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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, 2011

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  x    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 15, 2011

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, 2011 and December 31, 2010

     3   
 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010

     4   
 

Unaudited Condensed Consolidated Statements of Stockholder’s Equity for the six months ended June 30, 2011 and 2010

     5   
 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

     6   
  Notes to Unaudited Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      40   

Item 4.

  Controls and Procedures      41   
PART II.   OTHER INFORMATION      41   

Item 1.

  Legal Proceedings      41   

Item 1A.

  Risk Factors      41   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      41   

Item 3.

  Defaults Upon Senior Securities      41   

Item 5.

  Other Information      41   

Item 6.

  Exhibits      42   

SIGNATURES

     43   

EXHIBIT INDEX

     44   

 

2


Table of Contents

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

 

00000000000 00000000000
     June 30,
2011
    December 31,
2010
(As adjusted,
see Note 7)
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 28,409      $ 24,703   

Restricted cash

     4,613        1,226   

Accounts receivable, net

     4,321        3,197   

Due from affiliates

     1,488        2,671   

Inventory

     3,933        3,901   

Prepaid expenses and other current assets

     4,221        3,059   
  

 

 

   

 

 

 

Total current assets

     46,985        38,757   
  

 

 

   

 

 

 

PROPERTY, PLANT AND EQUIPMENT:

    

Land and improvements

     64,727        64,031   

Building and improvements

     201,031        198,962   

Equipment, furniture and fixtures

     107,391        104,928   

Leasehold improvements

     3,213        3,213   

Construction in progress

     907        1,033   
  

 

 

   

 

 

 
     377,269        372,167   

Less accumulated depreciation

     (146,408     (128,686
  

 

 

   

 

 

 

Property, plant and equipment, net

     230,861        243,481   
  

 

 

   

 

 

 

OTHER NONCURRENT ASSETS:

    

Goodwill

     48,728        48,728   

Identifiable intangible assets, net

     8,684        8,274   

Debt issue costs, net

     3,850        5,016   

Investment in equity securities

     2,465        1,652   

Other assets

     1,729        1,731   
  

 

 

   

 

 

 

TOTAL

   $ 343,302      $ 347,639   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 9,228      $ 8,498   

Accrued expenses

     18,640        16,811   

Due to affiliates

     228        639   

Current portion of long-term debt and capital lease obligations

     85,148        21,561   
  

 

 

   

 

 

 

Total current liabilities

     113,244        47,509   

Long-term debt and capital lease obligations

     213,120        281,692   

Other noncurrent liabilities

     1,169        1,114   
  

 

 

   

 

 

 

Total liabilities

     327,533        330,315   
  

 

 

   

 

 

 

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, 2011 and December 31, 2010

     —          —     

Class B Common stock $.01 par value; 200 shares authorized, 180 shares issued and outstanding as of June 30, 2011 and December 31, 2010

     —          —     

Additional paid-in capital

     37,015        31,825   

Accumulated deficit

     (21,246     (15,124
  

 

 

   

 

 

 

Total stockholder’s equity of Jacobs Entertainment, Inc.

     15,769        16,701   

Noncontrolling interest

     —          623   
  

 

 

   

 

 

 

Total stockholder’s equity

     15,769        17,324   
  

 

 

   

 

 

 

TOTAL

   $ 343,302      $ 347,639   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


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,
 
     2011     2010
(As
adjusted,
see Note 7)
    2011     2010
(As
adjusted,
see Note 7)
 

REVENUES

        

Gaming:

        

Casino

   $ 36,682      $ 36,549      $ 72,776      $ 70,505   

Truck stop

     17,981        16,906        37,489        35,709   

Pari-mutuel

     7,779        8,254        14,161        14,629   

Food and beverage

     7,395        7,779        14,472        15,256   

Convenience store — fuel

     32,349        26,754        59,038        48,757   

Convenience store — other

     3,748        3,500        7,092        6,586   

Hotel

     1,040        1,054        1,792        1,835   

Other

     1,579        2,120        2,812        3,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     108,553        102,916        209,632        196,671   

Less: Promotional allowances

     (9,344     (9,097     (18,594     (18,133
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     99,209        93,819        191,038        178,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS AND EXPENSES

        

Gaming:

        

Casino

     12,579        12,687        25,041        24,409   

Truck stop

     10,712        10,507        21,968        21,493   

Pari-mutuel

     6,204        6,379        11,054        11,151   

Food and beverage

     3,791        4,002        7,121        7,458   

Convenience store — fuel

     30,420        25,180        56,062        45,862   

Convenience store — other

     4,919        4,473        9,309        8,465   

Hotel

     236        102        398        379   

Marketing, general and administrative

     16,388        16,202        32,452        31,912   

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

     (333     326        (813     (260

Impairment of long-lived assets

     10,065        —          10,065        —     

Depreciation and amortization

     5,632        5,570        11,234        11,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     100,613        85,428        183,891        162,036   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (1,404     8,391        7,147        16,502   

Interest income

     5        4        17        14   

Interest expense

     (6,514     (6,795     (13,286     (13,362
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME

     (7,913     1,600        (6,122     3,154   

Net (income) loss of subsidiary attributable to the noncontrolling interest

     —          (6     —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME ATTRIBUTABLE TO JACOBS ENTERTAINMENT, INC.

   $ (7,913   $ 1,594      $ (6,122   $ 3,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(Dollars in Thousands)

 

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

BALANCES, JANUARY 1, 2011
(As adjusted, see Note 7)

     1,320         180       $ —         $ 31,825      $ (15,124   $ 623      $ 17,324   

Capital contributions

              20,913            20,913   

Distributions

              (15,723         (15,723

Acquisition of noncontrolling interest

                  (623     (623

Net loss**

                (6,122       (6,122
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES, JUNE 30, 2011

     1,320         180       $ —         $ 37,015      $ (21,246   $ —        $ 15,769   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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

BALANCES, JANUARY 1, 2010
(As adjusted, see Note 7)

     1,320         180       $ —         $ 34,758      $ (17,048   $ 618      $ 18,328   

Distributions

              (1,000         (1,000

Net income (loss) (As adjusted, see Note 7)**

                3,157        (3     3,154   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES, JUNE 30, 2010
(As adjusted, see Note 7)

     1,320         180       $ —         $ 33,758      $ (13,891   $ 615      $ 20,482   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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, 2011 and 2010, comprehensive (loss) income is equal to net (loss) income and is entirely attributable to the Jacobs Entertainment, Inc. stockholder other than the net loss attributable to the noncontrolling interest.

See notes to unaudited condensed consolidated financial statements.

 

5


Table of Contents

JACOBS ENTERTAINMENT, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

     Six Months Ended
June 30,
 
     2011     2010
(As adjusted,
see Note 7)
 

OPERATING ACTIVITIES:

    

Net (loss) income

   $ (6,122 )   $ 3,154   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     11,234        11,167   

Impairment of long-lived assets

     10,065        —     

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

     (813     (260

(Gain) loss on sale of equipment

     (7     7   

Deferred financing cost amortization

     1,166        1,005   

Other

     —          4   

Changes in operating assets and liabilities, net of acquisitions:

    

Restricted cash

     (3,387     (2,541

Accounts receivable, net

     (1,136     (380

Inventory

     (32     190   

Prepaid expenses and other assets

     (1,160     (1,747

Accounts payable

     1,694        2,576   

Accrued expenses and other noncurrent liabilities

     2,017        673   

Due from/to affiliates

     (1,124     (729
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,395        13,119   
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Additions to property, plant and equipment

     (8,077     (5,734

Proceeds from sale of equipment

     116        138   

Purchases of device rights

     (1,217     —     

Acquisition of noncontrolling interest

     (1,243     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,421     (5,596
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Payments to obtain financing

     —          (1,500

Borrowings on revolving line of credit

     30,800        13,000   

Payments on long-term debt

     (361     (1,432

Payments on revolving line of credit

     (14,300     (16,000

Distributions to stockholder

     (14,407     (1,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,732        (6,932
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     3,706        591   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     24,703        24,623   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 28,409      $ 25,214   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Cash paid for interest

   $ 12,036      $ 12,258   
  

 

 

   

 

 

 

Non-cash investing and financing activities:

    

Capital contributions exchanged for retirement of liabilities paid by affiliate

   $ 20,913      $ —     
  

 

 

   

 

 

 

Capital distributions for assets retained by affiliate

   $ 1,316      $ —     
  

 

 

   

 

 

 

Non-cash additions to property

   $ 488      $ 456   
  

 

 

   

 

 

 

Acquisition of property under note payable agreement

   $ —        $ 120   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

6


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 common stock. These persons and their 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, 2011, we owned and operated 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 Casino (“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 21 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 ten satellite wagering facilities in Virginia through a wholly-owned subsidiary, Colonial Holdings, Inc. (“Colonial”).

On August 16, 2010, we acquired a business and its related assets referred to as “Flats” for $2,800 based in what we call the Nautica Properties area in Cleveland, Ohio. Flats was controlled by the mother and sister of our CEO and was accounted for as a combination of entities under common control. See Note 7. On January 18, 2011, we acquired another Nautica Properties based business and its related assets referred to as “Nautica Phase 2” for $1,250 from a limited partnership. The general partner owned 1% and the limited partners owned 99% of the limited partnership. Our CEO owned 58% of the general partner interests and controlled the partnership. Third parties owned the remaining 42% of the general partner interests and the 99% limited partnership interest. Therefore, the portion of Nautica Phase 2 acquired from our CEO has been recorded at the historical cost bases in the assets and liabilities transferred and the portion of Nautica Phase 2 acquired from third parties has been recorded at fair value at the acquisition date using the acquisition method of accounting. See Note 7.

Additionally, on January 31, 2011, we acquired two truck plaza video gaming facilities in Louisiana, Cash Magic Springhill, LLC (“Springhill”) and Cash Magic Vivian, LLC (“Vivian”), for $5,462 and $4,913, respectively, which were previously wholly owned by another JII subsidiary, Gameco Holdings, Inc. (“Gameco”). On March 31, 2011, we acquired one additional truck plaza video gaming facility in Louisiana, Jalou Forest Gold, LLC (“Forest Gold”), for $3,025, which was also previously wholly owned by Gameco. The acquisitions of these truck stops were accounted for as combinations of entities under common control. Accordingly, the accompanying unaudited condensed consolidated financial statements have been retroactively adjusted to include the operations of these businesses from January 1, 2010. See Note 7.

 

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, 2011 and December 31, 2010, the results of our operations for the three and six months ended June 30, 2011 and 2010, and changes in stockholder’s equity and cash flows for the six months ended June 30, 2011 and 2010. 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, 2010 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, 2011.

 

7


Table of Contents

New Accounting GuidanceNew authoritative accounting guidance under FASB ASC Topic 924, Entertainment-Casinos (“ASC Topic 924”), clarified existing literature that an entity should accrue jackpot liabilities and charge to revenues when an entity has the obligation to pay the jackpot (or a portion thereof as applicable). This guidance applies to both base jackpots and the incremental portion of progressive jackpots. The standard was effective for us on January 1, 2011. The adoption of this standard did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued new fair value measurement authoritative guidance that clarifies the application of fair value measurement and disclosure requirements and changes particular principles or requirements for measuring fair value. This guidance is effective for annual periods beginning after December 15, 2011. We are currently evaluating the provisions of this guidance and assessing the impact, if any, it may have on our fair value disclosures.

In June 2011, the FASB issued new authoritative guidance that states an entity that reports items of other comprehensive income has the option to present the components of net income and comprehensive income in either one continuous financial statement, or two consecutive financial statements. This guidance is effective for annual periods beginning after December 15, 2011. We are currently evaluating the provisions of this guidance and assessing the impact it will have on our comprehensive income disclosures.

 

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 the future operating results of each reporting unit, multiples of EBITDA (earnings before interest, income taxes, depreciation and amortization), 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, 2010, prior to the acquisition by JEI, we determined the carrying value of the goodwill at Forest Gold was impaired. Market conditions in 2010 resulted in Forest Gold not meeting the financial performance expectations originally forecast at the time of acquisition. Consequently, Forest Gold recorded a goodwill impairment charge of $836 during the year third quarter of 2010. There have been no circumstances subsequently to indicate any additional impairment testing is required. There has been no change in the carrying amount of goodwill during 2011.

In addition, as of June 30, 2011, 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, 2011 and December 31, 2010, consist of the following:

 

            June 30, 2011      December 31, 2010 (As adjusted, see Note 7)  
     Weighted
Average
Remaining
Life
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Amortizable intangible assets:

                    

Revenue rights

     40.50       $ 6,000       $ 1,140       $ 4,860       $ 6,000       $ 1,080       $ 4,920   

Device use rights

     2.74         11,623         8,174         3,449         10,987         8,047         2,940   

Restriction agreements

     5.21         743         368         375         743         329         414   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 18,366       $ 9,682       $ 8,684       $ 17,730       $ 9,456       $ 8,274   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Aggregate amortization expense of identifiable intangible assets was $418 and $452 for the three months ended June 30, 2011 and 2010, respectively, and $807 and $922 for the six months ended June 30, 2011 and 2010, respectively.

Estimated amortization expense for the years ending December 31:

 

2011 (remaining 6 months)

   $ 715   

2012

     1,314   

2013

     932   

2014

     702   

2015

     606   

Thereafter

     4,415   
  

 

 

 

Total

   $ 8,684   
  

 

 

 

 

4. SEGMENTS

Our CEO is our chief operating decision maker. At June 30, 2011 and 2010, we had 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 our truck plaza/video poker facilities, and the Virginia segment consists of Colonial’s pari-mutuel operations and 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, 2010. 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, 2011

 

     Colorado     Nevada     Louisiana     Virginia     Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

            

Gaming

            

Casino

   $ 27,543      $ 9,139            $ 36,682   

Truck stop

       $ 17,981            17,981   

Pari-mutuel

         $ 7,779          7,779   

Food and beverage

     2,978        2,455        1,420        542          7,395   

Convenience store — fuel

         32,349            32,349   

Convenience store — other

         3,748            3,748   

Hotel

     470        570              1,040   

Other

     235        309        434        439      $ 162        1,579   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     31,226        12,473        55,932        8,760        162        108,553   

Less: Promotional allowances

     (6,323     (1,528     (1,493         (9,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

   $ 24,903      $ 10,945      $ 54,439      $ 8,760      $ 162      $ 99,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ 1,677      $ 1,673      $ 1,502      $ 584      $ 196      $ 5,632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

   $ —        $ —        $ 1      $ 4      $ —        $ 5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ 2,158      $ 1,274      $ 1,104      $ 128      $ 1,850      $ 6,514   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,547      $ (10,845   $ 2,982      $ (376   $ (4,221   $ (7,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(1)

   $ 8,382      $ (7,898   $ 5,587      $ 332      $ (2,175   $ 4,228   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

   $ 6,711      $ 8,836      $ 33,181          $ 48,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable intangible assets, net

       $ 8,684          $ 8,684   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

   $ 77,882      $ 36,405      $ 44,852      $ 61,846      $ 9,876      $ 230,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 111,521      $ 42,955      $ 101,816      $ 71,387      $ 15,623      $ 343,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

   $ 84,771      $ 42,149      $ 33,514      $ 4,862      $ 47,824      $ 213,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 1,597      $ 461      $ 544      $ 631      $ 210      $ 3,443   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

As of and for the Six Months Ended June 30, 2011

 

     Colorado     Nevada     Louisiana     Virginia     Corporate
Adjustments,
Eliminations
and Other
    Total  

Revenues:

            

Gaming

            

Casino

   $ 54,601      $ 18,175            $ 72,776   

Truck stop

       $ 37,489            37,489   

Pari-mutuel

         $ 14,161          14,161   

Food and beverage

     5,955        4,781        2,909        827          14,472   

Convenience store — fuel

         59,038            59,038   

Convenience store — other

         7,092            7,092   

Hotel

     943        849              1,792   

Other

     453        615        828        649      $ 267        2,812   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     61,952        24,420        107,356        15,637        267        209,632   

Less: Promotional allowances

     (12,553     (3,061     (2,980         (18,594
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

   $ 49,399      $ 21,359      $ 104,376      $ 15,637      $ 267      $ 191,038   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ 3,325      $ 3,364      $ 2,998      $ 1,151      $ 396      $ 11,234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

   $ —        $ —        $ 5      $ 12      $ —        $ 17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ 4,315      $ 2,548      $ 2,401      $ 257      $ 3,765      $ 13,286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 8,791      $ (12,123   $ 6,125      $ (534   $ (8,381   $ (6,122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(1)

   $ 16,431      $ (6,211   $ 11,519      $ 862      $ (4,220   $ 18,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

   $ 6,711      $ 8,836      $ 33,181          $ 48,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable intangible assets, net

       $ 8,684          $ 8,684   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

   $ 77,882      $ 36,405      $ 44,852      $ 61,846      $ 9,876      $ 230,861   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 111,521      $ 42,955      $ 101,816      $ 71,387      $ 15,623      $ 343,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

   $ 84,771      $ 42,149      $ 33,514      $ 4,862      $ 47,824      $ 213,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 3,414      $ 1,635      $ 1,018      $ 1,143      $ 867      $ 8,077   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

(Balance Sheet Data as of December 31, 2010)

 

     Colorado     Nevada     Louisiana
(As
adjusted,

see Note 7)
    Virginia     Corporate
Adjustments,
Eliminations
and Other

(As adjusted,
see Note 7)
    Total
(As
adjusted,

see Note 7)
 

Revenues:

            

Gaming

            

Casino

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

Truck stop

       $ 16,906            16,906   

Pari-mutuel

         $ 8,254          8,254   

Food and beverage

     3,053        2,367        1,688        671          7,779   

Convenience store — fuel

         26,754            26,754   

Convenience store — other

         3,500            3,500   

Hotel

     482        572              1,054   

Other

     255        325        846        536      $ 158        2,120   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     31,177        12,426        49,694        9,461        158        102,916   

Less: Promotional allowances

     (6,049     (1,662     (1,386         (9,097
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

   $ 25,128      $ 10,764      $ 48,308      $ 9,461      $ 158      $ 93,819   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ 1,698      $ 1,567      $ 1,518      $ 564      $ 223      $ 5,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ 2,167      $ 1,311      $ 1,360      $ 134      $ 1,823      $ 6,795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,731      $ (572   $ 2,525      $ (42   $ (5,042   $ 1,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(1)

   $ 8,596      $ 2,306      $ 5,402      $ 653      $ (2,996   $ 13,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

   $ 6,711      $ 8,836      $ 33,181          $ 48,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable intangible assets, net

       $ 8,274          $ 8,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

   $ 88,587      $ 38,124      $ 46,019      $ 61,856      $ 8,895      $ 243,481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 110,380      $ 54,412      $ 101,306      $ 66,959      $ 14,582      $ 347,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

   $ 84,771      $ 61,113      $ 53,989      $ 4,875      $ 76,944      $ 281,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 913      $ 1,141      $ 552      $ 371      $ 122      $ 3,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

(Balance Sheet Data as of December 31, 2010)

 

     Colorado     Nevada     Louisiana
(As
adjusted,

see Note 7)
    Virginia     Corporate
Adjustments,
Eliminations
and Other

(As adjusted,
see Note 7)
    Total
(As
adjusted,

see Note 7)
 

Revenues:

            

Gaming

            

Casino

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

Truck stop

       $ 35,709            35,709   

Pari-mutuel

         $ 14,629          14,629   

Food and beverage

     6,005        4,665        3,564        1,022          15,256   

Convenience store — fuel

         48,757            48,757   

Convenience store — other

         6,586            6,586   

Hotel

     956        879              1,835   

Other

     472        657        1,200        755      $ 310        3,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     59,991        24,148        95,816        16,406        310        196,671   

Less: Promotional allowances

     (11,965     (3,387     (2,781         (18,133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

   $ 48,026      $ 20,761      $ 93,035      $ 16,406      $ 310      $ 178,538   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization

   $ 3,423      $ 3,112      $ 3,048      $ 1,108      $ 476      $ 11,167   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

   $ —        $ —        $ 10      $ 4      $ —        $ 14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

   $ 4,337      $ 2,597      $ 2,669      $ 281      $ 3,478      $ 13,362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 8,075      $ (1,684   $ 5,964      $ (219   $ (8,982   $ 3,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA(1)

   $ 15,835      $ 4,025      $ 11,671      $ 1,166      $ (5,028   $ 27,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

   $ 6,711      $ 8,836      $ 33,181          $ 48,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Identifiable intangible assets, net

       $ 8,274          $ 8,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net

   $ 88,587      $ 38,124      $ 46,019      $ 61,856      $ 8,895      $ 243,481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 110,380      $ 54,412      $ 101,306      $ 66,959      $ 14,582      $ 347,639   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

   $ 84,771      $ 61,113      $ 53,989      $ 4,875      $ 76,944      $ 281,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

   $ 1,945      $ 1,704      $ 852      $ 970      $ 263      $ 5,734   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 an agreement with a totalisator company which provides wagering services and designs, programs, and manufactures totalisator systems for our pari-mutuel wagering applications. In addition, Colonial has an agreement with a company which provides broadcasting and simulcasting equipment and services. Total expense incurred for totalisator and broadcasting and simulcasting services was $215 and $217 for the three months ended June 30, 2011 and 2010, respectively, and $358 and $367 for the six months ended June 30, 2011 and 2010, respectively.

 

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Table of Contents

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 $769 and $724 for the three months ended June 30, 2011 and 2010, respectively, and $1,499 and $1,474 for the six months ended June 30, 2011 and 2010, 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 a consulting 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 payments of $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 for the three months ended June 30, 2011 and 2010, respectively, and $625 and $625 for the six months ended June 30, 2011 and 2010, respectively.

Transactions with Affiliate Truck Stops

We allocate management, accounting and overhead costs incurred by JEI to truck stops owned by Gameco. These costs totaled $86 and $94 for the three months ended June 30, 2011 and 2010, respectively, and $156 and $159 for the six months ended June 30, 2011 and 2010, respectively. Additionally, to help JEI reach the fuel sale volume necessary to qualify for the reduced pricing structure under our fuel supply agreements, we entered into agreements with various Gameco subsidiaries to provide gasoline and diesel fuel at cost for their fuel operations, which totaled $1,624 and $1,695 for the three months ended June 30, 2011 and 2010, respectively, and $2,736 and $2,535 for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, Gameco owns one remaining truck stop.

Jalou Device Owner, L.P.

Under Louisiana law, video poker machines must be owned by Louisiana residents. The video poker machines and the related repair parts inventory used by the Jalou truck plazas are owned by Jalou Device Owner, L.P. (“Device Owner”), of which Gameco owns 49% and is the general partner. Two Louisiana residents own 51% and are the limited partners. The Jalou truck plazas pay 90 cents per operating video poker machine per day to Device Owner, plus reimbursement for Device Owner’s licensing costs. Total expense under these arrangements was $377 and $377 for the three months ended June 30, 2011 and 2010, respectively, and $753 and $753 for the six months ended June 30, 2011 and 2010, respectively.

Other Related Party Transactions

Nautica Phase 2 periodically provided working capital advances to JIMCO. These advances totaled $583 as of December 31, 2010 and are included in the balances due from affiliates discussed below. These working capital advances were settled upon acquisition of Nautica Phase 2 by JEI during 2011.

Balances Due To/From Affiliates

Each of the above related party transactions results in either receivables from or payables to our affiliates. As of June 30, 2011 and December 31, 2010, these transactions resulted in net receivables from affiliates totaling $1,488 and $2,671, respectively. As of June 30, 2011 and December 31, 2010, these transactions resulted in net payables to affiliates totaling $228 and $639, respectively.

 

14


Table of Contents

Nautica Properties

During July 2006, we acquired from affiliated parties options to lease and options to purchase six businesses and their related assets, including various parcels of land, buildings and related improvements, on the west bank of the Cuyahoga River in Cleveland, Ohio. We refer to these businesses and their related assets as the Nautica Properties.

In July 2010, we amended the three remaining unexercised option agreements and extended the option periods to July 2012, giving us the right to purchase or enter into long-term leases on the three remaining Nautica Properties businesses and their related assets. On January 18, 2011, we exercised one of these remaining option agreements and acquired a fourth Nautica Properties business and its related assets referred to as “Nautica Phase 2.” See Note 7.

The remaining two unexercised options on the Nautica Properties require aggregate option payments totaling $100 per year. Our CEO owns varying interests in the two remaining parcels. Although we may elect not to exercise the remaining options unless casino gaming opportunities arise, we nonetheless have the right to acquire all or part of the remaining Nautica Properties for other purposes. If we decide to exercise our two remaining options, the aggregate annual lease payments on the remaining two parcels would be $230. If both remaining parcels are purchased, the total purchase price would be $2,300. The purchase price and rent payments would be increased based on independent appraisals of the land, improvements and other assets values if, in the future, a casino were to be licensed on the Nautica Properties.

 

7. RECENT ACQUISITION ACTIVITY

Acquisition of Flats Development, Inc.

As discussed in Note 1, on August 16, 2010, we acquired Flats for $2,800. The acquisition of Flats and its parking lot business was accounted for as a combination of entities under common control. Therefore, the acquisition has been recorded at the historical cost bases in the assets and liabilities transferred. A distribution of $2,800 was recorded on the acquisition date, and the net assets of the entity acquired have been retroactively accounted for in the accompanying unaudited condensed consolidated financial statements since January 1, 2010. Therefore, an effective net distribution of $1,163 (the $2,800 distribution reduced by the $1,637 of net assets acquired) results from the transaction.

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 Flats could increase based on independent appraisals of the land, improvements and other asset 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. 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 as a combination of entities under common control. At June 30, 2011, the fair value of the Flats contingent purchase price was immaterial to the financial position of JEI, but could have a material impact in the future if and when a casino license is granted for the Nautica Properties.

The following table summarizes the net assets acquired and liabilities assumed as of August 16, 2010, for the Flats acquisition:

 

     Flats  

Property and equipment, net

   $ 1,652   

Current liabilities assumed

     15   
  

 

 

 

Net assets acquired

   $ 1,637   
  

 

 

 

 

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Acquisition of Nautica Phase 2

As discussed in Note 1, on January 18, 2011, we acquired Nautica Phase 2 for $1,250. The acquisition of Nautica Phase 2 and its parking lot business was accounted for as a combination of entities under common control. Therefore, the portion of Nautica Phase 2 acquired from our CEO has been recorded at the historical cost bases in the assets and liabilities transferred and the portion of Nautica Phase 2 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 $7 was recorded on the acquisition date for the portion of the purchase price attributable to our CEO. The net assets of the entity acquired have been retroactively accounted for in the accompanying unaudited condensed consolidated financial statements since January 1, 2010. 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 Nautica Phase 2 could increase based on independent appraisals of the land, improvements and other asset 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. 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 our CEO 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, 2011, the fair value of the Nautica Phase 2 contingent purchase price was immaterial to the financial position of JEI, but could have a material impact in the future if and when a casino license is granted for the Nautica Properties.

The following table summarizes the preliminary allocation of the purchase price to net assets acquired and liabilities assumed as of January 18, 2011, for the Nautica Phase 2 acquisition:

 

     Nautica
Phase 2
 

Property and equipment, net

   $ 1,305   

Current liabilities assumed

     62   
  

 

 

 

Net assets acquired

   $ 1,243   
  

 

 

 

Any change in the fair value of the net assets of Nautica Phase 2 during the purchase price allocation period (generally within one year of the acquisition date) may result in an allocation to goodwill.

The following schedule discloses the effects on JEI’s equity due to the change in ownership interest in Nautica Phase 2 discussed above:

 

     Six Months Ended June 30,  
     2011     2010  

Net (loss) income attributable to JEI

   $ (6,122   $ 3,157   

Decrease in JEI’s equity for purchase of Nautica Phase 2 noncontrolling interest

     (623     —     
  

 

 

   

 

 

 

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

   $ (6,745   $ 3,157   
  

 

 

   

 

 

 

Acquisitions of Springhill and Vivian

On January 31, 2011, we acquired two truck plaza video gaming facilities in Louisiana, Springhill and Vivian, for $10,375, which were previously wholly owned by Gameco. The acquisitions of these truck plaza facilities were accounted for as a combination of entities under common control. Therefore, the acquisition has been recorded at the historical cost bases in the assets and liabilities transferred. A distribution totaling $10,375 was recorded on the acquisition date, and the net assets of the entity acquired have been retroactively accounted for in the accompanying unaudited condensed consolidated financial statements since January 1, 2010. Therefore, an effective net distribution of $2,904 (the $10,375 distribution reduced by the $7,471 of net assets acquired) results from the transactions.

 

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At December 31, 2010, Springhill’s and Vivian’s outstanding debt totaled $4,600 and $4,000, respectively, and has been included in the restated unaudited condensed consolidated balance sheet. On January 31, 2011, with proceeds from the sales of Springhill and Vivian, Gameco repaid the outstanding principal and interest of $8,629. The debt was not assumed by JEI and is reflected as a capital contribution in the statement of stockholder’s equity.

The following table summarizes the net assets acquired and liabilities assumed as of January 31, 2011, for the acquisitions occurring on that date:

 

     Springhill      Vivian      Total  

Current assets

   $ 495       $ 507       $ 1,002   

Property and equipment, net

     2,309         2,555         4,864   

Goodwill

     1,376         —           1,376   

Identifiable intangible assets

     318         288         606   

Other assets

     27         12         39   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     4,525         3,362         7,887   

Current liabilities assumed

     188         228         416   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 4,337       $ 3,134       $ 7,471   
  

 

 

    

 

 

    

 

 

 

Acquisition of Forest Gold

On March 31, 2011, we acquired the Forest Gold truck plaza video gaming facility for $3,025 from Gameco. Forest Gold is located in Amite, Louisiana. The acquisition of the truck plaza facility was accounted for as a combination of entities under common control. Therefore, the acquisition has been recorded at the historical cost bases in the assets and liabilities transferred. A distribution of $3,025 was recorded on the acquisition date, and the net assets of the entity acquired have been retroactively accounted for in the accompanying unaudited condensed consolidated financial statements since January 1, 2010. Therefore, an effective net distribution of $65 (the $3,025 distribution reduced by the $2,960 of net assets acquired) results from the transaction.

At December 31, 2010, Forest Gold’s outstanding debt totaled $12,123 and has been included in the restated unaudited condensed consolidated balance sheet. At March 31, 2011, the outstanding principal and accrued interest totaling $12,282 were not assumed by JEI and are reflected as a capital contribution in the statement of stockholder’s equity.

The following table summarizes the net assets acquired and liabilities assumed as of March 31, 2011, for the acquisition occurring on that date:

 

     Forest Gold  

Current assets

   $ 419   

Property and equipment, net

     2,056   

Goodwill

     880   

Identifiable intangible assets

     251   
  

 

 

 

Total assets acquired

     3,606   

Current liabilities assumed

     646   
  

 

 

 

Net assets acquired

   $ 2,960   
  

 

 

 

 

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8. LONG-TERM DEBT

On June 16, 2006, we 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 (of which $3,000 expired June 2011 and the remainder is due June 2012); (ii) a $40,000 six-year term loan facility due June 2012; and (iii) a $20,000 six-year delayed draw term loan due June 2012. 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, 2011, the blended interest rate on our senior secured credit facility was approximately 3.35%. As of June 30, 2011, $9,000 was available on the revolving credit facility. Outstanding borrowings on the senior secured credit facility are due within 12 months and are therefore classified as current portion of long-term debt at June 30, 2011. We are evaluating refinance alternatives and anticipate having a new facility in place prior to the June 2012 maturity of the senior secured 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  

2011

     102.438

2012 and thereafter

     100.000

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 note indenture. Annual distributions may be made to our owner in an aggregate amount not to exceed the greater of $1,000 or 50% of consolidated net income as defined in our credit agreement and indenture. At June 30, 2011, we were in compliance with our financial covenants.

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), establishes a framework for measuring fair value and requires specific 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 identifies 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.

 

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Table of Contents

Recurring Fair Value Measurements – Investment in Equity Securities

We own approximately three percent of the outstanding shares of MTR Gaming Group, Inc. (“MTR”), a publicly-traded gaming company. Our affiliates have also historically invested in MTR, which resulted in a combined ownership of approximately 18.3% of the outstanding common shares of MTR and thus making the affiliated group MTR’s largest shareholder.

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 (gain) loss on the change in the fair value of the investment totaling $(333) and $326 for the three months ended June 30, 2011 and 2010, respectively, and $(813) and $(260) for the six months ended June 30, 2011 and 2010, respectively.

The following table presents information about our financial assets measured at fair value on a recurring basis as of June 30, 2011, aggregated by the level in the fair value hierarchy within which those assets fall:

 

Assets Measured at Fair Value on a Recurring Basis at June 30, 2011

 
     Total Fair
Value
     Level 1      Level 2      Level 3  

Investment in equity securities

   $ 2,465       $ 2,465         —           —     

The following table presents information about our financial assets measured at fair value on a recurring basis as of December 31, 2010, aggregated by the level in the fair value hierarchy within which those assets fall:

 

Assets Measured at Fair Value on a Recurring Basis at December 31, 2010

 
     Total Fair
Value
     Level 1      Level 2      Level 3  

Investment in equity securities

   $ 1,652       $ 1,652         —           —     

Effective May 6, 2008, our CEO was appointed to the MTR board of directors, and on October 31, 2008, he became the chairman of the MTR board. In March 2010, our CEO resigned from MTR’s board of directors. For the period that our CEO was the chairman of the MTR board, we reached a level of significant influence. Therefore, consistent with the requirements of ASC Topic 825 and Rule 4-08(g) of Regulation S-X of the Securities Exchange Act of 1934, the following is summary level financial information of MTR for the three months ended March 31, 2010 as derived from its reports filed with the SEC:

 

     Three
Months Ended

March  31, 2010
 

Net revenues

   $ 99,359   

Total operating expenses

     90,069   

Loss from continuing operations

     (3,137

Net loss

     (3,280

Nonrecurring Fair Value Measurements – Property, Plant and Equipment

We apply the provisions of the fair value measurement standard to our nonrecurring, non-financial measurements including property, plant and equipment impairments. These assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. Property, plant and equipment is evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows.

 

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During the second quarter 2011, we evaluated our ability to recover the recorded cost of Gold Dust West-Carson City. See Note 11. Based on this evaluation, we recorded an impairment of long-lived assets totaling $10,065 related to this property. We used Level 3 inputs and income valuation, market valuation, and cost valuation techniques to measure the fair value of the Gold Dust West-Carson City asset group as of June 30, 2011. We considered a variety of factors when estimating the fair value of the asset group, including estimates about the future operating results, appropriate discount rates, multiples of EBITDA (earnings before interest, income taxes, depreciation and amortization), investment banker market analyses, and recent sales of comparable assets. A variety of estimates and judgments about the relevance and comparability of this information to our assets were made.

The following table presents information about our non-financial assets measured at fair value on a nonrecurring basis as of June 30, 2011, aggregated by the level in the fair value hierarchy within which those assets fall:

 

Assets Measured at Fair Value on a Nonrecurring Basis at June 30, 2011

 
     Total Fair
Value
     Level 1      Level 2      Level 3  

Property, plant and equipment

   $ 6,100         —           —         $ 6,100   

There was no property, plant and equipment measured at fair value within the accompanying balance sheet at December 31, 2010.

Other Estimated Fair Value Disclosures

The following disclosure of estimated fair value of our debt and capital lease obligations 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 debt and capital lease obligations is as follows:

 

     As of
June 30, 2011
     As of
December 31, 2010
(As adjusted, see Note 7)
 
            Estimated             Estimated  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

Liabilities—Debt and capital lease obligations

   $ 298,268       $ 303,584       $ 303,253       $ 301,358   

 

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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, 2011 and December 31, 2010, include the following:

 

     June 30,
2011
     December 31,
2010

(As adjusted,
see Note 7)
 

Payroll and related

   $ 5,412       $ 4,897   

Gaming taxes payable

     2,071         3,318   

Interest payable

     910         958   

Property taxes payable

     1,281         1,134   

Slot club liability

     1,382         1,199   

Progressive jackpot liability

     1,339         1,260   

Purses due horsemen

     2,987         511   

Other

     3,258         3,534   
  

 

 

    

 

 

 
   $ 18,640       $ 16,811   
  

 

 

    

 

 

 

 

11. IMPAIRMENT OF LONG-LIVED ASSETS

During the second quarter 2011, based on operating results, we were required, pursuant to FASB ASC Topic 360, Property, Plant and Equipment, to assess our ability to recover the recorded cost of the Gold Dust West-Carson City long-lived assets. We prepared a cash flow analysis based on management’s best estimate in an effort to assess the likelihood of recovering the cost of these assets. Based on these projections and the related underlying assumptions as well as our knowledge of the Carson City market, we believe that we will not be able to recover the carrying cost of these assets, and therefore, Gold Dust West-Carson City recorded an impairment of long-lived assets totaling $10,065 during the second quarter ended June 30, 2011. Future events such as actual performance versus projected performance, continued market decline, increased and/or changing competitive forces, or other unforeseen events could change our estimates and cause us to recognize an additional impairment in the carrying value of the Gold Dust West-Carson City long-lived assets in future periods. Such an impairment could be material to our financial position and results of operations.

 

12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Our senior secured credit facility and 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, 2011 and December 31, 2010, the Unaudited Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2011 and 2010, and the Unaudited Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2011 and 2010 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, 2011

 

     Parent                     
     Company     Subsidiary               
     Issuer     Guarantors      Eliminations     Consolidated  

ASSETS

         

Current assets

   $ 932      $ 46,053         $ 46,985   

Property, plant and equipment, net

     858        230,003           230,861   

Net investment in and advances to subsidiaries

     96,059         $ (96,059     —     

Other long-term assets

     4,436        61,020           65,456   
  

 

 

   

 

 

    

 

 

   

 

 

 
Total assets    $ 102,285      $ 337,076       $ (96,059   $ 343,302   
  

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

         

Current liabilities

   $ 87,017      $ 26,227         $ 113,244   

Current portion of long-term debt (receivable from) payable to affiliate

     (48,249     48,249           —     

Long-term debt

     210,000        3,120           213,120   

Long-term debt (receivable from) payable to affiliate

     (162,258     162,258           —     

Other long-term liabilities

     6        1,163           1,169   

Stockholder’s equity

     15,769        96,059       $ (96,059     15,769   
  

 

 

   

 

 

    

 

 

   

 

 

 
Total liabilities and equity    $ 102,285      $ 337,076       $ (96,059   $ 343,302   
  

 

 

   

 

 

    

 

 

   

 

 

 

AS OF DECEMBER 31, 2010

(As adjusted, see Note 7)

 

     Parent                     
     Company     Subsidiary               
     Issuer     Guarantors      Eliminations     Consolidated  

ASSETS

         

Current assets

   $ 554      $ 38,203         $ 38,757   

Property, plant and equipment, net

     897        242,584           243,481   

Net investment in and advances to subsidiaries

     93,840         $ (93,840     —     

Other long-term assets

     4,389        61,012           65,401   
  

 

 

   

 

 

    

 

 

   

 

 

 
Total assets    $ 99,680      $ 341,799       $ (93,840   $ 347,639   
  

 

 

   

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY          

Current liabilities

   $ 5,884      $ 41,625         $ 47,509   

Long-term debt

     275,250        6,442           281,692   

Long-term debt (receivable from) payable to affiliate

     (198,782     198,782           —     

Other long-term liabilities

     4        1,110           1,114   

Stockholder’s equity

     17,324        93,840       $ (93,840     17,324   
  

 

 

   

 

 

    

 

 

   

 

 

 
Total liabilities and equity    $ 99,680      $ 341,799       $ (93,840   $ 347,639   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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JACOBS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2011

 

     Parent                     
     Company     Subsidiary               
     Issuer     Guarantors     Eliminations      Consolidated  

Net revenues

     $ 99,209         $ 99,209   

Costs and expenses

   $ (2,261     (98,352        (100,613

Interest expense, net

     (1,456     (5,053        (6,509

Equity in earnings of subsidiaries

     (4,196     $ 4,196         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income

   $ (7,913   $ (4,196   $ 4,196       $ (7,913
  

 

 

   

 

 

   

 

 

    

 

 

 

FOR THE THREE MONTHS ENDED JUNE 30, 2010

(As adjusted, see Note 7)

 

     Parent                    
     Company     Subsidiary              
     Issuer     Guarantors     Eliminations     Consolidated  

Net revenues

     $ 93,844      $ (25   $ 93,819   

Costs and expenses

   $ (3,154     (82,299     25        (85,428

Interest expense, net

     (1,415     (5,376       (6,791

Equity in earnings of subsidiaries

     6,163          (6,163     —     

Noncontrolling interest

       (6       (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to JEI

   $ 1,594      $ 6,163      $ (6,163   $ 1,594   
  

 

 

   

 

 

   

 

 

   

 

 

 

FOR THE SIX MONTHS ENDED JUNE 30, 2011

 

     Parent                    
     Company     Subsidiary              
     Issuer     Guarantors     Eliminations     Consolidated  

Net revenues

     $ 191,063      $ (25   $ 191,038   

Costs and expenses

   $ (4,347     (179,569     25        (183,891

Interest expense, net

     (2,974     (10,295       (13,269

Equity in earnings of subsidiaries

     1,199          (1,199     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (6,122   $ 1,199      $ (1,199   $ (6,122
  

 

 

   

 

 

   

 

 

   

 

 

 

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(As adjusted, see Note 7)

 

     Parent                    
     Company     Subsidiary              
     Issuer     Guarantors     Eliminations     Consolidated  

Net revenues

     $ 178,588      $ (50   $ 178,538   

Costs and expenses

   $ (5,344     (156,742     50        (162,036

Interest expense, net

     (2,668     (10,680       (13,348

Equity in earnings of subsidiaries

     11,169          (11,169     —     

Noncontrolling interest

       3          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to JEI

   $ 3,157      $ 11,169      $ (11,169   $ 3,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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JACOBS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

 

     Parent                     
     Company     Subsidiary               
     Issuer     Guarantors     Eliminations      Consolidated  

Net cash provided by operating activities

   $ 9,576      $ 2,819      $ —         $ 12,395   
  

 

 

   

 

 

   

 

 

    

 

 

 

INVESTING ACTIVITIES:

         

Additions to property, plant and equipment

     (407     (7,670        (8,077

Proceeds from sale of equipment

       116           116   

Purchases of device rights

       (1,217        (1,217

Acquisition of noncontrolling interest

     (1,243          (1,243
  

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (1,650     (8,771        (10,421
  

 

 

   

 

 

   

 

 

    

 

 

 

FINANCING ACTIVITIES:

         

Proceeds from revolving line of credit

     30,800             30,800   

Payments on long-term debt

     (201     (160        (361

Payments on revolving line of credit

     (14,300          (14,300

Net advances to/from subsidiaries

     (9,613     9,613           —     

Distributions to stockholder

     (14,407          (14,407
  

 

 

   

 

 

   

 

 

    

 

 

 
Net cash (used in) provided by financing activities      (7,721     9,453           1,732   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Increase in Cash and Cash Equivalents

     205        3,501           3,706   

Cash and Cash Equivalents — Beginning of Period

     196        24,507           24,703   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents — End of Period

   $ 401      $ 28,008      $ —         $ 28,409   
  

 

 

   

 

 

   

 

 

    

 

 

 

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(As adjusted, see Note 7)

 

     Parent                     
     Company     Subsidiary               
     Issuer     Guarantors     Eliminations      Consolidated  

Net cash provided by operating activities

   $ 7,626      $ 5,493      $ —         $ 13,119   
  

 

 

   

 

 

   

 

 

    

 

 

 
INVESTING ACTIVITIES:          

Additions to property, plant and equipment

     (101     (5,633        (5,734

Proceeds from sale of equipment

       138           138   
  

 

 

   

 

 

   

 

 

    

 

 

 
Net cash used in investing activities      (101     (5,495        (5,596
  

 

 

   

 

 

   

 

 

    

 

 

 
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     (1,229        (1,432

Payments on revolving line of credit

     (16,000          (16,000

Net advances to/from subsidiaries

     (1,768     1,768           —     

Distributions to stockholder

     (1,000          (1,000
  

 

 

   

 

 

   

 

 

    

 

 

 
Net cash (used in) provided by financing activities      (7,471     539           (6,932
  

 

 

   

 

 

   

 

 

    

 

 

 

Net Increase in Cash and Cash Equivalents

     54        537           591   

Cash and Cash Equivalents — Beginning of Period

     191        24,432           24,623   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents — End of Period

   $ 245      $ 24,969      $ —         $ 25,214   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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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, 2011 and 2010. 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, 2010, 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 2011      25   

2.

  Overview and discussion of our operations      25   

3.

  Comparison of our results of operations for the three months ended June 30, 2011 to the three months ended
June 30, 2010
     28   

4.

  Comparison of our results of operations for the six months ended June 30, 2011 to the six months ended
June 30, 2010
     30   

5.

  Segment information      32   

6.

  Liquidity and capital resources      36   

7.

  Critical accounting policies and estimates      38   

1. Significant transactions occurring during 2011

Acquisitions

On January 18, 2011, we acquired a Nautica Properties based business and its related assets referred to as “Nautica Phase 2” for $1.25 million from a limited partnership. The general partner owned 1% and the limited partners owned 99% of the limited partnership. Our Chief Executive Officer (“CEO”) owned 58% of the general partner interests and controlled the partnership. Third parties owned the remaining 42% of the general partner interests and the 99% limited partnership interest. Therefore, the portion of Nautica Phase 2 acquired from our CEO has been recorded at the historical cost bases in the assets and liabilities transferred and the portion of Nautica Phase 2 acquired from third parties has been recorded at fair value at the acquisition date using the acquisition method of accounting. See Note 7 of the unaudited condensed consolidated financial statements.

Additionally, on January 31, 2011, we acquired two truck plaza video gaming facilities in Louisiana, Cash Magic Springhill, LLC (“Springhill”) and Cash Magic Vivian, LLC (“Vivian”), for $5.5 million and $4.9 million, respectively, which were previously wholly owned by another JII subsidiary, Gameco Holdings, Inc. (“Gameco”). On March 31, 2011, we acquired one additional truck plaza video gaming facility in Louisiana, Jalou Forest Gold, LLC (“Forest Gold”), for $3.0 million, which was also previously wholly owned by Gameco. The acquisitions of these truck stops were accounted for as combinations of entities under common control. Accordingly, the accompanying unaudited condensed consolidated financial statements have been retroactively adjusted to include the operations of these businesses from January 1, 2010. See Note 7 of the unaudited condensed consolidated financial statements.

2. Overview and discussion of our operations

Our CEO is our chief operating decision maker. As of June 30, 2011, we had 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 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 truck plaza/video poker facilities, and the Virginia segment consists of Colonial’s pari-mutuel operations and satellite wagering facilities.

 

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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 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 also 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 and/or financing.

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 monitor our cash levels 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 currently have $57.1 million outstanding on our senior secured credit facility with interest due at varying levels. As of June 30, 2011, $28.0 million was outstanding on the $40 million senior secured revolving credit facility (of which $3 million expired June 2011 and the remainder is due June 2012) we have 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, 2011, there were approximately 8,300 slot machines in the city of Black Hawk. We had 1,366 slot machines in this market (984 at The Lodge and 382 at the Gilpin), which represented approximately 16% of the total slot machines in Black Hawk. Additionally, there were 203 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 20% of the total table games in Black Hawk.

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 21 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, 2011, our truck plaza video gaming facilities had a combined total of 1,095 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. As of June 30, 2011, we operated ten satellite wagering facilities in Virginia. 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.

Since 2004, Colonial Downs has operated an internet account wagering platform in Virginia called EZ Horseplay. In early 2009, Colonial Downs commenced development of a custom built account wagering support kiosk that allows a customer to remotely open a wagering account, fund the account with cash, take a cash withdrawal from their account and print a race track program. The first kiosks, along with a touchscreen version of the EZ Horseplay internet account wagering platform, were deployed in September 2009. As of June 30, 2011, we have deployed approximately 55 kiosks in private clubs, bars and restaurants in Virginia.

 

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3. Comparison of our results of operations for the three months ended June 30, 2011 to the three months ended June 30, 2010.

The following table summarizes our consolidated results of operations for the three months ended June 30, 2011 and 2010 (dollars in thousands):

 

     Three Months Ended              
     June 30,              
     2011     2010
(As adjusted,
see Note 7 of
Financial
Statements)
    $ Change     % Variance  

REVENUES

        

Gaming:

        

Casino

   $ 36,682      $ 36,549      $ 133        0.36

Truck stop

     17,981        16,906        1,075        6.36

Pari-mutuel

     7,779        8,254        (475     -5.75

Food and beverage

     7,395        7,779        (384     -4.94

Convenience store – fuel

     32,349        26,754        5,595        20.91

Other

     6,367        6,674        (307     -4.60

Less: Promotional allowances

     (9,344     (9,097     (247     2.72
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     99,209        93,819        5,390        5.75
  

 

 

   

 

 

   

 

 

   

 

 

 
COSTS AND EXPENSES         

Gaming:

        

Casino

     12,579        12,687        (108     -0.85

Truck stop

     10,712        10,507        205        1.95

Pari-mutuel

     6,204        6,379        (175     -2.74

Food and beverage

     3,791        4,002        (211     -5.27

Convenience store – fuel

     30,420        25,180        5,240        20.81

Other

     5,155        4,575        580        12.68

Marketing, general and administrative

     16,388        16,202        186        1.15

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

     (333     326        (659     n/a   

Impairment of long-lived assets

     10,065        —          10,065        n/a   

Depreciation and amortization

     5,632        5,570        62        1.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     100,613        85,428        15,185        17.78
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (1,404     8,391        (9,795     n/a   

Interest expense, net

     (6,509     (6,791     282        -4.15   

Noncontrolling interest

     —          (6     6        -100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME ATTRIBUTABLE TO JEI

   $ (7,913 )   $ 1,594      $ (9,507     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

All comparisons below begin with the second quarter 2011 results followed by the second quarter 2010 results.

Casino revenues increased $0.1 million to $36.7 million from $36.6 million. The increase in casino revenues is due to increases at the Gilpin of $0.7 million or 15% and Gold Dust West-Elko of $0.2 million or 8%, somewhat offset by decreases at The Lodge of $0.6 million or 3% and Gold Dust West-Carson City of $0.2 million or 8%. Revenues at the Gilpin increased primarily due to an increase in slot coin-in associated to a new marketing program. The decrease in revenues at The Lodge was primarily due to decreases in player banked poker and table games.

Truck stop gaming revenues increased $1.1 million or 6% to $18.0 million from $16.9 million. The increase in revenues exceeded the statewide truck stop video gaming revenue increase of 2% resulting from the installation of new video gaming devices and remodeling of certain locations.

 

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Pari-mutuel revenues decreased $0.5 million or 6% to $7.8 million from $8.3 million. A $0.6 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 $0.3 million decrease in revenues at the racetrack as a result of 11 fewer race days, was partially offset by a $0.4 million increase in account wagering revenues.

Food and beverage revenues decreased $0.4 million or 5% to $7.4 million from $7.8 million. This decrease is primarily attributable to a decrease of $0.3 million at the truck stops, of which $0.2 million is the result of outsourcing the food and beverage operations at Springhill and Vivian in 2011. Additionally, decreases of $0.1 million at The Lodge and $0.1 million at Colonial were somewhat offset by an increase of $0.1 million at Gold Dust West-Elko.

Convenience store-fuel revenues increased $5.6 million or 21% to $32.3 million from $26.7 million. This resulted from the average selling price of fuel increasing to $3.73 per gallon in 2011 from $2.74 per gallon in 2010, somewhat offset by an 11% decrease in volume.

Other revenues decreased $0.3 million or 5% to $6.4 million from $6.7 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, somewhat offset by a $0.2 million increase in convenience store revenues at the truck stops.

Promotional allowances increased $0.2 million or 3% to $9.3 million from $9.1 million, and is primarily attributable to an increase in promotional allowances of $0.6 million at the Gilpin attributable to a new marketing program resulting in additional casino revenues, somewhat offset by decreases of $0.3 million at The Lodge and $0.1 million at Gold Dust West-Carson City.

Casino expenses decreased $0.1 million or 1% to $12.6 million from $12.7 million. A decrease of $0.3 million at The Lodge was somewhat offset by increases of $0.1 million at the Gilpin and $0.1 million at Gold Dust West-Elko. These changes in casino expenses are consistent with the changes in casino revenues at these locations.

Truck stop gaming expenses increased $0.2 million or 2% to $10.7 million from $10.5 million and is primarily due to direct costs associated with increased truck stop video poker gaming revenues.

Pari-mutuel costs and expenses decreased $0.2 million or 3% to $6.2 million from $6.4 million. The decrease is attributable to a $0.3 million decrease in pari-mutuel tax, purse, labor and facility costs, partially offset by an increase of $0.1 million in account wagering costs and expenses.

Food and beverage costs and expenses decreased $0.2 million or 5% to $3.8 million from $4.0 million, and is due to a decrease of $0.4 million at the truck stops, of which $0.2 million is the result of outsourcing the food and beverage operations at Springhill and Vivian in 2011, somewhat offset by increases of $0.1 million at The Lodge and $0.1 million at Gold Dust West-Elko.

Convenience store-fuel expenses increased $5.2 million or 21% to $30.4 million from $25.2 million. The increase was primarily due to an increase in the average cost of fuel to $3.50 per gallon in 2011 from $2.58 per gallon in 2010, somewhat offset by a decrease in volume as discussed in convenience store-fuel revenues above.

Other costs and expenses increased $0.6 million or 13% to $5.2 million from $4.6 million, and were primarily attributable to a $0.5 million increase in convenience store expenses at the truck stops, primarily due to increases in convenience store revenues and labor costs combined with a $0.1 million increase in hotel expenses at The Lodge.

Marketing, general and administrative expenses increased $0.2 million or 1% to $16.4 million from $16.2 million. This increase is primarily the result of increases of $0.3 million at the truck stops, $0.1 million at the Gilpin and $0.1 million at Gold Dust West-Elko. These increases are somewhat offset by decreases of $0.1 million at Colonial and $0.2 million at corporate primarily due to a reduction in campaign contributions, travel costs and professional accounting fees, somewhat offset by an increase in payroll costs.

We account for our investment in MTR Gaming Group, Inc. (“MTR”) under the fair value option, in accordance with the fair value option permitted by FASB ASC Topic 825, Financial Instruments (“ASC Topic 825”). An increase in the stock price during the second quarter of 2011 resulted in an unrealized gain on the change in fair value of investment in equity securities totaling $0.3 million. During the second quarter of 2010, we recorded an unrealized loss on the change in fair value of investment in equity securities totaling $0.3 million.

 

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At Gold Dust West-Carson City, we recorded an impairment of long-lived assets totaling $10.1 million during the second quarter of 2011. No comparable transaction occurred during the same period of 2010. See Note 11 of the unaudited condensed consolidated financial statements.

Depreciation and amortization expense increased less than $0.1 million or 1% to $5.6 million.

Net interest expense decreased $0.3 million or 4% to $6.5 million from $6.8 million. The decrease is primarily attributable to a decrease in debt outstanding.

4. Comparison of our results of operations for the six months ended June 30, 2011 to the six months ended June 30, 2010.

The following table summarizes our consolidated results of operations for the six months ended June 30, 2011 and 2010 (dollars in thousands):

 

     Six Months Ended              
     June 30,              
     2011     2010
(As adjusted,
see Note 7 of
Financial
Statements)
    $ Change     % Variance  

REVENUES

        

Gaming:

        

Casino

   $ 72,776      $ 70,505      $ 2,271        3.22

Truck stop

     37,489        35,709        1,780        4.98

Pari-mutuel

     14,161        14,629        (468     -3.20

Food and beverage

     14,472        15,256        (784     -5.14

Convenience store – fuel

     59,038        48,757        10,281        21.09

Other

     11,696        11,815        (119     -1.01

Less: Promotional allowances

     (18,594     (18,133     (461     2.54
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues

     191,038        178,538        12,500        7.00
  

 

 

   

 

 

   

 

 

   

 

 

 

COSTS AND EXPENSES

        

Gaming:

        

Casino

     25,041        24,409        632        2.59

Truck stop

     21,968        21,493        475        2.21

Pari-mutuel

     11,054        11,151        (97     -0.87

Food and beverage

     7,121        7,458        (337     -4.52

Convenience store – fuel

     56,062        45,862        10,200        22.24

Other

     9,707        8,844        863        9.76

Marketing, general and administrative

     32,452        31,912        540        1.69

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

     (813     (260     (553     n/a   

Impairment of long-lived assets

     10,065        —          10,065        n/a   

Depreciation and amortization

     11,234        11,167        67        0.60
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     183,891        162,036        21,855        13.49
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     7,147        16,502        (9,355     -56.69

Interest expense, net

     (13,269     (13,348     79        -0.59

Noncontrolling interest

     —          3        (3     -100.00
  

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME ATTRIBUTABLE TO JEI

   $ (6,122 )   $ 3,157      $ (9,279     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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All comparisons below begin with the year-to-date 2011 results followed by the year-to-date 2010 results.

Casino revenues increased $2.3 million or 3% to $72.8 million from $70.5 million. The increase in casino revenues is due to increases at The Lodge of $1.3 million or 3%, at the Gilpin of $0.8 million or 7% and at Gold Dust West-Elko of $0.5 million or 11%, somewhat offset by a decrease at Gold Dust West-Carson City of $0.3 million or 7%. Revenues at The Lodge increased primarily due to increases in slots and table games revenues, somewhat offset by a decrease in player banked poker. The increase in revenues at the Gilpin was primarily due to an increase in slot coin-in attributable to a new marketing program, offset by a slight reduction in revenues attributable to the March 2010 closure of the poker room.

Truck stop video poker gaming revenues increased $1.8 million or 5% to $37.5 million from $35.7 million. The increase in revenues exceeded the statewide truck stop video gaming revenue increase of 2% resulting from the installation of new video gaming devices and the remodeling of certain locations.

Pari-mutuel revenues decreased $0.4 million or 3% to $14.2 million from $14.6 million. A $0.8 million decrease in wagering revenues at the off track wagering facilities primarily due to a decrease in attendance compared to the prior year, combined with a $0.3 million decrease at the racetrack due to 11 fewer race days, was somewhat offset by a $0.7 million increase in account wagering revenues.

Food and beverage revenues decreased $0.8 million or 5% to $14.5 million from $15.3 million. This decrease is attributable to decreases of $0.7 million at the truck stop facilities, of which $0.3 million is the result of outsourcing the food and beverage operations at Springhill and Vivian in 2011 and a decrease of $0.2 million at Colonial, somewhat offset by an increase of $0.1 million at Gold Dust West-Elko.

Convenience store-fuel revenues increased $10.3 million or 21% to $59.0 million from $48.7 million. The increase was primarily due to an increase in the average selling price of fuel to $3.54 per gallon in 2011 from $2.70 per gallon in 2010, somewhat offset by an 8% decrease in volume.

Other revenues decreased $0.1 million or 1% to $11.7 million from $11.8 million and were primarily attributable to a one-time oil and gas royalty received in April 2010 totaling $0.5 million and a $0.1 million combined decrease in hotel and other revenues at the casinos, somewhat offset by a $0.5 million increase in convenience store revenues at the truck stops.

Promotional allowances increased $0.5 million or 3% to $18.6 million from $18.1 million. Promotional allowances increased by $0.8 million at the Gilpin associated to a new marketing program and $0.2 million at the truck stops, somewhat offset by decreases of $0.2 million at The Lodge and $0.3 million at Gold Dust West-Carson City.

Casino expenses increased $0.6 million or 3% to $25.0 million from $24.4 million primarily due to increases of $0.3 million at The Lodge, $0.2 million at Gold Dust West-Elko and $0.1 million at Gold Dust West-Reno. The increases at The Lodge and Gold Dust West-Elko directly correspond to the increase in casino revenues.

Truck stop gaming expenses increased $0.5 million or 2% to $22.0 million from $21.5 million and is primarily due to direct costs associated with increased truck stop video poker gaming revenues.

Pari-mutuel costs and expenses decreased $0.1 million or 1% to $11.1 million from $11.2 million. The decrease is attributable to a $0.3 million decrease in pari-mutuel tax, purse, labor, simulcast and facility costs and expenses, partially offset by a $0.2 million increase in account wagering costs and expenses.

Food and beverage costs and expenses decreased $0.3 million or 5% to $7.1 million from $7.4 million, and is primarily due to a decrease of $0.6 million at the truck stops, of which $0.3 million is the result of outsourcing the food and beverage operations at Springhill and Vivian in 2011, somewhat offset by increases of $0.1 million at The Lodge, $0.1 million at Gold Dust West-Carson City and $0.1 million at Gold Dust West-Elko.

Convenience store-fuel expenses increased $10.2 million or 22% to $56.1 million from $45.9 million. The increase was primarily due to an increase in the average cost of fuel to $3.35 per gallon in 2011 from $2.55 per gallon in 2010, somewhat offset by a decrease in volume as discussed in convenience store-fuel revenues above. Additionally, in January 2010, we collected $0.4 million in accounts receivable that had been fully reserved in 2008.

Other costs and expenses increased $0.9 million or 10% to $9.7 million from $8.8 million, and were primarily attributable to a $0.8 million increase in convenience store expenses at the truck stops which correlates to the increase in convenience store revenues combined with an increase in labor costs.

 

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Marketing, general and administrative expenses increased $0.5 million or 2% to $32.5 million from $31.9 million. This increase is primarily the result of increases of $0.6 million at the truck stops, $0.3 million at The Lodge, $0.1 million at the Gilpin and $0.2 million at Gold Dust West-Elko. These increases are somewhat offset by decreases of $0.3 million at Colonial and $0.4 million at corporate primarily due to a reduction in legal costs, campaign contributions and professional accounting fees, somewhat offset by an increase in payroll costs.

An increase in MTR’s stock price during the first six months of 2011 resulted in an unrealized gain on the change in fair value of investment in equity securities totaling $0.8 million compared to an unrealized gain totaling $0.3 million during the same period of 2010.

At Gold Dust West-Carson City, we recorded an impairment of long-lived assets totaling $10.1 million during 2011. No comparable transaction occurred during the same period of 2010. See Note 11 of the unaudited condensed consolidated financial statements.

Depreciation and amortization expense was unchanged at $11.2 million.

Net interest expense decreased by less than $0.1 million or 1% to $13.3 million and is attributable to a decrease in debt outstanding, somewhat offset by higher effective interest rates on our variable rate bank debt.

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, 2011 and 2010 (dollars in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010
(As adjusted,
see Note 7 of
Financial
Statements)
    2011     2010
(As adjusted,
see Note 7 of
Financial
Statements)
 
NET REVENUES         

Colorado:

        

The Lodge

   $ 20,122      $ 20,511      $ 40,153      $ 38,729   

Gilpin

     4,781        4,617        9,246        9,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Colorado

     24,903        25,128        49,399        48,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nevada:

        

Gold Dust West-Reno

     4,452        4,447        8,992        8,923   

Gold Dust West-Carson City

     3,369        3,484        6,146        6,306   

Gold Dust West-Elko

     3,124        2,833        6,221        5,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nevada

     10,945        10,764        21,359        20,761   
  

 

 

   

 

 

   

 

 

   

 

 

 

Louisiana

     54,439        48,308        104,376        93,035   

Virginia

     8,760        9,461        15,637        16,406   

Corporate and other

     162        158        267        310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenues

     99,209        93,819        191,038        178,538   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Colorado:

        

The Lodge

     13,025        13,166        26,066        25,303   

Gilpin

     3,496        3,366        6,902        6,888   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Colorado

     16,521        16,532        32,968        32,191   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nevada:

        

Gold Dust West-Reno

     3,063        2,953        6,227        5,992   

Gold Dust West-Carson City (1)

     13,333        3,306        16,474        6,372   

Gold Dust West-Elko

     2,447        2,199        4,869        4,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nevada

     18,843        8,458        27,570        16,736   
  

 

 

   

 

 

   

 

 

   

 

 

 

Louisiana

     48,852        42,906        92,857        81,364   

Virginia

     8,428        8,808        14,775        15,240   

Corporate overhead and other (2)(3)

     2,337        3,154        4,487        5,338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Costs and Expenses

     94,981        79,858        172,657        150,869   
  

 

 

   

 

 

   

 

 

   

 

 

 
EBITDA         

Colorado:

        

The Lodge

     7,097        7,345        14,087        13,426   

Gilpin

     1,285        1,251        2,344        2,409   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Colorado

     8,382        8,596        16,431        15,835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Nevada:

        

Gold Dust West-Reno

     1,389        1,494        2,765        2,931   

Gold Dust West-Carson City (1)

     (9,964     178        (10,328     (66

Gold Dust West-Elko

     677        634        1,352        1,160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Nevada

     (7,898     2,306        (6,211     4,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

Louisiana

     5,587        5,402        11,519        11,671   

Virginia

     332        653        862        1,166   

Corporate overhead and other (2)(3)

     (2,175     (2,996     (4,220     (5,028
  

 

 

   

 

 

   

 

 

   

 

 

 

Total EBITDA

   $ 4,228      $ 13,961      $ 18,381      $ 27,669   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes on page 36.

 

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Table of Contents

General

See sections 3 and 4 above for comparisons of our results of operations for the three and six months ended June 30, 2011 to the three months and six months ended June 30, 2010, which provide explanations regarding the fluctuations in our revenues and costs and expenses by property and segment.

The Lodge

EBITDA at The Lodge decreased $0.2 million or 3% for the three months ended June 30, 2011 compared to the same period of 2010 but increased $0.7 million or 5% for the six months ended June 30, 2011 compared to the same period of 2010. For the second quarter, decreases in casino and food and beverage revenues were somewhat offset by decreased promotional allowances. For the six months, total revenues increased by $1.4 million, primarily in slots and table games revenues, somewhat offset by a decrease in player banked poker. Labor costs and gaming taxes were also higher as a result of the increase in revenues.

Gilpin

EBITDA at the Gilpin increased less than $0.1 million or 3% for the three months ended June 30, 2011 compared to the same period of 2010 but decreased less than $0.1 million or 3% for the six months ended June 30, 2011 compared to the same period of 2010. Slots and table games revenues increased during the three and six months primarily due to an increase in promotional allowances. For the six months, the Gilpin experienced a decrease in player banked poker due to the March 2010 closure of its poker room. Gaming taxes were also higher as a result of increased gaming revenues.

Gold Dust West-Reno

EBITDA at Gold Dust West-Reno decreased $0.1 million or 7% for the three months ended June 30, 2011 compared to the same period of 2010 and decreased $0.2 million or 6% for the six months ended June 30, 2011 compared to the same period of 2010. Labor costs were higher in 2011 than in 2010, somewhat offset by a decrease in promotional allowances.

Gold Dust West-Carson City

Excluding the impact of the 2011 impairment of long-lived assets totaling $10.1 million, EBITDA at Gold Dust West-Carson City decreased $0.1 million or 43% for the three months ended June 30, 2011 compared to the same period of 2010 and $0.2 million for the six months ended June 30, 2011 compared to the same period of 2010. For both the three and six months ended June 30, 2011 compared to the same periods in 2010, we experienced a decrease in slots and other revenues resulting from local economic conditions, somewhat offset by a decrease in promotional allowances. Labor costs were also higher in 2011 than in 2010.

Gold Dust West-Elko

EBITDA at Gold Dust West-Elko increased less than $0.1 million or 7% for the three months ended June 30, 2011 compared to the same period of 2010 and $0.2 million or 17% for the six months ended June 30, 2011 compared to the same period of 2010. Net revenues increased $0.3 million for the second quarter and $0.7 million year to date, while costs and expenses increased $0.2 million and $0.5 million, respectively. The increase in EBITDA was primarily due to an increase in slot revenues of 9% for the quarter and 10% year to date, combined with increases in food and beverage revenues, somewhat offset by increases in direct costs attributable to the increases in revenues.

Louisiana

EBITDA at the Louisiana truck stops increased $0.2 million or 3% for the second quarter but decreased $0.2 million or 1% for the six months ended June 30, 2011 compared to the same period of 2010. During the second quarter of 2010, we received a one-time oil and gas royalty totaling $0.5 million, and during the six months ended June 2010, we collected $0.4 million in accounts receivable that had been fully reserved in 2008. These decreases were somewhat offset by increases in video poker gaming revenues combined with an increase in fuel gross profit per gallon.

 

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Table of Contents

Virginia

EBITDA at our pari-mutuel operations in Virginia decreased $0.3 million or 49% for the three months ended June 30, 2011 compared to the same period of 2010 and decreased $0.3 million or 26% for the six months ended June 30, 2011 compared to the same period of 2010. The second quarter decrease is primarily attributable to a $0.7 million decrease in pari-mutuel and other revenues which were somewhat 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 $0.8 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 decreased by $0.8 million for the three months ended June 30, 2011 and by $0.8 million for the six months ended June 30, 2011 compared to the same periods of 2010 and is primarily due to: (1) increases in the stock price of our investment in MTR, (2) decreased political contributions and professional accounting fees 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, somewhat offset by an increase in payroll costs.

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, 2011

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

Colorado:

          

The Lodge

   $ 7,097      $ 1,247       $ 1,682       $ 4,168   

Gilpin

     1,285        430         476         379   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Colorado

     8,382        1,677         2,158         4,547   
  

 

 

   

 

 

    

 

 

    

 

 

 

Nevada:

          

Gold Dust West-Reno

     1,389        408         654         327   

Gold Dust West-Carson City (1)

     (9,964     613         384         (10,961

Gold Dust West-Elko

     677        652         236         (211
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Nevada

     (7,898     1,673         1,274         (10,845
  

 

 

   

 

 

    

 

 

    

 

 

 

Louisiana

     5,587        1,502         1,103         2,982   

Virginia

     332        584         124         (376

Corporate overhead and other (2)

     (2,175     196         1,850         (4,221
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL

   $ 4,228      $ 5,632       $ 6,509       $ (7,913
  

 

 

   

 

 

    

 

 

    

 

 

 

 

Three months ended June 30, 2010 (As

adjusted, see Note 7 of Financial Statements)

   EBITDA     Depreciation and
Amortization
     Interest
Expense, net
     Noncontrolling
Interest
    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

     5,402        1,518         1,359           2,525   

Virginia

     653        564         131           (42

Corporate overhead and other (3)

     (2,996     223         1,823       $ (6     (5,048
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

TOTAL

   $ 13,961      $ 5,570       $ 6,791       $ (6   $ 1,594   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Six months ended June 30, 2011

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

Colorado:

          

The Lodge

   $ 14,087      $ 2,457       $ 3,363       $ 8,267   

Gilpin

     2,344        868         952         524   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Colorado

     16,431        3,325         4,315         8,791   
  

 

 

   

 

 

    

 

 

    

 

 

 

Nevada:

          

Gold Dust West-Reno

     2,765        835         1,309         621   

Gold Dust West-Carson City (1)

     (10,328     1,227         767         (12,322

Gold Dust West-Elko

     1,352        1,302         472         (422
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Nevada

     (6,211     3,364         2,548         (12,123
  

 

 

   

 

 

    

 

 

    

 

 

 

Louisiana

     11,519        2,998         2,396         6,125   

Virginia

     862        1,151         245         (534

Corporate overhead and other (2)

     (4,220     396         3,765         (8,381
  

 

 

   

 

 

    

 

 

    

 

 

 

TOTAL

   $ 18,381      $ 11,234       $ 13,269       $ (6,122
  

 

 

   

 

 

    

 

 

    

 

 

 

 

Six months ended June 30, 2010 (As

adjusted, see Note 7 of Financial Statements)

   EBITDA     Depreciation and
Amortization
     Interest
Expense, net
     Noncontrolling
Interest
     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

     11,671        3,048         2,659            5,964   

Virginia

     1,166        1,108         277            (219

Corporate overhead and other (3)

     (5,028     476         3,478       $ 3         (8,979
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL

   $ 27,669      $ 11,167       $ 13,348       $ 3       $ 3,157   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Included in Gold Dust West-Carson City for the three and six months ended June 30, 2011 is an impairment charge of long-lived assets totaling $10.1 million.
(2) Included in corporate overhead and other for the three and six months ended June 30, 2011 is a $0.3 million gain and $0.8 million gain, respectively, on the change in fair value of investment in equity securities.
(3) 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 million and $0.5 million, respectively.

6. Liquidity and capital resources

As of June 30, 2011, we had cash and cash equivalents of $28.4 million compared to $24.7 million in cash and cash equivalents as of December 31, 2010. The increase of $3.7 million is the result of $12.4 million cash provided by operating activities, $10.4 million cash used in investing activities, and $1.7 million cash provided by 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 decreased $0.7 million for the six months ended June 30, 2011 compared to June 30, 2010 primarily due to greater increases in restricted cash, accounts receivable and routine fluctuations in accounts payable resulting from cash management activities, somewhat offset by a greater increase in accrued expenses and other noncurrent liabilities.

 

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Table of Contents

Cash used in investing activities during the six months ended June 30, 2011 and 2010 was the result of property and equipment and device rights additions totaling $9.3 million and $5.7 million, respectively, for ongoing capital investments at our existing properties, somewhat offset by $0.1 million and $0.1 million, respectively, of proceeds from the sale of equipment. In addition, cash used in investing activities during the six months ended June 30, 2010 included $1.2 million to acquire the noncontrolling interest of Nautica Phase 2.

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 provided by financing activities during the six months ended June 30, 2011 was the result of net borrowings on the revolving senior credit facility totaling $16.5 million, somewhat offset by payments on long-term debt totaling $0.4 million, and cash distributions to stockholder totaling $14.4 million, including $10.4 million for the purchase of Springhill and Vivian and $3.0 million for the purchase of Forest Gold.

As of June 30, 2011, we had $9.0 million available on our $40 million revolving senior credit facility (of which $3.0 million expired June 2011 and the remainder is due June 2012) for acquisitions, capital expenditure programs and working capital. As of June 30, 2011, our total debt approximates $298.3 million, of which $85.1 million is due within the next 12 months. We are evaluating refinance alternatives and anticipate having a new facility in place prior to the June 2012 maturity of the senior credit facility. 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, 2011, 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 or 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 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 2011, 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. Adverse national and local economic conditions could persist or worsen. 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, 2011.

 

(In Thousands)

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

Long-term debt (1)

   $ 359,331       $ 108,297       $ 251,016       $ 18       $ —     

Capital lease obligations

     6,934         474         948         1,526         3,986   

Operating leases (2)

     36,824         3,254         5,696         4,780         23,094   

Purchase obligations (3)

     295,331         86,309         172,618         36,404         —     

Other long-term obligations (4)

     20,999         2,199         3,585         2,890         12,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 719,419       $ 200,533       $ 433,863       $ 45,618       $ 39,405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Long-term debt includes principal and interest owing under the terms of our senior unsecured notes, our senior secured credit facility and capital leases. Interest on variable rate debt is computed based on rates outstanding at June 30, 2011.
(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, 2011 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 $205,000. 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  

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 67% 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 the second quarter 2011, based on operating results, we were required, pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant and Equipment, to assess our ability to recover the recorded cost of the Gold Dust West-Carson City long-lived assets. We prepared a cash flow analysis based on management’s best estimate in an effort to assess the likelihood of recovering the cost of these assets. Based on these projections and the related underlying assumptions as well as our knowledge of the Carson City market, we believe that we will not be able to recover the carrying cost of these assets, and therefore, Gold Dust West-Carson City recorded an impairment of long-lived assets totaling $10.1 million during the second quarter ended June 30, 2011. Future events such as actual performance versus projected performance, continued market decline, increased and/or changing competitive forces, or other unforeseen events could change our estimates and cause us to recognize an additional impairment in the carrying value of the Gold Dust West-Carson City long-lived assets in future periods. Such an impairment could be material to our financial position and results of operations.

Goodwill and other intangible assets

We have $48.7 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.

Our reporting units with goodwill balances at June 30, 2011 are The Lodge ($4.2 million), Gilpin ($2.5 million), Gold Dust West-Reno ($8.8 million) and Louisiana ($33.2 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, 2010. 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. As of September 30, 2010, prior to the acquisition by JEI, we determined the carrying value of the goodwill at Forest Gold was impaired. Market conditions in 2010 resulted in Forest Gold not meeting the financial performance expectations originally forecast at the time of acquisition. Consequently, Forest Gold recorded a goodwill impairment charge of $0.8 million during the third quarter of 2010. There has been no change in the carrying amount of goodwill during 2011.

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 expired June 2011 and the remainder is due June 2012, (ii) a $40 million six-year term loan facility due June 2012, and (iii) a $20 million six-year delayed draw term loan due June 2012. As of June 30, 2011, $28.0 million is outstanding on the senior secured revolving credit facility and $57.1 million is outstanding on our senior secured term loan debt, bearing interest at a blended variable rate approximating 3.35% at June 30, 2011. As of June 30, 2011, $9.0 million was available on the revolving credit facility. Outstanding borrowings on the senior secured credit facility are due within 12 months and are therefore classified as current portion of long-term debt at June 30, 2011.

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, 2011.

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. 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, 2011.

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, 2011. 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, 2010, filed March 29, 2011.

 

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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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.
101    Financial statements for the Jacobs Entertainment, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholder’s Equity, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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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 15, 2011     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

 

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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.
101    Financial statements for the Jacobs Entertainment, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL: (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Stockholder’s Equity, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

 

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