items:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected federal income tax expense $1,722,413 $ 914,972 $606,164
State income taxes, net of Federal benefit 144,242 93,398 61,963
Other, net 33,433 62,174 67,766
---------- ---------- --------
Total $1,900,088 $1,070,544 $735,893
========== ========== ========
</TABLE>
The Company's deferred taxes at December 31, 1998 and 1997, are comprised
of the following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Start-up costs $ 61,129 $ 58,345
Land and gaming facilities basis differences 582,921 90,661
Other 42,920
-------- --------
Total gross deferred tax assets 686,970 149,006
Deferred tax liabilities -
Accrued expenses 82,582
-------- --------
Net deferred tax assets $604,388 $149,006
======== ========
</TABLE>
10. RELATED PARTIES
During the year ended December 31, 1997, an officer, director and
significant shareholder of the Company and another significant shareholder
of the Company executed personal letters of credit in the approximate
amount of $1,200,000 each to guarantee performance by the Company of
certain City of Black Hawk improvements related to The Lodge project. The
Company agreed to pay all out-of-pocket transaction costs incurred by the
two parties, a facility fee in the approximate amount of one-quarter of
one percent of the amount so guaranteed, and to pay additional
consideration to be negotiated. During the year ended December 31, 1997,
the Company reimbursed the two parties an aggregate amount of $30,298,
which represented the fee charged by their individual banks issuing the
letters of credit. In addition, during 1997 the Company paid the two
parties $6,018 each in facility fees for executing the letters of credit.
The letters of credit expired in February 1998 and were renewed for an
additional six month term. At the expiration of the extended term, the
Company replaced the letters of credit with a single Company-issued letter
F - 18
<PAGE> 60
of credit totaling $526,000 to ensure the one-year warranty period for the
public improvements and completion of other City works.
The Company and BH share a management fee of 5% of adjusted gross gaming
proceeds for the gaming operations of the LLC in the ratio of 60% to the
Company and 40% to BH during the first year and 50%-50% thereafter. During
the year ended December 31, 1998, BH earned $556,885 in management fees
from the LLC which covered the period from commencement of gaming
activities at The Lodge Casino (June 24, 1998) through year's end.
An officer, director and significant shareholder of the Company and
certain of his affiliates receive an annual credit enhancement fee of 2%
of the amount guaranteed, as defined, for personally guaranteeing the
Company's construction loan. Total credit enhancement fees incurred during
the years ended December 31, 1998 and 1997 were $546,487 and $36,625,
respectively.
Effective October 1, 1997, the Company entered into a one-year agreement
with an affiliate of an officer, director and significant shareholder of
the Company to assist the Company in its efforts to research, develop,
perform due diligence and possibly acquire new gaming opportunities. The
annual cost to the Company under the agreement was $225,000. On September
30, 1998, the agreement was extended for six months with effectively the
same terms as the 1997 agreement. The Company anticipates extension of the
agreement for an additional six-month period upon expiration of the
extended agreement on March 31, 1999. Through December 31, 1998, the
Company had paid $56,250 under the extended agreement.
During the year ended December 31, 1997, a director of the Company was
paid a $50,000 fee from a former employer, who received the fee from the
Company in connection with investment banking services provided to the
Company in an effort to obtain financing for The Lodge project.
11. 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.
The Company and the LLC (owner and developer of The Lodge) and other LLC
members are defendants in an action for trespass brought in late January
1998 by a company which claims to have succeeded to rights of heirs of
certain shareholders of a company which was dissolved under Colorado law
in 1942. The action alleges that the long defunct company had certain
reversionary rights to a small strip of land included within the
boundaries of The Lodge. The Company, the LLC, other LLC members and
certain title insurance companies have agreed to enter into a joint
defense of the action with all parties reserving their respective rights.
The action was dismissed without prejudice on January 3, 1999. A trustee
F - 19
<PAGE> 61
was appointed by the court on December 2, 1998, to represent the
interests, if any, ostensibly represented by the plaintiff, who may file
an action similar to that described above. If so, the Company intends to
vigorously defend the action and to institute and pursue counterclaims.
The Company is also involved in routine litigation arising in the ordinary
course of business. These matters are believed by the Company to be
covered by appropriate insurance policies.
On January 1, 1997, the Gilpin Hotel Casino Employee's 401(k) Plan (the
Plan) was organized and began accepting contributions on September 1,
1997. The Plan is a defined contribution plan covering eligible employees
of the Company. The Plan allows eligible employees to make tax-deferred
contributions that are matched by the Company up to a specified level. The
Company contributed approximately $92,400 and $13,800 to the Plan for the
years ended December 31, 1998 and 1997, respectively.
12. DERIVATIVE FINANCIAL INSTRUMENT
The Company is a party to an Interest Rate Swap Agreement with
off-balance-sheet risk. This derivative financial instrument is used in
the normal course of business to manage exposure to fluctuations in
interest rates and involves market risk, as the instrument is subject to
interest rate fluctuations and, potentially, credit risk. This derivative
transaction is used to partially hedge interest rate risk in the Company's
variable rate debt. The Interest Rate Swap Agreement provides that, on a
quarterly basis, the Company pays a fixed rate of 5.18% on the notional
amount of $35,000,000 and receives a payment based on LIBOR applied to the
notional amount. Gains or losses on the interest rate exchange are
included in interest expense as realized or incurred. As of December 31,
1998, the amount of loss the Company would incur if the counterparty
failed to perform under the agreement, would be equal to the net
settlement amount and is not expected to be material. Neither the
counterparty's nor the Company's obligations under the agreement are
collateralized. The Company manages its exposure to credit risk related to
the interest rate swap by its choice of a counterparty with a high credit
rating.
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of the Company's
financial instruments has been determined by the Company using available
market information and generally accepted 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 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. The asset (liability) amounts for the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Liabilities -
Debt $ (52,352,000) $ (52,352,000) $ (13,198,000) $ (13,198,000)
Off-Balance Sheet -
Interest Rate Swap Agreement 99,000
</TABLE>
The estimation methodologies utilized by the Company are summarized as
follows:
DEBT - The fair value of variable-rate debt is estimated to be equal to
its carrying amount. The fair value of fixed rate debt is based on the
relatively short time since issuance.
INTEREST RATE SWAP AGREEMENT - The fair value of the Interest Rate Swap
Agreement was based on the present value of estimated payments that would
be received by the Company over the term of the swap, based on the forward
interest rate swap curve as of December 31, 1998.
F - 20
<PAGE> 62
14. IMPAIRMENTS
As of December 31, 1996, it was determined that the carrying amount of
costs incurred to obtain a gaming license in another potential gaming
jurisdiction and for costs incurred to develop and test market a new
casino game were not recoverable and an impairment loss was recognized.
The aggregate impairment loss recognized during the year ended December
31, 1996, totaled $492,992.
As of December 31, 1998, the Company determined that certain costs
incurred in the pursuit of a gaming license in the U.S. Virgin Islands on
the island of St. Croix may not be recoverable and an impairment loss
should be recognized. This determination was based upon the Company's
inability to reach an agreement with respect to certain development issues
with the Virgin Islands Casino Control Commission. The impairment loss
recognized during the year ended December 31, 1998, was $610,338.
* * * *
F- 21
<PAGE> 63
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.
BLACK HAWK GAMING &
DEVELOPMENT COMPANY, INC.
Date: March 29, 1999 By: /s/ Jeffrey P. Jacobs
-------------------------------------
Jeffrey P. Jacobs, Chairman and
Chief Executive Officer
Date: March 29, 1999 /s/ Stephen R. Roark
-------------------------------------
Stephen R. Roark, President
and Chief Financial and
Accounting Officer
40
<PAGE> 64
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 and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jeffrey P. Jacobs Director March 29, 1999
- -----------------------------------
Jeffrey P. Jacobs
/s/ Stephen R. Roark Director March 29, 1999
- -----------------------------------
Stephen R. Roark
/s/ Frank B. Day Director March 29, 1999
- -----------------------------------
Frank B. Day
/s/ J. Patrick McDuff Director March 29, 1999
- -----------------------------------
J. Patrick McDuff
/s/ Robert H. Hughes Director March 29, 1999
- -----------------------------------
Robert H. Hughes
/s/ Timothy Knudsen Director March 29, 1999
- -----------------------------------
Timothy Knudsen
</TABLE>
41
<PAGE> 65
EXHIBIT INDEX
Filed herewith is the following exhibit:
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
10.98-1 Employment Agreement--Antone R. Cook
27 Financial Data Schedule
</TABLE>
E-1
<PAGE> 1
EXHIBIT 10.98-1
EMPLOYMENT AGREEMENT
ANTONE R. COOK
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into this 18th day of September, 1998, by and
between BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. ("Company") and ANTONE R.
COOK ("Executive"); provided however, that this Agreement shall not become
effective until February 1, 1999 ("Effective Date") and provided further that
this Agreement will not become effective if the Executive's current Employment
Agreement dated June 10, 1996 is terminated for any reason in accordance with
its terms prior to January 31, 1999.
1. TERM. This Agreement is for a term of three (3) years from the
Effective Date.
2. COMPENSATION. (i) Executive shall receive an annual base salary
of $250,000 to be paid in equal monthly installments for the three years of
employment. In addition, Executive shall be entitled to participate in the
Company's management bonus plan, if such is adopted by the Company's Board of
Directors, to the extent and in the amounts, if any, as determined by the Chief
Executive Officer ("CEO") and confirmed by the Compensation Committee of such
Board of Directors, however, in no event will the bonus payable to the executive
for the year ended 1998 and payable in the first quarter of 1999 be no less than
$25,000.
(ii) The Company will grant as of the date of this Agreement to the
Executive, thirty thousand (30,000) stock options under the Company's 1994 or
1996 Incentive Stock Option Plan as follows: All options will have an exercise
price of $8.38 (eight dollars and thirty-eight cents), vesting over 3 years at
the rate of 10,000 options per year with the first 10,000 options vesting one
year from the Effective Date. The second 10,000 options will vest two (2) years
from the Effective Date and the third 10,000 options will vest three (3) years
from the Effective Date; provided however, any rights to unvested options shall
be automatically cancelled if this
1
<PAGE> 3
Agreement does not become effective, or if it is terminated in accordance with
its terms at any time after the Effective Date.
(iii) The health benefits made available by the Company to other
executives will be available to Executive upon the Effective Date. If no health
benefits are then available, the Company agrees to pay for the health benefits
from a private insurance company of Executive's choice.
(iv) The Company will furnish Executive, without cost to him, with a
Company owned or leased, new, four-wheel drive vehicle of a make and model
similar in value to a Ford Explorer.
(v) Executive shall be entitled to reimbursement of all expenses
incurred by him in the performance of his duties, subject to the presenting of
appropriate vouchers in accordance with the Company's policies.
3. DUTIES. Executive shall be Vice President-Operations in charge of
Colorado gaming operations of the Company, which will include, among other
things, duties as the General Manager of the Gilpin Hotel Casino and The Lodge
Hotel Casino. His duties shall include:
(a) Primary authority over operations of the casinos including:
(1) Conduct of games;
(2) Purchasing of supplies;
(3) Hiring, firing and discipline of all employees;
(4) Operation of the food and beverage facilities;
(5) Supervision of the hotel facilities;
(6) Determination of patron comps, promotions and related
activities;
(7) Establishment and management of all business programs;
2
<PAGE> 4
(8) Advertising and marketing of the facilities;
(9) Supervision over the daily operations of casinos' security
of the gaming facilities;
(10) Oversight of parking activities at both facilities.
(b) In connection with the above stated duties, all subordinate
personnel, including those employed in executive functions, shall report
directly to Executive.
(c) From time to time the Executive will be called upon to assist the
Company's CEO on Casino design and start up acquisitions and market analysis.
(d) At the discretion of the CEO, Executive shall report directly to
the President and/or Chief Operating Officer of the Company and he shall be
subject to the direction of the CEO and Board of Directors. He shall perform and
discharge well and faithfully any additional duties which may be assigned to him
from time to time by the CEO and the Board of Directors in connection with the
conduct of the Company's business. If the Executive is elected or appointed a
director or to any other office of the Company or any subsidiary thereof during
the term of this Agreement, the Executive will serve in such capacity without
further compensation, unless, however, if in the determination of the Executive,
the CEO and the Board of Directors that the additional duties required by such
appointment increase in any material way the responsibilities or the nature of
his job functions as outlined herein then his compensation shall be
appropriately increased to reflect such change.
4. TERMINATION OF AGREEMENT. Executive shall not be terminated other
than for cause. Cause shall be defined as:
(1) abandonment of duties as evidenced by conduct indicating
that Executive has ceased performance;
(2) conviction of a felony or loss of his gaming license
privileges in Colorado;
3
<PAGE> 5
(3) a charge of theft or other misconduct indicating fraud on
the Casino which is of such degree as to demonstrate a lack
of character or integrity on the part of Executive. More
than a mere accusation of such conduct is necessary and
Executive may appeal any such termination to arbitration as
further outlined in paragraph 14 contained herein;
(4) failure of the Executive to obtain or retain any gaming,
liquor or other permits, licenses, or approvals which may be
required by any state or local authorities in order to
permit the Executive to continue employment as contemplated
by this Agreement or to properly discharge his duties
hereunder;
(5) physical or mental disability of the Executive which
prevents the Executive from performing duties under this
Agreement for a consecutive period of at least 60 days or
for at least 90 days in a period of 120 days; or
(6) death of the Executive.
Any such termination shall be effective only if notice is given to the Executive
not later than thirty days following the event, transaction, or occurrence
giving rise to such right of termination or if later, thirty days after the
Company first discovers that such event, transaction, or occurrence has taken
place. In addition, if any state agency which regulates activities of the
Company or any subsidiary, (including without limitation the Colorado Limited
Gaming Control Commission or the Colorado Division of Gaming) rules, whether as
a condition to granting a casino license, continuing such, or otherwise, that
the Executive may not be a director, officer, or employee of the Company, upon
notice given to the Executive not more than thirty days after that ruling
becomes final and no longer appealable, the Company will have the right to
4
<PAGE> 6
terminate this Agreement and the Executive's employment under this Agreement. A
ruling will be treated as no longer appealable when the time to appeal from that
ruling expires or if an appeal is taken, the time for any further appeal
expires. If a state agency which regulates gaming activities of the Company or a
subsidiary rules that the Executive may not be a director, officer, or employee
of the Company, and the effectiveness of that ruling is not stayed pending
appeal, the Company may suspend the Executive without pay, until such time as
the ruling is either rescinded or stayed or becomes final and no longer
appealable; provided, however, that in the event such ruling is finally
rescinded, reversed, or set aside, the Executive will then be entitled
retroactively to pay for the period of the suspension. In the event that any
such state agency ruling which becomes final and nonappealable provides that the
Executive may be an employee of the Company other than Vice
President-Operations, the Executive is under no obligation hereunder to accept
positions with the Company other than Vice President-Operations, and this
Agreement will terminate thirty days following the date of such final order
unless the Company gives notice to the Executive, within such thirty-day period,
that it elects to continue the Executive's employment as an employee under the
terms of this Agreement for the remainder of the employment period,
notwithstanding such final ruling.
5. (i) Death Benefit. In the event of the death of the Executive,
the Company shall pay to such beneficiary as the Executive designated by
instrument in writing filed with the Company during his lifetime, or to his
estate if no beneficiary has been so designated, a death benefit equal to six
(6) months salary.
(ii) Disability Benefit. In the event that the Executive shall
become disabled and is terminated in accordance with Section 4(5) above, the
Company shall pay to the Executive as a disability benefit equal to four (4)
months salary.
5
<PAGE> 7
6. COVENANTS OF EXECUTIVE. Executive covenants and agrees with the
Company as follows:
(i) Non Competition; Non-Solicitation. During the term of this
Agreement and continuing for a period of one (1) year thereafter (the
"Restricted Period"), Executive shall not, directly or indirectly:
(a) engage or participate, directly or indirectly, in
Colorado as an owner, partner, shareholder, consultant, director,
officer, employee, agent or otherwise, in any business which owns,
operates, manages or provides consulting services to a gaming casino;
(b) take any actions which are calculated to persuade any
employee, vendor or supplier of the Company to terminate or modify in
any adverse manner their association with the Company; or
Executive recognizes and agrees that the territorial, time and scope limitations
set forth in this Section are reasonable and are required for the protection of
the Company and in the event that any such territorial, time or scope limitation
is deemed to be unreasonable by a court of competent jurisdiction, the Company
and the Executive agree to the reduction of either or any of said territorial,
time or scope limitations to such an area, period or scope as such court shall
deem reasonable under the circumstances. The Company agrees that the ownership
by Executive of publicly traded securities of a corporation or other entity
which owns, operates, manages or provides consulting services to a gaming casino
shall not be a violation of the provisions of this Section.
(ii) Confidentiality. Executive will not use or disclose to any
person, entity, association, firm or corporation any Confidential Information of
the Company which came into his possession as a result of his relationship with
the Company, except as necessary to perform
6
<PAGE> 8
his duties under this Agreement. The term "Confidential Information" means
information and data not generally known outside the Company concerning the
Company's business and technical information, and includes, without limitation,
information relating to: (i) the identities of the Company's patrons and their
needs, check cashing histories and other information; (ii) suppliers' and
vendors' costs, products, services, discounts, margins, contact personnel and
other information; and (iii) the Company's gaming strategies trade secrets,
margins, discounts, financial and marketing information, personnel and
compensation information and business plans. Executive understands that this
Section applies to computerized as well as written information and to other
information, whether or not in written form.
7. LEAVE. Executive shall receive three (3) weeks per year paid
leave and ten (10) days sick leave with full pay. No leave shall accrue beyond
two (2) years and unused portions of leave shall not be subject to compensation
at the end of the term.
8. LIQUIDATED DAMAGES. If the Company breaches this Agreement other
than for cause as set forth above, it shall pay to Executive an amount equal to
the compensation remaining to be paid on the balance of the three (3) year term
of the Agreement.
9. RELOCATION. The Executive agrees to relocate if deemed in the
best interests of the Company by the Board of Directors; provided that all
reasonable relocation expenses will be paid by the Company.
10. NOTICES. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered mail to the
Executive at his residence in Colorado and to the Company in Black Hawk,
Colorado.
7
<PAGE> 9
11. WAIVER OF BREACH. A waiver by the Company or the Executive of a
breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by the other party.
12. ENTIRE AGREEMENT. This instrument contains the entire agreement
of the parties. It may be changed only by an agreement in writing signed by a
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought.
13. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Colorado.
14. ARBITRATION. The Company and the Executive expressly agree that
all disputes arising out of this Agreement shall be resolved by arbitration in
accordance with the following provisions. Either party must demand in writing
such arbitration within 10 days after the controversy arises by sending a notice
to arbitrate to both the other party and to the American Arbitration Association
(hereinafter referred to as "AAA"). The controversy shall then be arbitrated
pursuant to the rules promulgated by the AAA at the AAA's offices locates in
Denver, Colorado. The parties will select by mutual agreement the arbitrator or
arbitrators (hereinafter collectively referred to as "arbitrator") to hear and
resolve the controversy. The arbitrator shall be governed by the express terms
of this Agreement and the laws of the state that governs the interpretation of
this Agreement. The arbitrator's decision shall be final and binding on the
parties and shall bar any suit, action, or proceeding instituted in any federal,
state, or local court or administrative tribunal. Notwithstanding the preceding
sentence, the arbitrator's judgment may be entered in any court of competent
jurisdiction. These arbitration provisions shall survive the termination of this
Agreement.
8
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first hereinabove written.
BLACK HAWK GAMING & DEVELOPMENT
COMPANY, INC.
By: /s/ Stephen R. Roark
-------------------------------------
STEPHEN R. ROARK, PRESIDENT
By: /s/ Antone R. Cook
-------------------------------------
ANTONE R. COOK
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
DECEMBER 31, 1998 FORM 10-K FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,887,602
<SECURITIES> 0
<RECEIVABLES> 164,077
<ALLOWANCES> 0
<INVENTORY> 554,493
<CURRENT-ASSETS> 12,423,754
<PP&E> 81,968,319
<DEPRECIATION> 6,384,357
<TOTAL-ASSETS> 102,062,100
<CURRENT-LIABILITIES> 11,717,110
<BONDS> 0
0
0
<COMMON> 4,087
<OTHER-SE> 30,821,324
<TOTAL-LIABILITY-AND-EQUITY> 102,062,100
<SALES> 2,106,632
<TOTAL-REVENUES> 53,961,503
<CGS> 1,118,365
<TOTAL-COSTS> 45,635,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,387,205
<INCOME-PRETAX> 5,065,920
<INCOME-TAX> 1,900,088
<INCOME-CONTINUING> 3,165,832
<DISCONTINUED> 0
<EXTRAORDINARY> 46,192
<CHANGES> 0
<NET-INCOME> 3,212,024
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.75
</TABLE>
