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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-88242

 

 

JACOBS ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   34-1959351

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

17301 West Colfax Ave., Suite 250,

Golden, Colorado

  80401
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (303) 215-5200

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding as of August 11, 2010

Class A Common Stock, $.01 par value    1,320 shares
Class B Common Stock, $.01 par value    180 shares

 

 

 


Table of Contents

Jacobs Entertainment, Inc.

Index

 

PART I.    FINANCIAL INFORMATION    3

Item 1.

  

Financial Statements:

   3
  

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009

   3
  

Unaudited Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2010 and 2009

   4
  

Unaudited Condensed Consolidated Statements of Stockholder’s Equity for the six months
ended June 30, 2010 and 2009

   5
  

Unaudited Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2010 and 2009

   6
  

Notes to Unaudited Condensed Consolidated Financial Statements

   7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

   38

Item 4.

  

Controls and Procedures

   39
PART II.   

OTHER INFORMATION

   39

Item 1.

  

Legal Proceedings

   39

Item 1A.

  

Risk Factors

   39

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   39

Item 3.

  

Defaults Upon Senior Securities

   39

Item 5.

  

Other Information

   39

Item 6.

  

Exhibits

   40
SIGNATURES       40
EXHIBIT INDEX    40

 

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Table of Contents

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

     June 30,
2010
    December 31,
2009
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 24,729      $ 24,201   

Restricted cash

     3,662        1,121   

Accounts receivable, net

     3,283        2,952   

Due from affiliates

     762        1,012   

Inventory

     2,875        3,039   

Prepaid expenses and other current assets

     4,533        2,875   
                

Total current assets

     39,844        35,200   
                

PROPERTY, PLANT AND EQUIPMENT:

    

Land and improvements

     59,823        59,768   

Building and improvements

     191,287        190,236   

Equipment, furniture and fixtures

     97,919        95,125   

Leasehold improvements

     3,201        3,201   

Construction in progress

     976        594   
                
     353,206        348,924   

Less accumulated depreciation

     (115,499     (106,278
                

Property, plant and equipment, net

     237,707        242,646   
                

OTHER NONCURRENT ASSETS:

    

Goodwill

     46,471        46,471   

Identifiable intangible assets, net

     7,380        8,173   

Debt issue costs, net

     6,190        5,695   

Investment in equity securities

     1,318        1,058   

Other assets

     1,409        1,406   
                

TOTAL

   $ 340,319      $ 340,649   
                

LIABILITIES AND STOCKHOLDER’S EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 8,344      $ 6,347   

Accrued expenses

     16,382        15,936   

Due to affiliates

     —          738   

Current portion of long-term debt and capital lease obligations

     3,328        2,117   
                

Total current liabilities

     28,054        25,138   

Long-term debt and capital lease obligations

     284,267        289,767   

Other noncurrent liabilities

     1,060        1,011   
                

Total liabilities

     313,381        315,916   
                

COMMITMENTS AND CONTINGENCIES (Note 5)

    

STOCKHOLDER’S EQUITY:

    

Class A Common stock $.01 par value; 1,800 shares authorized, 1,320 shares issued and outstanding as of June 30, 2010 and December 31, 2009

     —          —     

Class B Common stock $.01 par value; 200 shares authorized, 180 shares issued and outstanding as of June 30, 2010 and December 31, 2009

     —          —     

Additional paid-in capital

     27,843        28,843   

Accumulated deficit

     (905     (4,110
                

Total stockholder’s equity

     26,938        24,733   
                

TOTAL

   $ 340,319      $ 340,649   
                

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

REVENUES

        

Gaming:

        

Casino

   $ 36,549      $ 33,115      $ 70,505      $ 67,621   

Truck stop

     14,846        15,819        31,164        33,453   

Pari-mutuel

     8,254        9,152        14,629        17,483   

Food and beverage

     7,433        7,400        14,530        14,633   

Convenience store — fuel

     24,084        14,895        43,747        27,913   

Convenience store — other

     2,840        3,319        5,379        6,793   

Hotel

     1,054        854        1,835        1,672   

Other

     2,036        1,556        3,247        3,102   
                                

Total revenues

     97,096        86,110        185,036        172,670   

Less: Promotional allowances

     (8,920     (8,298     (17,791     (16,881
                                

Net revenues

     88,176        77,812        167,245        155,789   
                                

COSTS AND EXPENSES

        

Gaming:

        

Casino

     12,687        10,932        24,409        22,279   

Truck stop

     9,173        9,375        18,688        19,763   

Pari-mutuel

     6,379        7,323        11,151        13,470   

Food and beverage

     3,653        3,487        6,800        6,652   

Convenience store — fuel

     22,699        13,884        41,169        26,054   

Convenience store — other

     3,714        4,073        7,041        8,227   

Hotel

     102        221        379        389   

Marketing, general and administrative

     15,883        15,741        31,294        30,928   

Unrealized loss (gain) on change in fair value of investment in equity securities

     326        (1,302     (260     (667

Depreciation and amortization

     5,298        5,272        10,625        10,530   
                                

Total costs and expenses

     79,914        69,006        151,296        137,625   
                                

OPERATING INCOME

     8,262        8,806        15,949        18,164   

Interest income

     4        5        13        20   

Interest expense

     (6,480     (6,310     (12,757     (12,622
                                

NET INCOME.

   $ 1,786      $ 2,501      $ 3,205      $ 5,562   
                                

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(Dollars in Thousands)

 

     Common Stock    Additional
Paid-in
Capital
    Accumulated
Deficit
    Noncontrolling
Interest
   Total  
     Class A
Shares
   Class B
Shares
   Amount*          

BALANCES, JANUARY 1, 2010

   1,320    180    $ —      $ 28,843      $ (4,110   $ —      $ 24,733   

Distributions

              (1,000          (1,000

Net income**

                3,205           3,205   
                                                

BALANCES, JUNE 30, 2010

   1,320    180    $ —      $ 27,843      $ (905   $ —      $ 26,938   
                                                

 

     Common Stock    Additional
Paid-in
Capital
                   
     Class A
Shares
   Class B
Shares
   Amount*      Accumulated
Deficit
    Noncontrolling
Interest
    Total  

BALANCES, JANUARY 1, 2009

   1,320    180    $ —      $ 31,139      $ (5,815   $ 212      $ 25,536   

Capital contribution

              942            942   

Distributions

              (3,238         (3,238

Acquisition of noncontrolling interest

                  (212     (212

Net income**

                5,562          5,562   
                                                 

BALANCES, JUNE 30, 2009

   1,320    180    $ —      $ 28,843      $ (253   $ —        $ 28,590   
                                                 

 

* The par value amount of the Jacobs Entertainment, Inc. 1,320 shares of Class A common stock and 180 shares of Class B common stock outstanding for the periods presented is less than $500 and is therefore presented as $0 due to rounding.
** For the six months ended June 30, 2010, comprehensive income is equal to net income and is entirely attributable to the Jacobs Entertainment, Inc. stockholder.

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

     Six Months Ended
June 30,
 
     2010     2009  

OPERATING ACTIVITIES:

    

Net income

   $ 3,205      $ 5,562   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     10,625        10,530   

Unrealized gain on change in fair value of investment in equity securities

     (260     (667

Loss on disposal of equipment

     7        17   

Deferred financing cost amortization

     1,005        820   

Other

     4        4   

Changes in operating assets and liabilities, net of acquisitions:

    

Restricted cash

     (2,541     (3,385

Accounts receivable, net

     (331     (71

Inventory

     164        (167

Prepaid expenses and other assets

     (1,666     (1,167

Accounts payable

     2,734        (1,519

Accrued expenses and other noncurrent liabilities

     495        757   

Due from/to affiliates

     (484     (360
                

Net cash provided by operating activities

     12,957        10,354   
                

INVESTING ACTIVITIES:

    

Additions to property, plant and equipment

     (5,654     (8,031

Proceeds from sale of equipment

     138        283   

Purchases of device rights

     —          (841

Acquisition of noncontrolling interest

     —          (212
                

Net cash used in investing activities

     (5,516     (8,801
                

FINANCING ACTIVITIES:

    

Payments to obtain financing

     (1,500     (555

Borrowings on revolving line of credit

     13,000        17,713   

Payments on long-term debt

     (1,413     (674

Payments on revolving line of credit

     (16,000     (11,250

Distributions to stockholder

     (1,000     (3,238
                

Net cash (used in) provided by financing activities

     (6,913     1,996   
                

NET INCREASE IN CASH AND CASH EQUIVALENTS

     528        3,549   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     24,201        21,879   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 24,729      $ 25,428   
                

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 11,781      $ 11,620   
                

Non-cash investing and financing activities:

    

Capital contribution exchanged for retirement of liabilities paid by affiliate

   $ —        $ 942   
                

Non-cash additions to property

   $ 456      $ 2,039   
                

Acquisition of property under note payable agreement

   $ 120      $ —     
                

See notes to unaudited condensed consolidated financial statements.

 

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Table of Contents

JACOBS ENTERTAINMENT, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS)

 

1. BUSINESS AND ORGANIZATION

Jacobs Entertainment, Inc. (“JEI,” the “Company,” “us,” “our,” or “we”) was formed on April 17, 2001 to become a geographically diversified gaming and pari-mutuel wagering company with properties in Colorado, Nevada, Louisiana, and Virginia. We are a wholly-owned subsidiary of Jacobs Investments, Inc. (“JII”) and a Qualified Subchapter S-Corporation Subsidiary under the Internal Revenue Code of 1986, as amended. Jeffrey P. Jacobs, our Chief Executive Officer (“CEO”), and his family trusts own 100% of JII’s outstanding Class A and Class B shares. Our CEO and his affiliates are referred to herein as “Jacobs.” We have four reportable segments (Colorado, Nevada, Louisiana and Virginia), as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting. See Note 4.

As of June 30, 2010, we own and operate five casinos through wholly-owned subsidiaries. Our casinos include The Lodge Casino at Black Hawk (“The Lodge”) and the Gilpin Hotel Casino (“Gilpin”), both in Black Hawk, Colorado, the Gold Dust West-Reno (“Gold Dust West-Reno”) in Reno, Nevada, the Gold Dust West-Carson City (“Gold Dust West-Carson City”) in Carson City, Nevada and the Gold Dust West-Elko (“Gold Dust West-Elko”) in Elko, Nevada. JEI also owns and operates 18 truck plaza video gaming facilities in Louisiana, which are collectively referred to as “Jalou,” “truck stops” or “truck plazas.” We also receive a percentage of gaming revenue from an additional truck plaza video gaming facility. Finally, JEI owns and operates a horse racing track with nine satellite wagering facilities in Virginia through a wholly-owned subsidiary, Colonial Holdings, Inc. (“Colonial”).

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Condensed Consolidated Financial StatementsThe accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of our financial position as of June 30, 2010 and December 31, 2009, the results of our operations for the three and six months ended June 30, 2010 and 2009, and changes in stockholder’s equity and cash flows for the six months ended June 30, 2010 and 2009. All intercompany transactions and balances have been eliminated in consolidation. We have evaluated subsequent events through the date on which the financial statements are issued.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto in our Form 10-K report for the year ended December 31, 2009 filed with the U.S. Securities and Exchange Commission. Our significant accounting policies are discussed in detail in Note 2 to the financial statements contained in our Form 10-K report. The results of interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2010.

New Accounting Guidance New authoritative accounting guidance under FASB ASC Topic 810, Consolidation (“ASC Topic 810”), amends existing accounting literature to require an enterprise to perform an analysis to determine whether any variable interest held gives it a controlling financial interest in a variable interest entity and requires an ongoing reassessment of this nature. The standard also requires enhanced disclosures that will provide more transparent information about an entity’s involvement in a variable interest entity. The standard was effective for us on January 1, 2010. The adoption of this pronouncement did not have a material impact on our consolidated financial statements.

 

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Table of Contents
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

We test goodwill for impairment as of September 30 each year or when circumstances indicate it is necessary. Testing compares the estimated fair values of our reporting units to the reporting units’ carrying value. We consider a variety of factors when estimating the fair value of our reporting units, including estimates about future operating results of each reporting unit, multiples of EBITDA, investment banker market analyses, and recent sales of comparable business units if such information is available to us. A variety of estimates and judgments about the relevance and comparability of these factors to the reporting units are made. As of September 30, 2009, we believe the carrying value of the goodwill held in our reporting units was not impaired. There has been no change in the carrying amount of goodwill during 2010 or 2009.

In addition, as of June 30, 2010, we have reassessed the useful lives of our identifiable intangible assets without any change to the previously established amortization periods of such assets. Identifiable intangible assets as of June 30, 2010 and December 31, 2009, consist of the following:

 

     Weighted
Average
Remaining
Life
   June 30, 2010    December 31, 2009
        Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount

Amortizable intangible assets:

                    

Revenue rights

   41.50    $ 6,000    $ 1,020    $ 4,980    $ 6,000    $ 960    $ 5,040

Device use rights

   2.38      9,044      6,857      2,187      9,064      6,275      2,789

Restriction agreements

   2.60      1,369      1,156      213      1,369      1,025      344
                                            

Total

      $ 16,413    $ 9,033    $ 7,380    $ 16,433    $ 8,260    $ 8,173
                                            

Aggregate amortization expense of identifiable intangible assets was $386 and $432 for the three months ended June 30, 2010 and 2009, respectively, and $789 and $983 for the six months ended June 30, 2010 and 2009, respectively.

Estimated amortization expense for the years ending December 31:

 

2010 (remaining 6 months)

   $ 701

2011

     894

2012

     708

2013

     407

2014

     208

Thereafter

     4,462
      

Total

   $ 7,380
      

 

4. SEGMENTS

Our CEO is the chief operating decision maker. At June 30, 2010 and 2009, we have four segments representing the geographic regions of our operations. Each segment is managed separately because of the unique characteristics of its revenue stream and customer base. We have aggregated our operations into these four segments based on similarities in the nature of the properties’ businesses, customers and regulatory environment in which each property operates. The Colorado segment consists of The Lodge and Gilpin casinos. Our Nevada segment includes the Gold Dust West-Reno, Gold Dust West-Carson City and Gold Dust West-Elko casinos. The Louisiana operations consist of its truck plaza/video poker facilities, and the Virginia segment consists of Colonial’s pari-mutuel operations and its satellite wagering facilities.

The accounting policies of the segments are the same as those described in Note 2 above and those included in our Form 10-K report for the year ended December 31, 2009. The corporate adjustments, eliminations and other represent all other income and expenses, and are also presented.

 

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Table of Contents

As of and for the Three Months Ended June 30, 2010

 

     Colorado     Nevada     Louisiana     Virginia     Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

            

Gaming

            

Casino

   $ 27,387      $ 9,162            $ 36,549   

Truck stop

       $ 14,846            14,846   

Pari-mutuel

         $ 8,254          8,254   

Food and beverage

     3,053        2,367        1,342        671          7,433   

Convenience store — fuel

         24,084            24,084   

Convenience store — other

         2,840            2,840   

Hotel

     482        572              1,054   

Other

     255        325        819        536      $ 101        2,036   
                                                

Total revenues

     31,177        12,426        43,931        9,461        101        97,096   

Less: Promotional allowances

     (6,049     (1,662     (1,209         (8,920
                                                

Net revenues

   $ 25,128      $ 10,764      $ 42,722      $ 9,461      $ 101      $ 88,176   
                                                

Depreciation and amortization

   $ 1,698      $ 1,567      $ 1,249      $ 564      $ 220      $ 5,298   
                                                

Interest income

   $ —        $ —        $ 1      $ 3      $ —        $ 4   
                                                

Interest expense

   $ 2,167      $ 1,311      $ 1,054      $ 134      $ 1,814      $ 6,480   
                                                

Net income (loss)

   $ 4,731      $ (572   $ 2,716      $ (42   $ (5,047   $ 1,786   
                                                

EBITDA(1)

   $ 8,596      $ 2,306      $ 5,018      $ 653      $ (3,013   $ 13,560   
                                                

Goodwill

   $ 6,711      $ 8,836      $ 30,924          $ 46,471   
                                                

Identifiable intangible assets, net

       $ 7,380          $ 7,380   
                                                

Property, plant and equipment, net

   $ 89,450      $ 39,470      $ 39,353      $ 62,681      $ 6,753      $ 237,707   
                                                

Total assets

   $ 111,568      $ 55,769      $ 88,764      $ 71,596      $ 12,622      $ 340,319   
                                                

Long-term debt

   $ 84,770      $ 61,225      $ 51,089      $ 4,888      $ 82,295      $ 284,267   
                                                

Capital expenditures

   $ 913      $ 1,141      $ 487      $ 371      $ 122      $ 3,034   
                                                

 

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As of and for the Six Months Ended June 30, 2010

 

     Colorado     Nevada     Louisiana     Virginia     Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

            

Gaming

            

Casino

   $ 52,558      $ 17,947            $ 70,505   

Truck stop

       $ 31,164            31,164   

Pari-mutuel

         $ 14,629          14,629   

Food and beverage

     6,005        4,665        2,838        1,022          14,530   

Convenience store — fuel

         43,747            43,747   

Convenience store — other

         5,379            5,379   

Hotel

     956        879              1,835   

Other

     472        657        1,145        755      $ 218        3,247   
                                                

Total revenues

     59,991        24,148        84,273        16,406        218        185,036   

Less: Promotional allowances

     (11,965     (3,387     (2,439         (17,791
                                                

Net revenues

   $ 48,026      $ 20,761      $ 81,834      $ 16,406      $ 218      $ 167,245   
                                                

Depreciation and amortization

   $ 3,423      $ 3,112      $ 2,513      $ 1,108      $ 469      $ 10,625   
                                                

Interest income

   $ —        $ —        $ 9      $ 4      $ —        $ 13   
                                                

Interest expense

   $ 4,337      $ 2,597      $ 2,082      $ 281      $ 3,460      $ 12,757   
                                                

Net income (loss)

   $ 8,075      $ (1,684   $ 6,002      $ (219   $ (8,969   $ 3,205   
                                                

EBITDA(1)

   $ 15,835      $ 4,025      $ 10,588      $ 1,166      $ (5,040   $ 26,574   
                                                

Goodwill

   $ 6,711      $ 8,836      $ 30,924          $ 46,471   
                                                

Identifiable intangible assets, net

       $ 7,380          $ 7,380   
                                                

Property, plant and equipment, net

   $ 89,450      $ 39,470      $ 39,353      $ 62,681      $ 6,753      $ 237,707   
                                                

Total assets

   $ 111,568      $ 55,769      $ 88,764      $ 71,596      $ 12,622      $ 340,319   
                                                

Long-term debt

   $ 84,770      $ 61,225      $ 51,089      $ 4,888      $ 82,295      $ 284,267   
                                                

Capital expenditures

   $ 1,945      $ 1,704      $ 772      $ 970      $ 263      $ 5,654   
                                                

 

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As of and for the Three Months Ended June 30, 2009

(Balance Sheet Data as of December 31, 2009)

 

     Colorado     Nevada     Louisiana     Virginia     Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

            

Gaming

            

Casino

   $ 23,458      $ 9,657            $ 33,115   

Truck stop

       $ 15,819            15,819   

Pari-mutuel

         $ 9,152          9,152   

Food and beverage

     2,676        2,214        1,734        776          7,400   

Convenience store — fuel

         14,895            14,895   

Convenience store — other

         3,319            3,319   

Hotel

     288        566              854   

Other

     227        357        309        521      $ 142        1,556   
                                                

Total revenues

     26,649        12,794        36,076        10,449        142        86,110   

Less: Promotional allowances

     (5,059     (2,063     (1,176         (8,298
                                                

Net revenues

   $ 21,590      $ 10,731      $ 34,900      $ 10,449      $ 142      $ 77,812   
                                                

Depreciation and amortization

   $ 1,750      $ 1,500      $ 1,241      $ 553      $ 228      $ 5,272   
                                                

Interest income

   $ —        $ —        $ 1      $ 3      $ 1      $ 5   
                                                

Interest expense

   $ 2,177      $ 1,276      $ 1,012      $ 148      $ 1,697      $ 6,310   
                                                

Net income (loss)

   $ 3,215      $ (544   $ 2,787      $ (172   $ (2,785   $ 2,501   
                                                

EBITDA(1)

   $ 7,142      $ 2,232      $ 5,039      $ 526      $ (861   $ 14,078   
                                                

Goodwill

   $ 6,711      $ 8,836      $ 30,924          $ 46,471   
                                                

Identifiable intangible assets, net

       $ 8,173          $ 8,173   
                                                

Property, plant and equipment, net

   $ 91,585      $ 40,907      $ 40,294      $ 62,964      $ 6,896      $ 242,646   
                                                

Total assets

   $ 113,679      $ 57,580      $ 90,201      $ 67,847      $ 11,342      $ 340,649   
                                                

Long-term debt

   $ 84,981      $ 61,337      $ 51,115      $ 4,902      $ 87,432      $ 289,767   
                                                

Capital expenditures

   $ 2,988      $ 829      $ 638      $ 421      $ 219      $ 5,095   
                                                

 

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As of and for the Six Months Ended June 30, 2009

(Balance Sheet Data as of December 31, 2009)

 

     Colorado     Nevada     Louisiana     Virginia    Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

             

Gaming

             

Casino

   $ 48,385      $ 19,236             $ 67,621   

Truck stop

       $ 33,453             33,453   

Pari-mutuel

         $ 17,483        17,483   

Food and beverage

     5,343        4,391        3,654        1,245        14,633   

Convenience store — fuel

         27,913             27,913   

Convenience store — other

         6,793             6,793   

Hotel

     763        909               1,672   

Other

     433        713        884        800    $ 272        3,102   
                                               

Total revenues

     54,924        25,249        72,697        19,528      272        172,670   

Less: Promotional allowances

     (10,314     (4,295     (2,272          (16,881
                                               

Net revenues

   $ 44,610      $ 20,954      $ 70,425      $ 19,528    $ 272      $ 155,789   
                                               

Depreciation and amortization

   $ 3,476      $ 2,990      $ 2,550      $ 1,059    $ 455      $ 10,530   
                                               

Interest income

   $ —        $ —        $ 5      $ 12    $ 3      $ 20   
                                               

Interest expense

   $ 4,349      $ 2,545      $ 2,024      $ 296    $ 3,408      $ 12,622   
                                               

Net income (loss)

   $ 7,614      $ (1,397   $ 6,536      $ 230    $ (7,421   $ 5,562   
                                               

EBITDA(1)

   $ 15,439      $ 4,138      $ 11,105      $ 1,573    $ (3,561   $ 28,694   
                                               

Goodwill

   $ 6,711      $ 8,836      $ 30,924           $ 46,471   
                                               

Identifiable intangible assets, net

       $ 8,173           $ 8,173   
                                               

Property, plant and equipment, net

   $ 91,585      $ 40,907      $ 40,294      $ 62,964    $ 6,896      $ 242,646   
                                               

Total assets

   $ 113,679      $ 57,580      $ 90,201      $ 67,847    $ 11,342      $ 340,649   
                                               

Long-term debt

   $ 84,981      $ 61,337      $ 51,115      $ 4,902    $ 87,432      $ 289,767   
                                               

Capital expenditures

   $ 3,625      $ 1,430      $ 1,692      $ 737    $ 547      $ 8,031   
                                               

 

(1) EBITDA (earnings before interest, income taxes, depreciation and amortization) is presented as supplemental information in the tables above as it is a key measure of operating performance used by our chief operating decision maker. EBITDA can be reconciled directly to our unaudited condensed consolidated net income (loss) by adding the amounts shown for depreciation, amortization, income taxes and interest to net income (loss). This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States of America, such as net income (loss), nor should it be considered as an indicator of our overall financial performance. Our calculation of EBITDA may be different from the calculation used by other companies and comparability may be limited. Management believes that presentation of a non-GAAP financial measure such as EBITDA is useful because it allows holders of our debt and management to evaluate and compare our operating results from continuing operations from period to period in a meaningful and consistent manner in addition to standard GAAP financial measures. Management internally evaluates the performance of our segments using EBITDA measures as do most analysts following the gaming industry. EBITDA is also a key component of certain financial covenants in our debt agreements.

 

5. COMMITMENTS AND CONTINGENCIES

Commitments

Colonial has entered into an agreement with a totalisator company which provides wagering services and designs, programs, and manufactures totalisator systems for our pari-mutuel wagering applications. The basic terms of the agreement state that the totalisator company shall provide totalisator services to Colonial for all wagering held at Colonial’s facilities to 2012, and to provide replacement equipment for existing equipment, at a rate of .385% of handle up to $270,000 in handle. Handle above $270,000 will be charged a rate of .345%. The agreement also provides for a minimum charge per calendar year of $189. In addition, effective May 1, 2009, Colonial has entered into an agreement with a company which provides broadcasting and simulcasting equipment and services. The agreements for live racing broadcasting and simulcasting services at the horse racing track expires December 31, 2011. Total expense incurred for totalisator and broadcasting and simulcasting services was $217 and $222 for the three months ended June 30, 2010 and 2009, respectively, and $367 and $395 for the six months ended June 30, 2010 and 2009, respectively.

 

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The Interstate Horse Racing Act requires that we secure the consent of the Virginia Horsemen’s Benevolence and Protective Association (the “VaHBPA”) and the Virginia Harness Horse Association (“VHHA”) to export the simulcasting of races. These consents are usually contained in the agreement between each group and Colonial. We have an agreement with the VHHA that expires December 31, 2011 and an agreement with the VaHBPA that expires December 31, 2012.

JEI Distributing, LLC (“JEID”), a wholly-owned subsidiary of JEI, has entered into various fuel supply agreements with CITGO Petroleum Corporation (“CITGO”). The agreements provide for the purchase and sale of CITGO branded and unbranded gasoline and diesel fuel. On December 21, 2009, JEID and CITGO entered into a five-year Marketer Franchise Agreement (the “MFA”) which created a franchise relationship between JEID and CITGO and requires JEID to purchase at least 90% of certain listed monthly quantities of gasoline from CITGO in order to maintain the franchise and not be in violation of the MFA. Under the MFA, CITGO grants JEID, for the term of the MFA, the right to use CITGO’s applicable brand names, trademarks and other forms of CITGO’s identification, in the manner established by CITGO, in connection with the resale by JEID of products acquired under CITGO’s brand names. Additionally, on December 21, 2009, JEID and CITGO entered into an Unbranded Rack Sales Agreement (the “RSA”). Although the initial term of the RSA is five years followed by annual renewals, the RSA provides that either party may terminate the RSA, without cause, upon providing thirty days written notice. The RSA requires JEID to purchase at least 90% of certain listed monthly quantities of fuel from CITGO in order to qualify for CITGO’s rack posting pricing in effect and not be in violation of the RSA. The Addendum to Unbranded Rack Sales Agreement between JEID and CITGO, also dated December 21, 2009, amends the pricing for unbranded fuel under the RSA. The amended pricing equals the sum of the base price and an adder fee that is dependent on the location of the terminal where the product is delivered.

Operating Leases

Our operating leases include various land and building leases for certain properties in Nevada, Louisiana and Virginia, leases for office space in Colorado, Louisiana, Virginia and Florida, as well as leases for automobiles and other property and equipment at all locations, expiring at various dates. Total expense under these non-cancelable operating leases was $722 and $695 during the three months ended June 30, 2010 and 2009, respectively, and $1,471 and $1,458 for the six months ended June 30, 2010 and 2009, respectively.

Contingencies

We are involved in routine litigation arising in the ordinary course of our business pertaining to workers compensation claims, equal opportunity employment issues, or guest injury claims. All such claims are routinely turned over to our insurance providers. None of the claims is expected to have a material impact on our financial position, results of operations or cash flows. We believe these matters are covered by appropriate insurance policies.

 

6. RELATED PARTY TRANSACTIONS

JIMCO Management Agreement

In order to assist us in our efforts to research, develop, perform due diligence on and possibly acquire new gaming opportunities, we have an agreement with Jacobs Investments Management Co. Inc. (“JIMCO”), 82% of which is owned by Jeffrey P. Jacobs and the remaining 18% of which is owned in equal portions by two of his business associates. This agreement calls for $1,250 per year payable in two equal installments of $625 on January 1st and July 1st plus 2.5% of budgeted development costs for projects undertaken by us, if certain debt covenant ratios are met. Total expenses incurred under this agreement with JIMCO were $312 and $312 during the three months ended June 30, 2010 and 2009, respectively, and $625 and $625 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, these transactions resulted in net payables to affiliates totaling $0 and $625, respectively.

 

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Transactions with Affiliate Truck Stops

We allocate management, accounting and overhead costs incurred by JEI to various truck stops owned by Jacobs. These costs totaled $323 and $274 for the three months ended June 30, 2010 and 2009, respectively, and $613 and $568 for the six months ended June 30, 2010 and 2009, respectively. Additionally, to help JEI reach the fuel sale volume necessary to qualify for the reduced pricing structure under the CITGO contracts discussed in Note 5 above, JEI entered into agreements with affiliates to provide gasoline and diesel fuel at cost for their fuel operations, which totaled $2,967 and $4,469 for the three and six months ended June 30, 2010, respectively. These transactions result in receivables from and payables to our affiliates. As of June 30, 2010 and December 31, 2009, these transactions resulted in net receivables from affiliates totaling $344 and $390, respectively.

Jalou Device Owner, L.P.

Additionally, under Louisiana law, video poker machines must be owned by Louisiana residents. Through October 2009, the Jalou truck plaza video gaming facilities paid a fee to the third party owner of the machines in order to maintain the machines used in our truck plaza operations, plus reimbursement for the owner’s licensing costs and various other expenses. Beginning in November 2009, the ownership of the video poker machines and the related repair parts inventory used by the Jalou truck plazas was transferred from the third party owner to a related party, Jalou Device Owner, L.P. (“Device Owner”), of which Gameco Holdings, Inc. (“Gameco”), a wholly-owned subsidiary of JII, owns 49% and is its general partner. Two Louisiana residents own 51% and are the limited partners of Device Owner. The Jalou truck plazas pay 90 cents per operating video poker machine per day to Device Owner, plus reimbursement for the owner’s licensing costs. Total expense under these obligations was $325 and $272 for the three months ended June 30, 2010 and 2009, respectively, and $649 and $544 for the six months ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and December 31, 2009, the transfer of the repair parts inventory from us to Device Owner, ongoing repair parts purchased from Device Owner and device owner fees paid resulted in net receivables from affiliates totaling $361 and $588, respectively.

Other Related Party Transactions

As of June 30, 2010 and December 31, 2009, we also had various immaterial receivables from JII and other Jacobs affiliates totaling $57 and $34, respectively.

We also had payables to affiliates totaling $113 at December 31, 2009 due to the R.E. Jacobs Group, an affiliate, for JEI-related airplane usage during 2009. This payment was made during the first quarter of 2010.

Nautica Properties

During July 2006, we acquired from affiliated parties several options to lease and options to purchase six parcels of land and certain improvements on the west bank of the Cuyahoga River in Cleveland, Ohio. We refer to these properties, covering an aggregate of approximately 624,000 square feet of land (14.4 acres) and a building comprised of 47,380 square feet of net rentable space, as the Nautica Properties.

During March 2008, we exercised our option to acquire one of these parcels referred to as “Lot D.” On April 1, 2008, we purchased this parcel for $800. Additionally, on January 15, 2009, we exercised our option to acquire one of these parcels referred to as “Sugar Warehouse,” and on January 21, 2009, we purchased this parcel for $2,450 from the limited partnership that owned this building. An affiliate of our CEO owned 82% of the general partner interests and 16.4% of the limited partner interests of the seller. See Note 7 below.

On July 7, 2010, we exercised our option and entered into a purchase agreement with Flats Development, Inc. to acquire a certain parcel of real estate for $3,000 (comprised of a payment of $2,800 due upon closing and previously paid option payments totaling $200). Closing of the transaction is expected to occur on or before August 13, 2010. Flats Development, Inc. is owned by the mother of our CEO.

In July 2010, we amended three of the option agreements and extended the option period to July 11, 2012 giving us the right to purchase or enter into long-term leases on these remaining three parcels. The Nautica Properties currently require aggregate option payments totaling $150 per year. Our CEO owns varying interests in the three remaining parcels.

Although we may elect not to exercise all the options unless casino gaming opportunities arise, we nonetheless have the right to acquire all or part of the Nautica Properties for other purposes. If casino gaming is not legalized on the Nautica Properties but we decide to exercise our three remaining options, the aggregate annual lease payments on the remaining three parcels would be approximately $355. If all three remaining parcels are purchased and none leased, the total purchase price would be approximately $3,550, less any aggregate option payments previously made. The purchase price and rent payments would be increased based on independent appraisals of the land and improvement values if, in the future, casino gaming were to become legalized in Ohio and a casino is licensed on the Nautica Properties.

 

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On November 3, 2009, a constitutional amendment (“Issue 3”) was passed in Ohio which permits casino gaming at designated locations in Cincinnati, Cleveland, Columbus and Toledo. None of the designated locations is owned by JEI or its affiliates. We are currently evaluating the impact Issue 3 might have on our development efforts on the Nautica Properties in Ohio.

 

7. RECENT ACQUISITION ACTIVITY

Acquisition of Nautica Sugar Warehouse

As discussed in Note 6 above, on January 21, 2009, we acquired Sugar Warehouse for $2,450. Sugar Warehouse is a building comprised of 47,380 square feet of net rentable space with commercial tenants. The acquisition of Sugar Warehouse and its related business was accounted for as a combination of entities under common control. Therefore, the portion acquired from our CEO has been recorded at the historical cost bases in the assets and liabilities transferred and the portion acquired from third parties has been recorded at fair value at the acquisition date using the acquisition method of accounting in accordance with FASB ASC Topic 805, Business Combinations. A distribution of $2,238 was recorded on the acquisition date for the portion of the purchase price attributable to our CEO. Additionally, the net assets attributable to the noncontrolling interest holders have been reflected as a separate component of equity.

If casino gaming were to become legalized in Ohio within seven years from the purchase date and a for-profit casino is licensed on the Nautica Properties, the purchase price of Sugar Warehouse could increase based on independent appraisals of the land and improvement values. Any additional purchase price shall be equal to the fair market value of the property at the time that a license is issued to JEI in the State of Ohio for a for-profit casino less the purchase price previously paid. The fair market value shall be determined based upon the average of three independent appraisals prepared at that time. There is no maximum additional purchase price. We will continue to evaluate the fair value of this additional contingent purchase price at each balance sheet date throughout the term of the agreement. If applicable, any additional purchase price would be accounted for consistently with the original acquisition accounting, whereby the portion attributable to the related party would be accounted for as a combination of entities under common control and as a distribution, and the portion attributable to third parties would be accounted for using the acquisition method of accounting. At June 30, 2010, the fair value of the Sugar Warehouse contingent purchase price was immaterial to the financial position of JEI but could have a material impact in the future if and when gaming becomes legalized in Ohio and a casino license is granted for this site.

The following table summarizes the net assets acquired and liabilities assumed as of January 21, 2009, for the Sugar Warehouse acquisition considering both the portion acquired from our CEO and the noncontrolling interest holders:

 

     Sugar
Warehouse

Current assets

   $ 47

Property and equipment, net

     1,775
      

Total assets acquired

     1,822
      

Current liabilities assumed

     38

Other long-term liabilities

     63
      

Total liabilities assumed

     101
      

Net assets acquired

   $ 1,721
      

 

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The following schedule discloses the effects on JEI’s equity due to the change in ownership interest in Sugar Warehouse discussed above:

 

     Six Months Ended June 30,  
     2010    2009  

Net income attributable to JEI

   $ 3,205    $ 5,562   

Decrease in JEI’s equity for purchase of Sugar Warehouse noncontrolling interest

     —        (212
               

Change from net income attributable to JEI and purchase of the noncontrolling interest

   $ 3,205    $ 5,350   
               

For the three months ended June 30, 2010 and 2009, there is no impact to equity due to the change in ownership interest in Sugar Warehouse discussed above other than net income attributable to JEI.

Acquisition of Land and Land Options along the Gulf Coast of Mississippi

During 2008, we completed several land purchase transactions with owners of real estate along the Gulf Coast of Mississippi, resulting in total purchases of $3,047, including acquisition costs of $246. During January 2009, we completed one additional land purchase transaction at a total purchase price of $307.

During September 2008, we entered into two land purchase options totaling $160. During the second quarter of 2009, these two land purchase options were extended to July 1, 2010 for $200. These option agreements expired unexercised in June 2010. During November 2008, we entered into a third land purchase option totaling $100, which expired unexercised in May 2009.

We continue to conduct due diligence regarding the feasibility of developing and constructing a mixed use project which may include a licensed gaming establishment, a hotel, restaurant, condominiums, retail development and parking facilities. Our application filed with Hancock County, Mississippi, to rezone the property to waterfront district, as part of our plan to build a casino resort and hotel, was approved by the Planning Commission but denied by the Hancock County Board of Supervisors by a vote of 3 to 2 in April 2009. However, we continue to evaluate rezoning of the property, including the potential to file an amended application with Hancock County. The project is subject to all necessary approvals from the Mississippi Gaming Commission and the necessary financing.

 

8. LONG-TERM DEBT

We have issued senior unsecured notes in the amount of $210,000 bearing interest at 9 3/4% due June 15, 2014 with interest only payments due each June 15 and December 15. We also have a $100,000 senior secured credit facility consisting of: (i) a $40,000 revolving credit facility; (ii) a $40,000 six-year term loan facility; and (iii) a $20,000 six-year delayed draw term loan. Borrowings under our senior secured credit facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate, as defined, and (2) the federal funds rate plus  1/2 of 1% or (b) a LIBOR rate for the interest period relevant to such borrowing adjusted for certain costs. At June 30, 2010, the blended interest rate on our senior secured credit facility was approximately 3.45%. We have $1,900 of outstanding letters of credit as of June 30, 2010 resulting in $22,100 available on the revolving credit facility.

Our $210,000 of 9 3/4% senior unsecured notes rank equally in right of payment with all of our existing and future unsecured senior indebtedness and senior to any existing and future subordinated indebtedness. The notes are effectively subordinated to any secured indebtedness (including indebtedness under our senior credit facility) up to the value of the collateral securing such indebtedness. The notes are guaranteed by our current and future restricted subsidiaries that also guarantee our senior credit facility. Beginning June 15, 2010, we can redeem all or part of our outstanding senior unsecured notes aggregating $210,000 at the redemption prices set forth below, plus accrued and unpaid interest. The redemption prices, expressed as a percentage of the principal amount, for the 12-month period beginning on June 15 of the years indicated below are as follows:

 

Year

   Percentage  

2010

   104.875

2011

   102.438

2012 and thereafter

   100.000

 

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Table of Contents

There are many restrictions and covenants placed upon us under both our secured and unsecured indebtedness. We are required to maintain certain operating performance ratios, our covenants impose various restrictions on us as to the timing of redemptions of our notes, there are various change of control covenants, and there are many other restrictive and operational limitations on us that would be difficult or impossible for us to change. The occurrence of any one of these events and/or covenant violations to our debt agreements could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under our debt agreements. The failure to repay or maintain compliance with our covenants on any of our indebtedness would result in an event of default under both our senior credit facility and our indenture.

On March 31, 2010, we entered into an Amendment and Restatement Agreement (the “Amendment”) to the credit agreement. Generally, the Amendment, among other things, adjusted our bank financial covenants, allowed for the exclusion of certain items from EBITDA for purposes of calculating our revised financial covenants, and other minor amendments. Additionally, all but $3,000 of our revolving senior credit facility aggregating $40,000 due June 2011 (“Class B Revolving Loans”) was extended to June 2012 (“Class A Revolving Loans”). We have the ability to raise an additional $3,000 to fully replace the revolver capacity should we so choose.

As a result of the Amendment, our interest rate increased by 0.25% on the drawn Class B Revolving Loans balance and by 0.50% on the drawn Class A Revolving Loans balance, and our interest rate on the Tranche B Term Loan and Delayed Draw Tranche B Term Loan (aggregating $57,650 at June 30, 2010) increased from 2.75% above LIBOR to 3.00% above LIBOR. The total cost of the Amendment, including the bank consent fees, the fees to Credit Suisse Securities (USA) LLC (the Joint Lead Arrangers) and legal, accounting and other costs was $1,982. Of these costs, $1,500 will be amortized to interest expense over the remaining life of the credit facility which is approximately 2 years and the remainder was expensed as incurred. At June 30, 2010, we were in compliance with our financial covenants.

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Effective January 1, 2008, we adopted the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) for all financial and nonfinancial assets and liabilities measured at fair value on a recurring basis. Effective January 1, 2009, we adopted the provisions of ASC Topic 820 pertaining to nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities. The guidance establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes market or observable inputs as the preferred sources of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The guidance establishes a hierarchy for grouping these assets and liabilities, based on the significance level of the following inputs:

 

   

Level 1 — inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

 

   

Level 2 — inputs include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

   

Level 3 — inputs are unobservable and considered significant to the fair value measurement.

A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Investment in Equity Securities

During 2006, we acquired approximately three percent of the outstanding shares of MTR Gaming Group, Inc. (“MTR”), a publicly-traded gaming company. Our CEO, Jeffrey P. Jacobs, his father, as well as other entities affiliated with them, also invested in MTR, increasing their combined ownership to 18.5% of the outstanding common shares of MTR, making the group MTR’s largest shareholder. Effective May 6, 2008, our CEO was appointed to the Board of Directors of MTR, and effective October 31, 2008, he was appointed Chairman and three of his nominees were added as Board members. On June 5, 2009, our CEO’s father died and on July 31, 2009, a trust established by our CEO was bequeathed the shares formerly held by his father. As a result, our CEO and his family trusts now control the entire 18.5% interest in MTR. Effective March 12, 2010, our CEO resigned from MTR’s Board of Directors.

 

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The fair value of our investment in MTR is based entirely upon quoted market prices, which is a Level 1 input. As of June 30, 2010 and December 31, 2009, the fair value of our investment in MTR was $1,318 and $1,058, respectively. We have elected the fair value option permitted by FASB ASC Topic 825, Financial Instruments (“ASC Topic 825”), and therefore, we recognize changes in the fair value of our investment in MTR as unrealized gains/losses in earnings based on its quoted market price. We recorded an unrealized loss (gain) on the change in the fair value of the investment totaling $326 and $(1,302) for the three months ended June 30, 2010 and 2009, respectively, and $(260) and $(667) for the six months ended June 30, 2010 and 2009, respectively.

Other Financial Instruments

The following disclosure of estimated fair value of our financial instruments has been determined 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. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The estimated fair value of our financial instruments is as follows:

 

     As of
June 30, 2010
   As of
December 31, 2009
          Estimated         Estimated
     Carrying    Fair    Carrying    Fair
     Amount    Value    Amount    Value

Liabilities—Debt and capital lease obligations

   $ 287,595    $ 268,359    $ 291,884    $ 283,961

The estimation methodologies utilized are summarized as follows:

Debt—The fair value of our variable rate debt is estimated to be equal to its carrying amount. The fair value of our senior unsecured notes is based upon quoted market rates. The fair value of other fixed rate debt is estimated based on a discounted cash flow analysis, using the prevailing market interest rates for debt of similar dollar amount, maturity and risk.

The estimated fair value of our other financial instruments, such as cash and cash equivalents, accounts receivable and accounts payable, have been determined to approximate carrying value based on the short-term nature of those financial instruments.

 

10. ACCRUED EXPENSES

Accrued expenses as of June 30, 2010 and December 31, 2009, include the following:

 

     June 30,
2010
   December 31,
2009

Payroll and related

   $ 3,819    $ 3,886

Gaming taxes payable

     2,037      3,213

Interest payable

     927      941

Property taxes payable

     1,147      1,060

Slot club liability

     1,331      1,169

Progressive jackpot liability

     1,216      1,381

Purses due horsemen

     2,270      598

Other

     3,635      3,688
             
   $ 16,382    $ 15,936
             

 

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11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

On June 16, 2006, we completed a debt refinancing in the form of secured and unsecured indebtedness. The secured portion of our indebtedness, which was with a bank syndicate group, consists of a $100,000 senior secured credit facility consisting of: (i) a $40,000 revolving credit facility; (ii) a $40,000 six-year term loan facility; and (iii) a $20,000 six-year delayed draw term loan. The unsecured portion of our debt is in the form of $210,000 of 9 3/4 % unsecured senior notes. The senior secured credit facility and the unsecured senior notes are both guaranteed by our current and future restricted subsidiaries. Each subsidiary guarantor is 100% owned by the parent company, all guarantees are full and unconditional and joint and several, and all subsidiaries of JEI guarantee the securities.

The following information sets forth our Unaudited Condensed Consolidating Balance Sheets as of June 30, 2010 and December 31, 2009, the Unaudited Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2010 and 2009, and the Unaudited Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2010 and 2009 as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended. Investments in our subsidiaries are accounted for on the equity method. Accordingly, entries necessary to consolidate the Parent Company Issuer and our Subsidiary Guarantors are reflected in the eliminations column.

 

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JACOBS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JUNE 30, 2010

 

     Parent
Company
Issuer
    Subsidiary
Guarantors
   Eliminations     Consolidated

ASSETS

         

Current assets

   $ 749      $ 39,095      $ 39,844

Property, plant and equipment, net

     1,118        236,589        237,707

Net investment in and advances to subsidiaries

     106,172         $ (106,172     —  

Other long-term assets

     4,832        57,936        62,768
                             

Total assets

   $ 112,871      $ 333,620    $ (106,172   $ 340,319
                             

LIABILITIES AND EQUITY

         

Current liabilities

   $ 3,763      $ 24,291      $ 28,054

Long-term debt

     281,050        3,217        284,267

Long-term debt (receivable from) payable to affiliate

     (198,882     198,882        —  

Other long-term liabilities

     2        1,058        1,060

Stockholder’s equity

     26,938        106,172    $ (106,172     26,938
                             

Total liabilities and equity

   $ 112,871      $ 333,620    $ (106,172   $ 340,319
                             

AS OF DECEMBER 31, 2009

 

     Parent
Company
Issuer
    Subsidiary
Guarantors
   Eliminations     Consolidated

ASSETS

         

Current assets

   $ 644      $ 34,556      $ 35,200

Property, plant and equipment, net

     1,404        241,242        242,646

Net investment in and advances to subsidiaries

     109,449         $ (109,449     —  

Other long-term assets

     3,655        59,148        62,803
                             

Total assets

   $ 115,152      $ 334,946    $ (109,449   $ 340,649
                             

LIABILITIES AND EQUITY

         

Current liabilities

   $ 3,023      $ 22,115      $ 25,138

Long-term debt

     286,569        3,198        289,767

Long-term debt (receivable from) payable to affiliate

     (199,182     199,182        —  

Other long-term liabilities

     9        1,002        1,011

Stockholder’s equity

     24,733        109,449    $ (109,449     24,733
                             

Total liabilities and equity

   $ 115,152      $ 334,946    $ (109,449   $ 340,649
                             

 

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JACOBS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2010

 

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations     Consolidated  

Net revenues

     $ 88,176        $ 88,176   

Costs and expenses

   $ (3,154     (76,760       (79,914

Interest expense, net

     (1,415     (5,061       (6,476

Equity in earnings of subsidiaries

     6,355        $ (6,355     —     
                                

Net income

   $ 1,786      $ 6,355      $ (6,355   $ 1,786   
                                

 

FOR THE THREE MONTHS ENDED JUNE 30, 2009

 

  

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations     Consolidated  

Net revenues

     $ 77,812        $ 77,812   

Costs and expenses

   $ (1,033     (67,973       (69,006

Interest expense, net

     (1,298     (5,007       (6,305

Equity in earnings of subsidiaries

     4,832        $ (4,832     —     
                                

Net income

   $ 2,501      $ 4,832      $ (4,832   $ 2,501   
                                

 

FOR THE SIX MONTHS ENDED JUNE 30, 2010

 

  

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations     Consolidated  

Net revenues

     $ 167,245        $ 167,245   

Costs and expenses

   $ (5,344     (145,952       (151,296

Interest expense, net

     (2,668     (10,076       (12,744

Equity in earnings of subsidiaries

     11,217        $ (11,217     —     
                                

Net income

   $ 3,205      $ 11,217      $ (11,217   $ 3,205   
                                

 

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

  

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations     Consolidated  

Net revenues

     $ 155,914      $ (125   $ 155,789   

Costs and expenses

   $ (4,002     (133,748     125        (137,625

Interest expense, net

     (2,613     (9,989       (12,602

Equity in earnings of subsidiaries

     12,177          (12,177     —     
                                

Net income

   $ 5,562      $ 12,177      $ (12,177   $ 5,562   
                                

 

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JACOBS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

 

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations    Consolidated  

Net cash provided by operating activities

   $ 7,628      $ 5,329      $      $ 12,957   
                               

INVESTING ACTIVITIES:

         

Additions to property, plant and equipment

     (101     (5,553        (5,654

Proceeds from sale of equipment

       138           138   
                               

Net cash used in investing activities

     (101     (5,415        (5,516
                               

FINANCING ACTIVITIES:

         

Payments to obtain financing

     (1,500          (1,500

Proceeds from revolving line of credit

     13,000             13,000   

Payments on long-term debt

     (203     (1,210        (1,413

Payments on revolving line of credit

     (16,000          (16,000

Net advances to/from subsidiaries

     (1,770     1,770           —     

Distributions to stockholder

     (1,000          (1,000
                               

Net cash (used in) provided by financing activities

     (7,473     560           (6,913
                               

Net Increase in Cash and Cash Equivalents

     54        474           528   

Cash and Cash Equivalents — Beginning of Period

     191        24,010           24,201   
                               

Cash and Cash Equivalents — End of Period

   $ 245      $ 24,484      $      $ 24,729   
                               

 

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

  

     Parent
Company
Issuer
    Subsidiary
Guarantors
    Eliminations    Consolidated  

Net cash provided by operating activities

   $ 3,296      $ 7,058      $      $ 10,354   
                               

INVESTING ACTIVITIES:

         

Additions to property, plant and equipment

     (31     (8,000        (8,031

Proceeds from sale of equipment

       283           283   

Purchases of device rights

       (841        (841

Acquisition of noncontrolling interest

     (212          (212
                               

Net cash used in investing activities

     (243     (8,558        (8,801
                               

FINANCING ACTIVITIES:

         

Payments to obtain financing

     (555          (555

Proceeds from revolving line of credit

     17,713             17,713   

Payments on long-term debt

     (202     (472        (674

Payments on revolving line of credit

     (11,250          (11,250

Net advances to/from subsidiaries

     (5,644     5,644           —     

Distributions to stockholder

     (3,238          (3,238
                               

Net cash (used in) provided by financing activities

     (3,176     5,172           1,996   
                               

Net (Decrease) Increase in Cash and Cash Equivalents

     (123     3,672           3,549   

Cash and Cash Equivalents — Beginning of Period

     487        21,392           21,879   
                               

Cash and Cash Equivalents — End of Period

   $ 364      $ 25,064      $      $ 25,428   
                               

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This section discusses the results of our operations for the three and six months ended June 30, 2010 and 2009. We recommend reading the following discussions and analyses in conjunction with our unaudited condensed consolidated financial statements, including the notes and other financial information contained in this Form 10-Q, as well as our audited consolidated financial statements as of December 31, 2009, included in our Form 10-K report filed with the Securities and Exchange Commission (“10-K Report”). Certain statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations constitute “forward-looking statements,” which statements involve risks and uncertainties. In this regard, see the section “Risk Factors” in Item 1A of our 10-K Report.

The historical information should not necessarily be taken as a reliable indicator of our future performance.

TABLE OF CONTENTS TO MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (MD&A)

 

Description of item

    

1.

   Significant transactions occurring during 2010    23

2.

   Overview and discussion of our operations    23

3.

   Comparison of our results of operations for the three months ended June 30, 2010 to the three months ended June 30, 2009    26

4.

   Comparison of our results of operations for the six months ended June 30, 2010 to the six months ended June 30, 2009    28

5.

   Segment information    30

6.

   Liquidity and capital resources    34

7.

   Critical accounting policies and estimates    36

1. Significant transactions occurring during 2010

Amendment to Credit Agreement

On March 31, 2010, we entered into an Amendment and Restatement Agreement (the “Amendment”) to the credit agreement. Generally, the Amendment, among other things, adjusted our bank financial covenants, allowed for the exclusion of certain items from EBITDA for purposes of calculating our revised financial covenants, and other minor amendments. Additionally, all but $3.0 million of our revolving senior credit facility aggregating $40.0 million due June 2011 (“Class B Revolving Loans”) was extended to June 2012 (“Class A Revolving Loans”). We have the ability to raise an additional $3.0 million to fully replace the revolver capacity should we so choose.

As a result of the Amendment, our interest rate increased by 0.25% on the drawn Class B Revolving Loans balance and by 0.50% on the drawn Class A Revolving Loans balance, and our interest rate on the Tranche B Term Loan and Delayed Draw Tranche B Term Loan (aggregating $57.7 million at June 30, 2010) increased from 2.75% above LIBOR to 3.00% above LIBOR. The total cost of the Amendment, including the bank consent fees, the fees to Credit Suisse Securities (USA) LLC (the Joint Lead Arrangers) and legal, accounting and other costs was approximately $2.0 million. Of these costs, $1.5 million will be amortized to interest expense over the remaining life of the credit facility which is approximately 2 years and the remainder were expensed as incurred. At June 30, 2010, we were in compliance with our financial covenants.

Nautica Properties

In July 2010, we amended three of the option agreements and extended the option period to July 11, 2012 giving us the right to purchase or enter into long-term leases on these remaining three parcels. Additionally, on July 7, 2010, we exercised the option and entered into a purchase agreement with Flats Development, Inc. to acquire a certain parcel of real estate for $3.0 million (comprised of a payment of $2.8 million due upon closing and previously paid option payments totaling $0.2 million). Closing of the transaction is expected to occur on or before August 13, 2010. Flats Development, Inc. is owned by the mother of our CEO. Our CEO owns varying interests in the three remaining Nautica Property parcels.

2. Overview and discussion of our operations

We have four segments representing the geographic regions of our operations: Colorado, Nevada, Louisiana and Virginia. Each segment is managed separately because of the unique characteristics of its revenue stream, regulatory environment and customer base.

 

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Our Chief Executive Officer (“CEO”) is the chief operating decision maker. Our casino properties in Colorado (The Lodge and Gilpin casinos) and Nevada (the Gold Dust West-Reno, Gold Dust West-Carson City and Gold Dust West-Elko casinos) are managed by our Chief Operating Officer (“COO”) who is located in our Golden, Colorado corporate offices. Our 18 video poker truck plaza operations are also managed by our COO. Our COO reports to our President, who is also located in Golden, Colorado. Our President reports directly to our CEO. Our Virginia racetrack and satellite wagering facilities are managed by our on-site President of Pari-Mutuel Operations, and he reports directly to our CEO.

When we analyze and manage our segments, we focus on several measurements that we believe provide us with the necessary ratios and key performance indicators for us to determine how we are performing versus our competition and against our own internal goals and budgets. We confer monthly and discuss and analyze significant variances in an effort to identify trends and changes in our business. We focus on EBITDA (earnings before interest, income taxes, depreciation and amortization) as one of the primary measurements of reviewing and analyzing the operating results of each segment. While we recognize that EBITDA is not a generally accepted accounting principle (i.e. it is a non-GAAP financial measure), we nonetheless believe it is useful because it allows holders of our debt and management to evaluate and compare operating results from continuing operations from period to period in a meaningful and consistent manner in addition to standard GAAP financial measures. Additionally, most financial analysts following the gaming industry utilize EBITDA as a financial measurement, and when our debt holders (both secured and unsecured) inquire and discuss our operational performance with us, they consistently inquire about our EBITDA performance levels versus the prior year as well as our EBITDA margins versus our competitors. Finally, EBITDA is a key component of certain financial covenants contained in our debt agreements, among other things, and as such it is a critical ingredient that we must watch in order to ensure compliance with our bank credit agreement and our note indenture covenants, measure our historical operating performance, and determine our ability to achieve future growth.

In addition to the above performance measurements, we pay particular attention to our monthly and annual cash flow. Our business is sensitive to shifts in volumes and levels of activity and we find it necessary to watch our cash closely. Every six months (June 15 and December 15) we have a cash interest payment due on our $210 million senior unsecured notes amounting to $10.2 million. Additionally, we have drawn $60 million on our senior secured credit facility with interest due at varying levels. We have a $40 million revolving loan with a bank group on which we can draw as needed in order to augment the cash flow we generate from operations. This is generally a function of the timing of generating cash from operations coupled with the amount of cash we need to run the business—i.e., our cash inventory. Presently, we estimate that we require approximately $15 million of cash inventory to operate our properties. See “Liquidity and Capital Resources.”

Colorado

Our Colorado operations consist of The Lodge Casino at Black Hawk (“The Lodge”) and the Gilpin Casino (“Gilpin”), both of which are located in Black Hawk, Colorado. The competitive aspects of the market in Black Hawk continue to be a significant factor in our operations. At June 30, 2010, there were approximately 8,700 slot machines in the city of Black Hawk. We had 1,360 slot machines in this market (966 at The Lodge and 394 at the Gilpin), which represented approximately 16% of the total slot machines in Black Hawk. Additionally, there were 182 table games in the city of Black Hawk. We had 41 table games in this market (35 at The Lodge and 6 at the Gilpin), which represented approximately 23% of the total table games in Black Hawk. On March 15, 2010, we closed the Gilpin poker room.

New gaming regulation, which became effective on July 2, 2009 at Colorado casinos, allowed for the introduction of craps and roulette, increased the maximum wager limit to $100, and allows for 24-hour gaming operations. During 2009, our Colorado properties were affected by a number of events related to preparing our properties to take advantage of the higher limits, new games and extended hours. We reduced the slot machine count to accommodate the addition of table games. Our casino floors at both The Lodge and Gilpin were disrupted during the second quarter of 2009 to install new carpet, additional surveillance and new table games. On September 9, 2009, we began a construction project to expand our casino floor space at The Lodge. The project was completed November 16, 2009.

Nevada

Our Nevada operations consist of Gold Dust West-Reno, located in Reno, Nevada, which was acquired on January 5, 2001; Gold Dust West-Carson City, located in Carson City, Nevada, which was acquired on June 25, 2006; and Gold Dust West-Elko, located in Elko, Nevada, which we developed and opened on March 5, 2007. As in Colorado, our Nevada casinos operate in highly competitive markets. As a result of the added competition from Indian Gaming in California, many Northern Nevada casinos advertise themselves as “locals’ casinos.”

 

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Louisiana

The Louisiana truck plaza video gaming facilities consist of 18 truck plazas located in Louisiana and a share in the gaming revenues of an additional truck plaza. Each truck plaza features a convenience store, fueling operations, a restaurant and up to 50 video gaming devices in the casino depending on the level of fuel sales and available space. At June 30, 2010, our truck plaza video gaming facilities had a combined total of 944 video gaming devices.

The Louisiana truck plazas’ revenues are comprised of: (i) revenue from video poker gaming machines; (ii) sales of gasoline and diesel fuel; (iii) sales of groceries, trucker supplies and sundry items through their convenience stores; (iv) sales of food and beverages in their restaurants and bars; and (v) miscellaneous commissions on ATMs, pay phones and lottery sales.

All video poker activity is reported via a computer phone line directly to the Louisiana State Police. The Louisiana truck plazas’ revenues are dependent on meeting the minimum gallons of fuel sales requirements necessary to operate video poker gaming machines in Louisiana. The fuel sales requirements must be complied with on an annual basis (except for the first year of operations during which it must be complied with on a quarterly basis) and in the event of noncompliance, the Louisiana State Police will turn off a portion of the video poker machines until the minimum fuel sales requirements are met. Management of the Louisiana truck plazas believes that they will continue to meet the fuel sales requirements necessary to operate video poker gaming machines in Louisiana at current levels, however, we can give no assurances in this regard.

Virginia

Colonial’s revenues are comprised of: (i) pari-mutuel commissions from wagering on races broadcast from out-of-state racetracks to Colonial’s satellite wagering facilities and the track using import simulcasting; (ii) wagering at the track and Colonial’s satellite wagering facilities of its live races; (iii) commissions from advance deposit account wagering by telephone and over the internet; (iv) admission fees, program and racing form sales, and certain other ancillary deposit account activities; and (v) net income from food and beverage sales and concessions.

Colonial’s revenues are heavily dependent on the operations of its satellite wagering facilities. Revenues from the satellite wagering facilities help support live racing at the track. The amount of revenue Colonial earns from each wager depends on where the race is run. Revenues from import simulcasting of out-of-state races and from wagering at the track and at the satellite wagering facilities on races run at the track consist of the total amount wagered at Colonial’s facilities, less the amount paid as winning wagers. The percentage of each dollar wagered on horse races that must be returned to the public as winning wagers (typically about 79%) is legislated by the state in which a race takes place. Revenues from export simulcasting consist of amounts payable to Colonial by the out-of-state racetracks and their simulcast facilities with respect to wagering on races run at the track.

On April 28, 2010, we opened a satellite wagering facility in Henrico County, Virginia. As of June 30, 2010, we operate nine satellite wagering facilities in Virginia.

 

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3. Comparison of our results of operations for the three months ended June 30, 2010 to the three months ended June 30, 2009.

The following table summarizes our consolidated results of operations for the three months ended June 30, 2010 and 2009 (dollars in thousands):

 

     Three Months Ended
June 30,
             
     2010     2009     $ Change     % Variance  

REVENUES

        

Gaming:

        

Casino

   $ 36,549      $ 33,115      $ 3,434      10.37

Truck stop

     14,846        15,819        (973   -6.15

Pari-mutuel

     8,254        9,152        (898   -9.81

Food and beverage

     7,433        7,400        33      0.45

Convenience store – fuel

     24,084        14,895        9,189      61.69

Other

     5,930        5,729        201      3.51

Less: Promotional allowances

     (8,920     (8,298     (622   7.50
                              

Net revenues

     88,176        77,812        10,364      13.32
                              

COSTS AND EXPENSES

        

Gaming:

        

Casino

     12,687        10,932        1,755      16.05

Truck stop

     9,173        9,375        (202   -2.15

Pari-mutuel

     6,379        7,323        (944   -12.89

Food and beverage

     3,653        3,487        166      4.76

Convenience store – fuel

     22,699        13,884        8,815      63.49

Other

     3,816        4,294        (478   -11.13

Marketing, general and administrative

     15,883        15,741        142      0.90

Unrealized loss (gain) on change in fair value of investment in equity securities

     326        (1,302     1,628      n/a   

Depreciation and amortization

     5,298        5,272        26      0.49
                              

Total costs and expenses

     79,914        69,006        10,908      15.81
                              

OPERATING INCOME

     8,262        8,806        (544   -6.18

Interest expense, net

     (6,476     (6,305     (171   2.71
                              

NET INCOME

   $ 1,786      $ 2,501      $ (715   -28.59
                              

All comparisons below begin with the second quarter 2010 results followed by the second quarter 2009 results.

Casino revenues increased $3.4 million or 10% to $36.5 million from $33.1 million. The increase in casino revenues is due to increases at The Lodge of $3.6 million or 19%, at the Gilpin of $0.3 million or 7%, and Gold Dust West-Carson City of $0.1 million or 2%, somewhat offset by a decrease at Gold Dust West-Reno of $0.6 million or 12%. Revenues at The Lodge increased primarily due to Amendment 50 becoming effective July 2, 2009 which resulted in an increase in table games revenues in 2010 compared to 2009. Amendment 50 seems to be benefiting the larger casino properties in Black Hawk. Overall, the City of Black Hawk casino win increased by 16% during the second quarter of 2010 compared to the same period of 2009. Gold Dust West-Reno continues to be negatively impacted by continued market declines.

Truck stop gaming revenues decreased $1.0 million or 6% to $14.8 million from $15.8 million. The decrease in revenues was experienced at nearly all of our truck stop locations and is consistent with the statewide truck stop video gaming revenue decline of 5% resulting from the continued general economic conditions, including higher unemployment and decreased disposable income, for the second quarter of 2010 compared to the same period of 2009.

 

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Pari-mutuel revenues decreased $0.9 million or 10% to $8.3 million from $9.2 million. The decrease in revenues is attributable to a $0.7 million decrease in wagering revenues at the off track wagering facilities primarily due to a decrease in overall attendance compared to the prior year, combined with a $0.2 million decrease in account wagering revenues.

Food and beverage revenues increased less than $0.1 million to $7.4 million. This increase is attributable to increases of $0.4 million at The Lodge and $0.1 million at Gold Dust West-Carson City, offset by decreases of $0.4 million at the truck stops and $0.1 million at Colonial due to the lower level of gaming activity.

Convenience store-fuel revenues increased $9.2 million or 62% to $24.1 million from $14.9 million. This resulted from the average selling price of fuel increasing to $2.73 per gallon in 2010 from $2.20 per gallon in 2009, combined with a 30% increase in volume. In December 2009, JEI entered into a fuel supply agreement with CITGO Petroleum Corporation. To help JEI reach the fuel sale volume necessary to qualify for the reduced pricing structure under the CITGO contract, JEI entered into agreements with affiliates to provide fuel at cost for their fuel operations. The increase in fuel sales volume for this period was primarily due to the new affiliate agreements. The increase in fuel sales associated to the new affiliate agreements was $2.9 million during the second quarter of 2010.

Other revenues increased $0.2 million or 4% to $5.9 million from $5.7 million and was primarily attributable to a one-time oil and gas royalty received in April 2010 totaling $0.5 million at the truck stops and an increase in hotel revenues totaling $0.2 million at The Lodge, somewhat offset by a $0.5 million decrease in convenience store revenues at the truck stops.

Promotional allowances increased $0.6 million or 7% to $8.9 million from $8.3 million, and is primarily attributable to an increase in promotional allowances of $1.0 million at The Lodge, somewhat offset by a decrease of $0.4 million at Gold Dust West-Reno.

Casino expenses increased $1.8 million or 16% to $12.7 million from $10.9 million. Increases of $1.6 million at The Lodge, $0.2 million at the Gilpin and $0.1 million at Gold Dust West-Carson City were consistent with the increase in casino revenues at these locations. Additionally, the increases at our Colorado properties were due to additional staffing for the table games and extended hours combined with increased gaming taxes resulting from an increase in casino revenues. These increases were somewhat offset by a decrease totaling $0.1 million at Gold Dust West-Elko.

Truck stop gaming expenses decreased $0.2 million or 2% to $9.2 million from $9.4 million and is primarily due to direct costs associated with decreased truck stop video poker gaming revenues.

Pari-mutuel costs and expenses decreased $0.9 million or 13% to $6.4 million from $7.3 million. The decrease is attributable to decreased direct costs resulting from decreased pari-mutuel revenues combined with a $0.4 million decrease in account wagering costs due to revised profit sharing agreements with horsemen’s groups.

Food and beverage costs and expenses increased $0.2 million or 5% to $3.7 million from $3.5 million, and is due to increases of $0.2 million at The Lodge, $0.1 million at Gold Dust West-Carson City and $0.1 million at Gold Dust West-Elko, somewhat offset by a decrease of $0.2 million at the truck stops.

Convenience store-fuel expenses increased $8.8 million or 63% to $22.7 million from $13.9 million. The increase was primarily due to an increase in the average cost of fuel to $2.57 per gallon in 2010 from $2.05 per gallon in 2009, combined with an increase in volume as discussed in convenience store-fuel revenues above. The increase in fuel costs associated to the new affiliate agreements was $2.9 million during the second quarter of 2010.

Other costs and expenses decreased $0.5 million or 11% to $3.8 million from $4.3 million, and were primarily attributable to a $0.4 million decrease in convenience store expenses at the truck stops corresponding to the decrease in convenience store revenues, combined with a $0.1 million decrease in hotel expenses at The Lodge.

Marketing, general and administrative expenses increased $0.1 million or 1% to $15.9 million from $15.7 million. This increase is primarily the result of $0.2 million for political contributions, $0.2 million for travel expenses at corporate and $0.2 million at The Lodge. These increases are somewhat offset by decreases of $0.1 million at Gold Dust West-Reno, $0.1 million at Gold Dust West-Carson City, $0.1 million at Colonial and $0.2 million at the truck stops.

 

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We account for our investment in MTR Gaming Group, Inc. (“MTR”) as an equity security, in accordance with the fair value option permitted by FASB ASC Topic 825, Financial Instruments (“ASC Topic 825”). A decrease in the stock price during the second quarter of 2010 resulted in an unrealized loss on the change in fair value of investment in equity securities totaling $0.3 million. During the second quarter of 2009, we recorded an unrealized gain on the change in fair value of investment in equity securities totaling $1.3 million.

Depreciation and amortization expense increased less than $0.1 million to $5.3 million.

Net interest expense increased $0.2 million or 3% to $6.5 million from $6.3 million. The increase is attributable to higher effective interest rates on our variable rate bank debt, somewhat offset by a decrease in debt outstanding during the three months ended June 30, 2010 compared to the three months ended June 30, 2009.

4. Comparison of our results of operations for the six months ended June 30, 2010 to the six months ended June 30, 2009.

The following table summarizes our consolidated results of operations for the six months ended June 30, 2010 and 2009 (dollars in thousands):

 

     Six Months Ended
June 30,
             
     2010     2009     $ Change     % Variance  

REVENUES

        

Gaming:

        

Casino

   $ 70,505      $ 67,621      $ 2,884      4.26

Truck stop

     31,164        33,453        (2,289   -6.84

Pari-mutuel

     14,629        17,483        (2,854   -16.32

Food and beverage

     14,530        14,633        (103   -0.70

Convenience store – fuel

     43,747        27,913        15,834      56.73

Other

     10,461        11,567        (1,106   -9.56

Less: Promotional allowances

     (17,791     (16,881     (910   5.39
                              

Net revenues

     167,245        155,789        11,456      7.35
                              

COSTS AND EXPENSES

        

Gaming:

        

Casino

     24,409        22,279        2,130      9.56

Truck stop

     18,688        19,763        (1,075   -5.44

Pari-mutuel

     11,151        13,470        (2,319   -17.22

Food and beverage

     6,800        6,652        148      2.22

Convenience store – fuel

     41,169        26,054        15,115      58.01

Other

     7,420        8,616        (1,196   -13.88

Marketing, general and administrative

     31,294        30,928        366      1.18

Unrealized (gain) loss on change in fair value of investment in equity securities

     (260     (667     407      -61.02

Depreciation and amortization

     10,625        10,530        95      0.90
                              

Total costs and expenses

     151,296        137,625        13,671      9.93
                              

OPERATING INCOME

     15,949        18,164        (2,215   -12.19

Interest expense, net

     (12,744     (12,602     (142   1.13
                              

NET INCOME

   $ 3,205      $ 5,562      $ (2,357   -42.38
                              

All comparisons below begin with the year-to-date 2010 results followed by the year-to-date 2009 results.

Casino revenues increased $2.9 million or 4% to $70.5 million from $67.6 million. The increase in casino revenues is due to increases at The Lodge of $3.9 million or 10% and at the Gilpin of $0.3 million or 3%, somewhat offset by decreases at Gold Dust West-Reno of $1.2 million or 13% and Gold Dust West-Elko of $0.1 million or 2%. Revenues at The Lodge increased primarily due to Amendment 50 becoming effective July 2, 2009. Amendment 50 seems to be benefiting the larger casino properties in Black Hawk. Overall, the City of Black Hawk casino win increased 13% during the first six months of 2010 compared to the same period of 2009. Gold Dust West-Reno continues to be negatively impacted by continued market declines.

 

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Truck stop video poker gaming revenues decreased $2.3 million or 7% to $31.2 million from $33.5 million. The decrease in revenues was experienced at nearly all of our truck stop locations and is consistent with the statewide truck stop video gaming revenue decline of 7% resulting from the continued general economic conditions, including higher unemployment and decreased disposable income, for the first six months of 2010 compared to the same period of 2009.

Pari-mutuel revenues decreased $2.9 million or 16% to $14.6 million from $17.5 million. The decrease in revenues is attributable to a $2.6 million decrease in wagering revenues at the off track wagering facilities primarily due to an overall decrease in attendance in 2010 compared to 2009, combined with a $0.4 million decrease in account wagering revenues primarily due to a decrease in commission revenue resulting from revised profit sharing agreements with horsemen’s groups as compared to the prior year, somewhat offset by a $0.1 million increase at the racetrack due to three days of live racing in 2010 compared to zero days in 2009.

Food and beverage revenues decreased $0.1 million or 1% to $14.5 million from $14.6 million. This decrease is attributable to decreases of $0.8 million at the truck stop facilities and $0.2 million at Colonial, somewhat offset by increases of $0.5 million at The Lodge, $0.1 million at the Gilpin, $0.1 million at Gold Dust West-Reno, $0.1 million at Gold Dust West-Carson City and $0.1 million at Gold Dust West-Elko.

Convenience store-fuel revenues increased $15.8 million or 57% to $43.7 million from $27.9 million. The increase was primarily due to an increase in the average selling price of fuel to $2.68 per gallon in 2010 from $2.06 per gallon in 2009, combined with an 20% increase in volume. In December 2009, JEI entered into a fuel supply agreement with CITGO Petroleum Corporation. To help JEI reach the fuel sale volume necessary to qualify for the reduced pricing structure under the CITGO contract, JEI entered into agreements with affiliates to provide fuel at cost for their fuel operations. The increase in fuel sales volume for this period was primarily due to the new affiliate agreements. The increase in fuel sales associated to the new affiliate agreements was $4.4 million in 2010.

Other revenues decreased $1.1 million or 10% to $10.5 million from $11.6 million and were primarily attributable to a $1.4 million decrease in convenience store revenues at the truck stops and receipt of $0.3 million in 2009 of insurance proceeds in excess of hurricane losses incurred during late 2008 at our truck stops, somewhat offset by a one-time oil and gas royalty received in April 2010 totaling $0.5 million and an increase in hotel revenues totaling $0.2 million at The Lodge. Additionally, other revenues at Colonial, Lot D and Sugar Warehouse decreased by a combined $0.1 million.

Promotional allowances increased $0.9 million or 5% to $17.8 million from $16.9 million. Promotional allowances increased by $1.6 million at The Lodge and $0.2 million at the truck stops, somewhat offset by a decrease of $0.9 million at Gold Dust West-Reno.

Casino expenses increased $2.1 million or 10% to $24.4 million from $22.3 million. Increases of $2.0 million at The Lodge and $0.3 million at the Gilpin were somewhat offset by decreases totaling $0.2 million at our three Nevada casinos combined. The increases at our Colorado properties were primarily due to additional staffing for the table games and extended hours.

Truck stop gaming expenses decreased $1.1 million or 5% to $18.7 million from $19.8 million and is primarily due to direct costs associated with decreased truck stop gaming video poker revenues.

Pari-mutuel costs and expenses decreased $2.3 million or 17% to $11.2 million from $13.5 million. The decrease is attributable to decreased direct costs resulting from decreased pari-mutuel revenues resulting from an overall decrease in attendance at the satellite wagering facilities as compared to the prior year combined with a decrease in costs associated with account wagering resulting from revised profit sharing agreements with horsemen’s groups.

Food and beverage costs and expenses increased $0.1 million or 2% to $6.8 million from $6.7 million, and is due to increases of $0.3 million at The Lodge, $0.1 million at the Gilpin, $0.1 million at Gold Dust West-Reno, $0.3 million at Gold Dust West-Carson City and $0.1 million at Gold Dust West-Elko, somewhat offset by decreases of $0.6 million at the truck stops and $0.1 million at Colonial.

 

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Convenience store-fuel expenses increased $15.1 million or 58% to $41.2 million from $26.1 million. The increase was primarily due to an increase in the average cost of fuel to $2.54 per gallon in 2010 from $1.92 per gallon in 2009, combined with an increase in volume as discussed in convenience store-fuel revenues above. In January 2010, we also collected $0.3 million in accounts receivable that had been fully reserved in December 2008. The increase in fuel costs associated to the new affiliate agreements was $4.4 million in 2010.

Other costs and expenses decreased $1.2 million or 14% to $7.4 million from $8.6 million, and were attributable to a $1.2 million decrease in convenience store expenses at the truck stops which correlates to the decrease in convenience store revenues.

Marketing, general and administrative expenses increased $0.4 million or 1% to $31.3 million from $30.9 million. This increase is primarily the result of $0.5 million of costs incurred during 2010 related to the amendment to our credit agreement; combined with increases of $0.2 million for corporate payroll and professional accounting fees; $0.2 million for political contributions; $0.2 million for travel expenses at corporate; $0.2 million at The Lodge and $0.1 million at the Gilpin. These increases are somewhat offset by decreases of $0.2 million at Gold Dust West-Reno, $0.2 million at Gold Dust West-Carson City, $0.3 million at Colonial and $0.3 million at the truck stops.

We account for our investment in MTR Gaming Group, Inc. as an equity security, in accordance with the fair value option permitted by ASC Topic 825. An increase in the stock price during the first six months of 2010 resulted in an unrealized gain on the change in fair value of investment in equity securities totaling $0.3 million compared to an unrealized gain totaling $0.7 million during the same period of 2009.

Depreciation and amortization expense increased $0.1 million or 1% to $10.6 million from $10.5 million and was primarily attributable to increases at Gold Dust West-Carson City and Colonial.

Net interest expense increased by $0.1 million or 1% to $12.7 million from $12.6 million and is attributable to higher effective interest rates on our variable rate bank debt, somewhat offset by a decrease in debt outstanding for the six months ended June 30, 2010 compared to the six months ended June 30, 2009.

5. Segment information

As discussed above, we have four segments representing the geographic regions of our operations: Colorado, Nevada, Louisiana and Virginia. Each segment is managed separately because of the unique characteristics of its revenue stream, regulatory environment and customer base.

The information presented is by each segment in which we have operations and also presents our EBITDA (earnings before interest, income taxes, depreciation and amortization) for each segment. We believe that the presentation of a non-GAAP financial measure such as EBITDA is useful because it allows holders of our debt and management to evaluate and compare our operating results from continuing operations from period to period in a meaningful and consistent manner in addition to standard GAAP financial measures. Management internally evaluates the performance of our segments using EBITDA measures as do most analysts following the gaming industry. EBITDA is an element of certain key financial covenants in our debt agreements and, as such, is a critical component that we closely watch in order to determine our ability to achieve future growth and to ensure we are in compliance with our debt agreements. We present EBITDA in the tables below to provide further discussion and analysis of our operating results. EBITDA can be reconciled directly to our consolidated net income (loss) by adding the amounts shown for depreciation and amortization, interest and income taxes to net income (loss). This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States of America, such as net income (loss), nor should it be considered as an indicator of our overall financial performance. Our calculation of EBITDA may be different from the calculation used by other companies and comparability may be limited.

 

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The following is a summary of the net revenues, costs and expenses and EBITDA, for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

NET REVENUES

        

Colorado:

        

The Lodge

   $ 20,511      $ 17,384      $ 38,729      $ 35,715   

Gilpin

     4,617        4,206        9,297        8,895   
                                

Total Colorado

     25,128        21,590        48,026        44,610   
                                

Nevada:

        

Gold Dust West-Reno

     4,447        4,529        8,923        9,129   

Gold Dust West-Carson City

     3,484        3,447        6,306        6,369   

Gold Dust West-Elko

     2,833        2,755        5,532        5,456   
                                

Total Nevada

     10,764        10,731        20,761        20,954   
                                

Louisiana

     42,722        34,900        81,834        70,425   

Virginia

     9,461        10,449        16,406        19,528   

Corporate and other

     101        142        218        272   
                                

Total Net Revenues

     88,176        77,812        167,245        155,789   
                                

COSTS AND EXPENSES (excluding depreciation and amortization, net interest expense and income taxes)

        

Colorado:

        

The Lodge

     13,166        11,384        25,303        22,847   

Gilpin

     3,366        3,064        6,888        6,324   
                                

Total Colorado

     16,532        14,448        32,191        29,171   
                                

Nevada:

        

Gold Dust West-Reno

     2,953        3,058        5,992        6,111   

Gold Dust West-Carson City

     3,306        3,195        6,372        6,250   

Gold Dust West-Elko

     2,199        2,246        4,372        4,455   
                                

Total Nevada

     8,458        8,499        16,736        16,816   
                                

Louisiana

     37,704        29,861        71,246        59,320   

Virginia

     8,808        9,923        15,240        17,955   

Corporate overhead and other (1)(2)

     3,114        1,003        5,258        3,833   
                                

Total Costs and Expenses

     74,616        63,734        140,671        127,095   
                                

EBITDA

        

Colorado:

        

The Lodge

     7,345        6,000        13,426        12,868   

Gilpin

     1,251        1,142        2,409        2,571   
                                

Total Colorado

     8,596        7,142        15,835        15,439   
                                

Nevada:

        

Gold Dust West-Reno

     1,494        1,471        2,931        3,018   

Gold Dust West-Carson City

     178        252        (66     119   

Gold Dust West-Elko

     634        509        1,160        1,001   
                                

Total Nevada

     2,306        2,232        4,025        4,138   
                                

Louisiana

     5,018        5,039        10,588        11,105   

Virginia

     653        526        1,166        1,573   

Corporate overhead and other (1)(2)

     (3,013     (861     (5,040     (3,561
                                

Total EBITDA

   $ 13,560      $ 14,078      $ 26,574      $ 28,694   
                                

See Notes on page 34.

 

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General

See sections 3 and 4 above for comparisons of our results of operations for the three and six months ended June 30, 2010 to the three months and six months ended June 30, 2009, which provide explanations regarding the fluctuations in our revenues and costs and expenses by property and segment.

Throughout 2010 and 2009, net revenues at many of our properties continue to be negatively impacted by local and general economic conditions, including higher unemployment and decreased disposable income, somewhat offset by an increase in fuel prices. However, during the three and six months ended June 30, 2010, both of our Colorado properties benefited from the new games, higher limits and extended hours that began on July 2, 2009. Except for our Colorado properties, costs and expenses are generally lower due to cost management efforts at all of our properties, combined with a decrease in direct costs associated to the decrease in net revenues. Year-over-year, costs and expenses increased at The Lodge and Gilpin as a result of additional personnel, training and other expenses resulting from the new gaming legislation, combined with increased gaming taxes resulting from increased revenues.

The Lodge

EBITDA at The Lodge increased $1.3 million or 22% for the three months ended June 30, 2010 compared to the same period of 2009 and $0.6 million or 4% for the six months ended June 30, 2010 compared to the same period of 2009. Increases in casino, food and beverage and hotel revenues were somewhat offset by increased promotional allowances. Labor costs in 2010 were higher than 2009 due to the additional personnel discussed in the “General” section above. Gaming taxes were also higher as a result of increased revenues.

Gilpin

EBITDA at the Gilpin increased $0.1 million or 10% for the three months ended June 30, 2010 compared to the same period of 2009 but decreased $0.2 million or 6% for the six months ended June 30, 2010 compared to the same period of 2009. Slots and table games revenues increased primarily due to the new gaming legislation, somewhat offset by a decrease in player banked poker due to the March 2010 closure of the poker room at the Gilpin combined with the general economic conditions discussed in the “General” section above. Labor and marketing costs in 2010 were higher than 2009. Gaming taxes were also higher as a result of increased revenues.

Gold Dust West-Reno

EBITDA at Gold Dust West-Reno increased less than $0.1 million or 2% for the three months ended June 30, 2010 compared to the same period of 2009 but decreased $0.1 million or 3% for the six months ended June 30, 2010 compared to the same period of 2009. For both the three and six months ended June 30, 2010 compared to the same periods in 2009, we experienced a decrease in slot revenues of approximately 12% resulting from the local and general economic conditions discussed in the “General” section above, somewhat offset by a decrease in promotional allowances.

Gold Dust West-Carson City

EBITDA at Gold Dust West-Carson City decreased $0.1 million or 29% for the three months ended June 30, 2010 compared to the same period of 2009 and $0.2 million for the six months ended June 30, 2010 compared to the same period of 2009. On April 1, 2010, we opened a new restaurant resulting in additional labor, food and beverage and other start-up costs.

Gold Dust West-Elko

EBITDA at Gold Dust West-Elko increased $0.1 million or 25% for the three months ended June 30, 2010 compared to the same period of 2009 and $0.2 million or 16% for the six months ended June 30, 2010 compared to the same period of 2009. Net revenues were up approximately $0.1 million for both the second quarter and year to date due to reduced promotional allowances, while costs were slightly below 2009.

Louisiana

EBITDA at the Louisiana truck stops decreased slightly for the second quarter and decreased $0.5 million or 5% for the six months ended June 30, 2010 compared to the same period of 2009 primarily due to a decrease in gaming and non-gaming revenues resulting from the general economic conditions discussed in the “General” section above, somewhat offset by a slight increase in fuel gross profit per gallon.

 

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Virginia

EBITDA at our pari-mutuel operations in Virginia increased $0.1 million or 24% for the three months ended June 30, 2010 compared to the same period of 2009 but decreased $0.4 million or 26% for the six months ended June 30, 2010 compared to the same period of 2009. The second quarter increase is primarily attributable to a $1.0 million decrease in pari-mutuel revenues which were more than offset by a decrease in pari-mutuel operations costs and marketing, general and administrative expenses. The year to date decrease is attributable to an overall decrease in revenues totaling $3.1 million, somewhat offset by decreased management, general and administrative costs combined with decreased pari-mutuel and food and beverage costs and expenses.

Corporate Overhead and Other

The EBITDA loss at corporate increased by $2.2 million for the three months ended June 30, 2010 and by $1.5 million for the six months ended June 30, 2010 compared to the same periods of 2009 and is primarily due to: (1) decreases in the stock price of our investment in MTR, (2) increased political contributions and travel expenses and (3) $0.1 million and $0.5 million incurred during the second quarter and year to date in 2010, respectively, for one-time costs related to the March 31, 2010 amendment to our credit agreement.

Reconciliation of EBITDA to Net Income (Loss)

The following table sets forth a reconciliation of our EBITDA, a non-GAAP financial measure, to our net income (loss), a GAAP financial measure (dollars in thousands):

 

Three months ended June 30, 2010

   EBITDA     Depreciation and
Amortization
   Interest
Expense, net
   Net
Income (Loss)
 

Colorado:

          

The Lodge

   $ 7,345      $ 1,263    $ 1,691    $ 4,391   

Gilpin

     1,251        435      476      340   
                              

Total Colorado

     8,596        1,698      2,167      4,731   
                              

Nevada:

          

Gold Dust West-Reno

     1,494        376      654      464   

Gold Dust West-Carson City

     178        562      384      (768

Gold Dust West-Elko

     634        629      273      (268
                              

Total Nevada

     2,306        1,567      1,311      (572
                              

Louisiana

     5,018        1,249      1,053      2,716   

Virginia

     653        564      131      (42

Corporate overhead and other (1)

     (3,013     220      1,814      (5,047
                              

TOTAL

   $ 13,560      $ 5,298    $ 6,476    $ 1,786   
                              

Three months ended June 30, 2009

   EBITDA     Depreciation and
Amortization
   Interest
Expense, net
   Net
Income (Loss)
 

Colorado:

          

The Lodge

   $ 6,000      $ 1,263    $ 1,701    $ 3,036   

Gilpin

     1,142        487      476      179   
                              

Total Colorado

     7,142        1,750      2,177      3,215   
                              

Nevada:

          

Gold Dust West-Reno

     1,471        399      655      417   

Gold Dust West-Carson City

     252        495      384      (627

Gold Dust West-Elko

     509        606      237      (334
                              

Total Nevada

     2,232        1,500      1,276      (544
                              

Louisiana

     5,039        1,241      1,011      2,787   

Virginia

     526        553      145      (172

Corporate overhead and other (2)

     (861     228      1,696      (2,785
                              

TOTAL

   $ 14,078      $ 5,272    $ 6,305    $ 2,501   
                              

 

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Six months ended June 30, 2010

   EBITDA     Depreciation and
Amortization
   Interest
Expense, net
   Net
Income (Loss)
 

Colorado:

          

The Lodge

   $ 13,426      $ 2,537    $ 3,385    $ 7,504   

Gilpin

     2,409        886      952      571   
                              

Total Colorado

     15,835        3,423      4,337      8,075   
                              

Nevada:

          

Gold Dust West-Reno

     2,931        752      1,309      870   

Gold Dust West-Carson City

     (66     1,111      767      (1,944

Gold Dust West-Elko

     1,160        1,249      521      (610
                              

Total Nevada

     4,025        3,112      2,597      (1,684
                              

Louisiana

     10,588        2,513      2,073      6,002   

Virginia

     1,166        1,108      277      (219

Corporate overhead and other (1)

     (5,040     469      3,460      (8,969
                              

TOTAL

   $ 26,574      $ 10,625    $ 12,744    $ 3,205   
                              

Six months ended June 30, 2009

   EBITDA     Depreciation and
Amortization
   Interest
Expense, net
   Net
Income (Loss)
 

Colorado:

          

The Lodge

   $ 12,868      $ 2,508    $ 3,397    $ 6,963   

Gilpin

     2,571        968      952      651   
                              

Total Colorado

     15,439        3,476      4,349      7,614   
                              

Nevada:

          

Gold Dust West-Reno

     3,018        797      1,310      911   

Gold Dust West-Carson City

     119        988      767      (1,636

Gold Dust West-Elko

     1,001        1,205      468      (672
                              

Total Nevada

     4,138        2,990      2,545      (1,397
                              

Louisiana

     11,105        2,550      2,019      6,536   

Virginia

     1,573        1,059      284      230   

Corporate overhead and other (2)

     (3,561     455      3,405      (7,421
                              

TOTAL

   $ 28,694      $ 10,530    $ 12,602    $ 5,562   
                              

 

(1) Included in corporate overhead and other for the three and six months ended June 30, 2010 is a $0.3 million loss and $0.3 million gain, respectively, on the change in fair value of investment in equity securities, and costs incurred related to the amendment to our credit agreement totaling $0.1 and $0.5 million, respectively.
(2) Included in corporate overhead and other for the three and six months ended June 30, 2009 is a $1.3 million gain and $0.7 million gain, respectively, on the change in fair value of investment in equity securities.

6. Liquidity and capital resources

As of June 30, 2010, we had cash and cash equivalents of $24.7 million compared to $24.2 million in cash and cash equivalents as of December 31, 2009. The increase of $0.5 million is the result of $12.9 million cash provided by operating activities, $5.5 million cash used in investing activities, and $6.9 million cash used in financing activities, which is further discussed below. Our primary sources of liquidity are cash provided by operating activities and external borrowings. Our primary uses of cash are for debt service, capital improvements, development and acquisitions. Cash flows provided by operating activities increased $2.6 million for the six months ended June 30, 2010 compared to June 30, 2009 primarily due to an increase in accounts payable and other accrued liabilities and a reduction in restricted cash, somewhat offset by the decrease in operating income after adjusting for non-cash transactions.

Cash used in investing activities during the six months ended June 30, 2010 and 2009 was the result of property and equipment and device rights additions totaling $5.6 million and $8.6 million, respectively, for ongoing capital investments at our existing properties, offset by $0.1 million and $0.3 million, respectively, of proceeds from the sale of equipment. In addition, cash used in investing activities during the six months ended June 30, 2009 included $0.3 million for Mississippi land purchase transactions and $0.2 million to acquire the noncontrolling interest of Sugar Warehouse.

 

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The cash provided by or used in our financing activities varies significantly from year to year depending upon the cash provided by operations and investing activities, both of which are discussed above, as well as our cash position. The cash used in financing activities during the six months ended June 30, 2010 was the result of net repayments on the revolving senior credit facility totaling $3.0 million, payments on long-term debt totaling $1.4 million, payments to obtain financing totaling $1.5 million and distributions to stockholder totaling $1.0 million.

As of June 30, 2010, we had $22.1 million available on our $40 million revolving senior credit facility for acquisitions, capital expenditure programs and working capital. As of June 30, 2010, our total debt approximates $287.6 million. Our future liquidity, which includes our ability to make semi-annual interest payments on June 15 and December 15 of each year, depends upon our future operational success. Our failure to pay interest, repay our indebtedness when due, or maintain compliance with our debt covenants would result in an event of default under both our senior credit facility and our note indenture. At June 30, 2010, we were in compliance with our financial covenants.

While our owner has made capital contributions in the past to facilitate our various acquisitions from time to time, we can give no assurance that it will continue to do so in the future. Additionally, as we are a Qualified Subchapter S-Corporation Subsidiary, we may from time to time make distributions to our owner for any taxes due as a result of taxable income generated by us. Furthermore, annual distributions may be made to our owner in an aggregate amount not to exceed the greater of $1 million and 50% of consolidated net income as defined in our credit agreement and indenture.

We believe that our cash flow from operations, cash and cash equivalents and our $40 million senior revolving credit facility discussed above will be adequate to meet our debt service obligations and operational expenditures, as well as our capital expenditure requirements for the next twelve months. During 2010, we anticipate spending approximately $15 million for discretionary capital expenditures. While we believe these sources will provide us sufficient liquidity over the next twelve months, we can give no assurance that these sources of cash will be sufficient to enable us to do so. Further, in addition to our normal capital expenditure requirements, we anticipate that we will pursue the acquisition of other properties and continue to engage in the pursuit of new development opportunities. It is possible that we may need to enter into new financing arrangements and raise additional capital in the future if we are unable to generate sufficient cash to sustain expansion. Our ability to incur additional debt is further restricted by the terms and covenants of our senior secured bank credit facility and senior unsecured notes. We can give no assurance that we will be able to raise any capital or obtain the necessary sources of liquidity and financing on favorable terms, if at all. Additionally, any debt financing that we may incur in the future will increase the amount of our total outstanding indebtedness and our debt service requirements, and therefore heighten the related risks we currently face.

We also face the risk that there could be a decline in the demand for our products and services, which would reduce our ability to generate funds from operations. While we believe our cash flows are geographically diverse, at present we do have a significant concentration of cash flows generated in the Black Hawk, Colorado and Louisiana markets. Should the Black Hawk or Louisiana markets decline or become saturated or should competition erode our market share, we would suffer a decline in available funds generated from operations. If this were to occur, there exists the possibility that our credit rating could be downgraded, which would further reduce our ability to access the capital markets and obtain additional or alternative financing. See the section “Risk Factors” in Item 1A of our 10-K Report.

 

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The following table provides disclosure concerning our obligations and commitments to make future payments under contracts, such as debt and lease agreements, and purchase and other long-term obligations as of June 30, 2010.

 

(In Thousands)

   Total    Less than 1
Year
   1-3
Years
   4-5
Years
   After 5
Years

Long-term debt (1)

   $ 371,109    $ 26,163    $ 114,429    $ 230,517    $ —  

Capital lease obligations

     7,500      567      948      1,649      4,336

Operating leases (2)

     33,975      2,811      4,099      3,540      23,525

Purchase obligations (3)

     255,689      57,814      115,793      82,082      —  

Other long-term obligations (4)

     21,545      2,055      3,450      2,915      13,125
                                  

Total contractual cash obligations

   $ 689,818    $ 89,410    $ 238,719    $ 320,703    $ 40,986
                                  

 

(1) Long-term debt includes principal and interest owing under the terms of our senior unsecured notes, our senior secured credit facility and the Black Hawk special assessment bonds. Interest on variable rate debt is computed based on rates outstanding at June 30, 2010.
(2) Operating leases include various land and building leases for certain properties in Nevada, Louisiana and Virginia; office space in Colorado, Louisiana, Virginia and Florida; and other equipment leases at all locations.
(3) Purchase obligations include five-year fuel supply agreements for gasoline and diesel fuel. Fuel volumes are specified in the contracts. The purchase price is a variable market-based price. The long-term obligations in this table were derived using the applicable contract prices for gasoline and diesel fuel at June 30, 2010 multiplied by the actual fuel volumes per the contracts.
(4) Other long-term obligations include a 20-year, $1.25 million per year management agreement with Jacobs Investments Management Co. Inc., an affiliated company, and our obligation to pay $0.90 per operating video poker machine per day to Jalou Device Owner, L.P., the related party owner of the video poker machines in order to maintain the machines used in our truck plaza operations. In addition, Colonial has entered into an agreement with a totalisator company, which provides wagering services and designs, programs, and manufactures totalisator systems for use in wagering applications. The amendment provides for a minimum charge per calendar year of $189,000. Other long-term obligations also include various surveillance and service agreements in Louisiana and at the corporate office.

Finally, beginning June 15, 2010, we can redeem all or part of our outstanding senior unsecured notes aggregating $210 million at the redemption prices set forth below, plus accrued and unpaid interest. The redemption prices, expressed as a percentage of the principal amount, for the 12-month period beginning on June 15 of the years indicated below are as follows:

 

Year

   Percentage  

2010

   104.875

2011

   102.438

2012 and thereafter

   100.000

7. Critical accounting policies and estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount 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. We periodically evaluate our policies and the estimates and assumptions related to these policies. All of our subsidiary companies operate in a highly regulated industry. Our Colorado, Nevada, Louisiana and Virginia operations are subject to regulations that describe and regulate operating and internal control procedures. The majority of our casino revenue is in the form of cash, personal checks, credit cards or gaming chips and tokens, which by their nature do not require complex estimations. We estimate certain liabilities with payment periods that extend for longer than several months. Such estimates include our slot club liabilities, outstanding gaming chip, token and pari-mutuel ticket liability, self-insured medical and workers compensation liabilities, and litigation costs. We believe that these estimates are reasonable based on our past experience with the business and based upon our assumptions related to possible outcomes in the future. Future actual results will likely differ from these estimates.

 

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Property and equipment

We have a significant investment in long-lived property and equipment, representing approximately 70% of our total assets. We estimate that the undiscounted future cash flows expected to result from the use of these assets exceed the current carrying value of these assets. Any adverse change to the estimate of these undiscounted cash flows could necessitate an impairment charge that would adversely affect operating results. We review the carrying value of our property and equipment when events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use. Further, we assign lives to our assets based on our standard policy, which is established by management as representative of the useful life of each class of assets. Should the actual useful life of a class of assets differ from the estimated useful life, we would record an impairment charge. We review useful lives and obsolescence and assess the commercial viability of our assets periodically. During 2009, based on operating results, we performed an impairment analysis of property and equipment at our Gold Dust West-Carson City and Virginia reporting units, and we determined that property and equipment is not impaired at either reporting unit.

Goodwill and other intangible assets

We have $46.5 million in goodwill recorded on our consolidated balance sheet resulting from the acquisition of businesses. We do not have any other nonamortizing intangible assets on our consolidated balance sheet. We annually review our goodwill for impairment. The annual evaluation of goodwill requires the use of estimates about future operating results of each reporting unit to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates. Once an impairment of goodwill has been recorded, it cannot be reversed.

Our reporting units with goodwill balances at June 30, 2010 are The Lodge ($4.2 million), Gilpin ($2.5 million), Gold Dust West-Reno ($8.8 million) and Louisiana ($31.0 million). There is no goodwill recorded in our Gold Dust West-Carson City, Gold Dust West-Elko or Virginia reporting units. We performed our most recent annual impairment test for these reporting units as of September 30, 2009. Our annual impairment test included an analysis of the gaming industry overall as well as an analysis of the specific locations in which we operate. We determined the fair values for each of these reporting units using both the market approach (recent comparable transactions from which we derived an applicable valuation multiple) and the income approach (net present value of our anticipated future cash flows). These fair values were then compared to the carrying values for the respective reporting unit. We determined that goodwill was not impaired at any of our reporting units. Furthermore, if the fair value of any of our reporting units declined by 10%, no goodwill impairment would be required.

We have also reassessed the useful lives of our identifiable intangible assets without any change to the previously established amortization periods of such assets.

 

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as commodity prices and interest rates. We purchase and sell fuel at market prices, subject to daily price changes.

We have issued $210 million of 9 3/4% fixed rate senior unsecured notes due in 2014 and a $100 million variable rate senior secured credit facility consisting of: (i) a $40 million revolving credit facility, of which $3 million is due in 2011 and the remainder is due in 2012, (ii) a $40 million term loan facility due in 2012, and (iii) a $20 million delayed draw term loan due in 2012. As of June 30, 2010, $16.0 million is outstanding on the senior secured revolving credit facility and $57.7 million is outstanding on our senior secured term loan debt, bearing interest at a blended variable rate approximating 3.45% at June 30, 2010. Additionally, we have $1.9 million of outstanding letters of credit as of June 30, 2010 resulting in $22.1 million available on the revolving credit facility.

If market interest rates increase, our cash requirements for interest on the senior secured credit facility balance would also increase. Conversely, if market interest rates decrease, our cash requirements for interest on the senior secured credit facility balance would also decrease. There would be an approximate change in our cash requirements of $0.3 million annually for interest should market rates increase or decrease by 10% compared to interest rate levels at June 30, 2010.

We currently do not use interest rate swaps or other similar investments to alter interest rate exposure.

JEI owns an investment in the publicly traded equity of MTR Gaming Group, Inc. (“MTR”). Market prices for equity securities are subject to fluctuation. Fluctuation in the market price of such a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments, and general market conditions. Consequently, the amount realized on any ultimate sale of this investment may significantly differ from the reported market value as of June 30, 2010.

The recent severe economic downturn and adverse conditions in the local, regional, national and global markets has negatively affected our operations, and may continue to negatively affect our operations in the future. During periods of economic contraction such as the current period, our revenues may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings. Gaming and other leisure activities we offer represent discretionary expenditures and participation in such activities may decline during economic downturns, during which consumers generally earn less disposable income. Even an uncertain economic outlook may adversely affect consumer spending in our gaming operations and related facilities, as consumers spend less in anticipation of a potential economic downturn. Furthermore, other uncertainties, including national and global economic conditions, terrorist attacks or other global events, could adversely affect consumer spending, increase gasoline prices and adversely affect our operations.

We use significant amounts of electricity, natural gas and other forms of energy. While we have generally not experienced any major shortages of energy, any substantial increases in the cost of electricity and natural gas in the United States could negatively impact our operating results. The extent of any impact is subject to the magnitude and duration of the energy price increases and could be material.

Also, if gas prices rise, this may result in a reduction of automobile travel and a decrease in the number of patrons at our properties. Our business, assets, financial condition and results of operations could be adversely affected by a weakening of national economic conditions, high gasoline prices and/or adverse winter weather conditions.

We are a highly levered company. While we intend to finance expansion and capital expenditures with existing cash, cash flow from operations and/or borrowings under our existing senior secured credit facilities, we may require additional financing to support our continued growth. However, due to the existing uncertainty in the capital and credit markets, our access to capital may not be available on terms acceptable to us or at all. Further, if adverse regional and national economic conditions persist or worsen, we could experience decreased revenues from our operations attributable to decreases in consumer spending levels and could fail to satisfy the financial and other restrictive covenants to which we are subject under our existing indebtedness.

 

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2010. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

We are involved in routine litigation arising in the ordinary course of our business pertaining to workers compensation claims, equal opportunity employment issues, or guest injury claims. All such claims are routinely turned over to our insurance providers. We believe these matters are covered by appropriate insurance policies, less applicable deductibles which are accrued in our financial statements. None of the claims or payment of deductibles is expected to have a material impact on our financial position, results of operations or cash flows.

 

Item 1A. Risk Factors

There has been no material change in the risk factors disclosed in our Form 10-K report for the year ended December 31, 2009, filed March 30, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3. Defaults Upon Senior Securities

None

Item 5. Other Information

None

 

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Table of Contents
Item 6. Exhibits

(a) Exhibits

 

31.1    Certification of the Chief Executive Officer pursuant to Rule 15d – 14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.
31.2    Certification of the Chief Financial Officer pursuant to Rule 15d – 14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.
32.1    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) filed under Exhibit 32 of Item 601 of Regulation S-K.
32.2    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) filed under Exhibit 32 of Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    Jacobs Entertainment, Inc.
    Registrant
Date: August 11, 2010     By:  

/s/ Jeffrey P. Jacobs

     

Jeffrey P. Jacobs, Chief Executive Officer

and Chairman of the Board of Directors

     

/s/ Brett A. Kramer

      Brett A. Kramer, Chief Financial Officer

EXHIBIT INDEX

 

EXHIBIT
NUMBER

  

DESCRIPTION

31.1

   Certification of the Chief Executive Officer pursuant to Rule 15d – 14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.

31.2

   Certification of the Chief Financial Officer pursuant to Rule 15d – 14(a) under the Securities Exchange Act of 1934, filed under Exhibit 31 of Item 601 of Regulation S-K.

32.1

   Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) filed under Exhibit 32 of Item 601 of Regulation S-K.

32.2

   Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) filed under Exhibit 32 of Item 601 of Regulation S-K.

 

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