10-Q 1 d10q.txt FORM 10-Q: 3RD QUARTER 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 September 30, 2001 ------------------ OR ---- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to _________________ Commission File Number: 0-21736 ------- BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. --------------------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-115848 ------------ ------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 21 240 Main Street Black Hawk, Colorado 80422 --------------------------------- -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (303) 582-1117 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_______ --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock 4,154,400 shares ------------- ---------------- Class Outstanding as of November 13, 2001 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. Index to Form 10-Q September 30, 2001

BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 --------------------------------------------------------------------------------

1 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

2 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

3 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------------------------------------------------

4 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

5 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 1. BUSINESS Black Hawk Gaming & Development Company, Inc. ("BHWK" or the "Company") was incorporated on January 10, 1991. The Company is a holding company, which owns, develops and operates gaming properties. Currently the Company operates the Gilpin Hotel Casino ("GHC") and The Lodge Casino at Black Hawk ("The Lodge"), both located in Black Hawk, Colorado, and The Gold Dust West Casino ("GDW") located in Reno, Nevada. GHC is a 37,000 square foot facility located in the Black Hawk gaming district and was the Company's first casino project. Originally built in the 1860's, the Gilpin Hotel was one of the oldest in Colorado; however, due to space limitations, the casino offers no hotel or lodging facilities. The Gilpin Hotel Casino commenced operations in October 1992, and was expanded through the acquisition of an adjacent casino in late 1994. Prior to April 24, 1998, the Company owned a 50% interest in the Gilpin Hotel Venture, which owned GHC. On April 24, 1998, the Company acquired the other 50% interest in GHC and related land. It now offers customers approximately 460 slot machines, 4 table games, two restaurants, four bars and parking for approximately 200 cars. The Lodge is a $74 million hotel/casino/parking complex and is one of Colorado's largest casinos. The 250,000 square foot facility which opened on June 24, 1998, presently offers customers 877 slot machines, 27 table games, 50 hotel rooms, three restaurants, four bars and parking for approximately 600 cars. The Company and its strategic partner, Jacobs Entertainment Ltd., developed and co-manage The Lodge, through an LLC, in which the Company owns a 75% interest and affiliates of Jacobs Entertainment Ltd. own 25%. On January 4, 2001, the Company purchased the assets and operating business of GDW for $26.5 million. The 24,000 square foot gaming and dining facility is located on 4.6 acres, a few blocks west of Reno's downtown gaming district. The casino has been catering to the "locals" market for the past 23 years and currently offers customers 500 slot machines, 106 motel rooms, one restaurant, four bars and parking for 277 cars. The Lodge, GHC, and GDW are sometimes referred to as the "Casinos." 2. SIGNIFICANT ACCOUNTING POLICIES Unaudited Consolidated Financial Statements --- In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial position of the Company at September 30, 2001 and the results of its operations for the three and nine months then ended. The accompanying unaudited consolidated financial statements include the accounts of BHWK, its wholly owned subsidiaries Gilpin Ventures, Inc. ("GVI") and GDW, and its 75% owned subsidiary, Black Hawk/Jacobs Entertainment, LLC. All significant inter-company transactions and balances have been eliminated in consolidation. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended December 31, 2000. The results of interim periods are not necessarily indicative of results to be expected for the year. Reclassifications - Certain amounts have been reclassified within the 2000 financial statements to conform to the presentation used in 2001. 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method - the purchase method. This Statement is effective for all business combinations initiated after June 30, 2001. The adoption of the statement did not have a material impact on the Company's financial position or results of operations. In July 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement, goodwill as well as other intangibles determined to have an indefinite life will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. This statement is effective for the Company for the first quarter in the fiscal year ended December 31, 2002. Management is currently evaluating the impact that this statement may have on the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supercedes current accounting guidance relating to impairment of long-lived assets and provides a single accounting methodology for long-lived assets to be disposed of, and also supercedes existing guidance with respect to reporting the effects of the disposal of a business. SFAS No. 144 is effective beginning January 1, 2002, with earlier adoption encouraged. Management is currently evaluating the impact that this statement may have on the Company's financial statements upon adoption. 6 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 (Continued) 3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued) In January 2001, FASB announced that the Emerging Issues Task Force ("EITF") had reached a final consensus on EITF 00-22 "Accounting for `Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future." EITF 00-22 requires that certain sales incentives provided by vendors that entitle a customer to receive a reduction in the price of a product or service based on a specified cumulative level of transactions be recognized as a reduction in revenue. This issue is scoped broadly to include all industries that utilize point or other loyalty programs, including the hospitality industry. Effective January 1, 2001, the Company adopted this standard resulting in a reclassification of player point and coupon cash redemption expenses from marketing, general and administrative expense to promotional allowances in the amount of $2,339,000 and $1,829,000 for the three months ended September 30, 2001 and 2000, respectively, and $6,579,000 and $5,780,000 for the nine months ended September 30, 2001 and 2000, respectively. 4. ACCOUNTING CHANGE Effective January 1, 2001, BHWK adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair-value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash-flow hedge, changes in the fair value of the derivative are recorded in other comprehensive income ("OCI") net of taxes, and are recognized in the income statement when the hedged item affects earnings. SFAS No. 133 defines requirements for designation and documentation of hedging relationships as well as ongoing effectiveness assessments in order to use hedge accounting. The Company uses derivative instruments to manage its exposure to interest rate risk. The Company's objective for holding derivatives is to minimize the risks associated with fluctuating interest rates by using the most effective methods available. Variable-rate debt is subject to interest rate risk. The Company uses Interest Rate Swaps, as cash flow hedging instruments, to manage its exposure to interest rate risk on its variable-rate debt. The adoption of SFAS No. 133 on January 1, 2001, resulted in the Company recording a $368,000 gain (net of $200,000 in taxes) in accumulated other comprehensive income/(loss) as a transition adjustment for its derivative instrument which had been designated as a cash flow hedge prior to adopting of SFAS No. 133. On February 16, 2001, the Company terminated this interest rate swap agreement and simultaneously entered into a new interest rate swap agreement and designated the new swap as a cash flow hedge as defined by SFAS No. 133. From January 1, 2001 through February 16, 2001, the Company recorded a $318,000 charge to interest expense due to the devaluation of the original interest rate swap. Although the transition adjustment was reflected in other comprehensive loss, subsequent changes in the value of the original interest rate swap are reflected in the income statement because the swap was not designated as a hedging instrument as defined by SFAS No. 133. In, addition, the Company reclassified $118,000 (net of $64,000 in taxes) of the transition gain from OCI to interest expense representing the amortization of the transition gain due to terminating the interest rate swap agreement during the nine months ended September 30, 2001. The amortization of the transition adjustment will continue through April 16, 2003 (the expiration date of the original interest rate swap agreement). Derivative losses included in OCI for the nine months ended September 30, 2001 amounted to $1,552,000 net of $873,000 in taxes reflecting the decline in market value of the interest rate swap entered into on February 16, 2001 through September 30, 2001. No event is expected to result in a reclassification of losses reported in OCI over the next twelve months due to the interest rate swap's effectiveness in off setting the variable rate cash flows of the debt. 5. BUYOUT OF COMMON STOCK On April 27, 2001, BHWK announced the execution of a merger agreement. Pursuant to the merger agreement, Gameco, Inc., an entity owned and controlled by Jeffrey P. Jacobs, Chairman of the Board and Chief Executive Officer of BHWK, has agreed to pay $12.00 per share, in cash, for each share of common stock of BHWK not currently owned by Mr. Jacobs or his affiliates and BHWK will become a wholly-owned subsidiary of Gameco. Consummation of the transaction is subject to various conditions, including, among other things, the approval by BHWK's stockholders and the obtaining of various regulatory approvals. On November 9, 2001, the Board of Directors granted to Gameco an extension until April 1, 2002 in which to arrange for financing and close the transaction. All other terms and conditions of the merger agreement remain in place. If the transaction fails to close by April 1, 2002 through no fault of BHWK, BHWK may terminate the merger agreement and will be entitled to liquidated damages of $2 million. 6. SEGMENT DISCLOSURE As of January 4, 2001, BHWK acquired the Gold Dust West Casino in Reno, Nevada. This acquisition expanded BHWK's operations into another gaming jurisdiction other than Black Hawk, Colorado. As defined by SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", the following segment information is presented after the elimination of inter-segment transactions. Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, minority interest in The Lodge, and privatization and other non-recurring costs) has been included as a supplemental disclosure to facilitate a more complete analysis of our casinos' financial performance. We believe this disclosure enhances the understanding of the financial performance of a company, such as ours, with substantial interest, taxes, depreciation and amortization. 7 BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 (continued) 6. SEGMENT DISCLOSURE (continued) BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED SEGMENT INFORMATION FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

7. ACQUISITION OF GOLD DUST WEST Assuming the Gold Dust West acquisition had occurred on January 1, 2000, for the three and nine months ended September 30, 2000, net revenues would have been $25,110,000 and $75,010,000 respectively, net income would have been $1,711,000 and $5,470,000 respectively, and earnings per share would have been $.41 and $1.32 per share respectively. The pro forma financial information is not necessarily indicative of either the results of operations that would have occurred had this agreement been effective on January 1, 2000 or of future operations. See BHWK's 8-K filing dated March 19, 2001 for other information on pro-forma results. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ------- ----------------------------------------------------------------------- This Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and we intend that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include our plans and objectives for future operations, including plans and objectives relating to our gaming operations and future economic performance, and our plans with respect to the buyout described in Note 5 above. The forward-looking statements are based on current expectations that involve a number of risks and uncertainties that might adversely affect our operating results in the future in a material way: intensity of competition, particularly the opening of new casinos in our immediate market area in 2000 and those planned to be opened in 2001 and 2002, levels of gaming activity in general and in Black Hawk in particular, our ability to meet debt obligations, regulatory compliance, taxation levels, effects of national and regional economic and market conditions, labor and marketing costs, success of our diversification plans, the proposed buyout and the ultimate outcome of litigation matters. The following discussion is qualified in its entirety by the unaudited financial statements and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Form 10-K for the year ended December 31, 2000. Results of Operations --------------------- Introduction ------------ BHWK's results of operations for the three and nine months ended September 30, 2001 and 2000 reflect the consolidated operations of our subsidiaries (GHC, GDW and The Lodge for 2001 and GHC and The Lodge for 2000 respectively) and the net corporate overhead of BHWK. BHWK owns 100% of GHC and GDW and 75% of The Lodge. The remaining 25% ownership in The Lodge is held by affiliates of our chief executive officer, and is reflected as "Minority Interest" in the consolidated financial statements. The net corporate overhead incurred at BHWK is the result of directing the overall operations of our Company including the specific efforts related to being a publicly traded company. We continually review the overall operational aspects of our Casinos and attempt to modify our operations, when and if necessary, in an attempt to remain competitive and to maintain our market share. Generally, our overall market strategy is to focus on our existing customer base while we develop marketing programs that increase new customer visits. Our vision is to be the best "locals casino" in each market by offering the best customer service, slot selection, player club benefits, and food and beverage service available in the market. Increased Competition in the Black Hawk Market On February 4, 2000 a casino opened in Black Hawk with approximately 950 devices and a 550-car valet/self-parking garage. A second casino opened next door to The Lodge on March 6, 2000 with approximately 750 devices and parking for 500 cars. A third project recommenced construction with a projected opening date sometime in the fourth quarter of 2001. A fourth project has begun various predevelopment efforts and submittals to the City of Black Hawk and other agencies. Based upon the level of development activity in the City of Black Hawk, it is apparent that increased competition within this market continues to be a certainty. We believe the new casinos have expanded the City of Black Hawk's gaming market; however, it is extremely difficult, if not impossible, to accurately predict the extent of the future growth of this market. In any event, we expect some of our previous and existing market share has been and will be lost to increased competition. We believe that the competition within this market will continue to increase and intensify. As a result, our marketing costs, our personnel costs and other costs at our properties will more than likely increase while we attempt to maintain our market share. GHC's operations have been most noticeably impacted due to the additional competition in Black Hawk, which also includes The Lodge. We are currently investigating possible expansion opportunities for the Gilpin in order to provide a more competitive single floor casino environment. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following is an analysis of the results of our unaudited consolidated operations for the three and nine months ended September 30, 2001 and 2000. Adjusted EBITDA is included in the discussion of the unaudited results of operations. Adjusted EBITDA should not be considered to be an alternative to operating income or net income as defined by accounting principles generally accepted in the United States of America. It also should not be construed to be an indicator of our operating performance, nor as an alternative to cash flows from operational activities and hence, a measure of our liquidity. We have presented Adjusted EBITDA as a supplemental disclosure element, which will facilitate a more complete analysis of our casinos' financial performance. We believe this disclosure enhances the understanding of the financial performance of a company, such as ours, with substantial interest, taxes, depreciation and amortization. BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC. UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 --------------------------------------------------------------------------------

11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) UNAUDITED CONSOLIDATED RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000. Net Revenues We generated net revenues of $26,026,000 during the three months ended September 30, 2001 compared to $20,354,000 for the same period of 2000. The increase in net revenues of $5,672,000 or 28% is the result of net revenues generated from GDW (acquired January 4, 2001) of $4,877,000 and an increase in net revenues at The Lodge of $908,000. These increases were offset by a decrease in net revenues at the Gilpin casino of $113,000. Generally we believe the primary reason for the decrease in net revenues at the Gilpin facility for the comparable three months periods ending September 30, 2001 and 2000 was due to the continued intense level of competition created by the newer and larger casinos in the City of Black Hawk including The Lodge. Costs and Expenses Our total costs and expenses were $19,583,000 for the three months ended September 30, 2001 compared to $15,231,000 for the same period of 2000. The overall increase of $4,352,000 or 29% was the result of costs and expenses associated with GDW of $3,679,000 as well as increased costs and expenses at The Lodge of $832,000. These expenses were partially offset by a reduction in costs and expenses at GHC and Corporate of $31,000 and $128,000 respectively. Adjusted EBITDA When our total costs and expenses are subtracted from our net revenues, the result is Adjusted EBITDA of $6,443,000 for the three months ended September 30, 2001 compared to $5,123,000 for the same period of 2000. The increase of $1,320,000 or 26% is primarily the result of the factors discussed above. Our Adjusted EBITDA ratio (Adjusted EBITDA divided by our net revenues) for each of the three months ended September 30, 2001 and 2000 was 25%. Interest Income We had interest income totaling $31,000 during the three months ended September 30, 2001 compared to $68,000 for the same period of 2000. The decrease of $37,000 or 54% is due primarily to the reductions in interest rates and invested cash balances. Interest Expense We had interest expense totaling $1,266,000 during the three months ended September 30, 2001 compared to $795,000 for the same period of 2000. The increase of $471,000 or 59% is primarily the result of interest on borrowings associated with the acquisition of GDW of $458,000 and increases in interest expense at The Lodge of $95,000. The increases were partially offset by reductions in interest expense incurred at GHC of $82,000. Privatization and other non-recurring costs During the three months ended September 30, 2001, we incurred privatization and other non-recurring costs of approximately $151,000. These costs were associated with the buyout offer (See Item 1 Note 5 above) and include fees paid to financial advisors hired to identify strategic alternatives available to the Company as well as fees paid to legal counsel and financial advisors hired by the Company and the Special Committee of the Board of Directors in its analysis of the buyout offer. Depreciation and Amortization We had depreciation and amortization of $1,964,000 for the three months ended September 30, 2001 compared to $1,459,000 for the same period of 2000. The increase of $505,000 or 35% is primarily due to the depreciation and amortization incurred by the GDW of $521,000 and an increase in depreciation and amortization expense at The Lodge of $4,000 offset by a decrease in depreciation and amortization expense at GHC of $20,000. Depreciation and amortization primarily relates to buildings, equipment, and intangible assets. Minority Interest Minority interest for the three months ended September 30, 2001 totaled $573,000 compared to $590,000 for the same period of the prior year. Minority interest represents the 25% share of The Lodge's income (before eliminating inter-company transactions) that is owned by affiliates of our chief executive officer. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) UNAUDITED CONSOLIDATED RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 (continued) Income Taxes Our effective income tax rate for the three months ended September 30, 2001 and 2000 resulted in income tax expense of $974,000 and $845,000. The unique tax characteristics of the individual components of our income before income taxes are what determine our overall effective tax rate. Due to the significant costs incurred in association with the buyout offer (see privatization and other non-recurring costs above) and the non-deductible nature of a substantial portion of those costs, the Company's effective income tax rate for the three months ended increased to 39% as compared to 36% for the comparable quarter of the prior year. With the exception of costs associated with the buyout offer and assuming continued profitability at our current levels (and no change in the current tax law), we expect our effective income tax rate to return to the 36% range next year. Net Income As a result of the factors discussed above, we reported net income of $1,546,000 for the three months ended September 30, 2001 compared to $1,502,000 for the same period of 2000, an increase in net income of $44,000 or 3%. Earnings Per Share We reported basic earnings per share for the three months ended September 30, 2001 and 2000 of $.38 and $.37, respectively and diluted earnings per share for the same time periods of $.36 and $.36, respectively. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) THE LODGE UNAUDITED RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Net Revenues The Lodge generated net revenues of $15,619,000 during the three months ended September 30, 2001 compared to $14,711,000 for the same period of 2000. The increase in our net revenues at The Lodge of $908,000 or 6% is primarily due to a an increase in casino revenue (net of cash redemptions) of $892,000 or 1% and a net increase in other combined net revenue of $16,000. We believe the primary reason for the increase in our net revenues for the three months period ending September 30, 2001 and 2000 is due to an increase in our marketing efforts as well as overall market growth in the City of Black Hawk. Costs and Expenses The Lodge's costs and expenses (after eliminating inter-company transactions) totaled $11,246,000 during the three months ended September 30, 2001 compared to $10,414,000 for the same period of 2000. The overall increase of $832,000 or 8% is due to increases in labor costs of $425,000, gaming taxes of $202,000, marketing and media costs of $162,000, bus program costs of $64,000, utilities of $11,000, and other net expenses of $9,000. These increases were offset by a decrease in slot participation costs of $41,000. Adjusted EBITDA When The Lodge's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $4,374,000 for the three months ended September 30, 2001 compared to $4,297,000 for the same period of 2000. The increase in Adjusted EBITDA of $77,000 or 2% is primarily the result of market growth in the City of Black Hawk offset by increased costs of competition. Interest Expense Interest expense at The Lodge was $702,000 for the three months ended September 30, 2001 compared to $607,000 for the same period of 2000. The increase of $95,000 or 16% is primarily due to increases in interest expense of $144,000 on our increased average debt outstanding. This was partially offset by a $49,000 credit to interest expense in connection with our interest rate swap activity during the three months ended September 30, 2001 (see Item 1 Note 4 above). Depreciation and Amortization Depreciation and amortization of The Lodge totaled $996,000 for the three months ended September 30, 2001 compared to $992,000 for the same period of 2000. The increase of $4,000 is generally due to an increase in depreciable assets. Income before income taxes As a result of the factors discussed above, The Lodge generated income before income taxes (after eliminating inter-company transactions and before minority interest) of $2,694,000 for the three months ended September 30, 2001 compared to $2,737,000 for the same period of 2000, a decrease of $43,000 or 2%. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) THE GILPIN HOTEL CASINO UNAUDITED RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Net Revenues GHC generated net revenues of $5,530,000 during the three months ended September 30, 2001 compared to $5,643,000 for the same period of 2000. The decrease in our net revenues at GHC of $113,000 or 2% is primarily due to a decrease in casino revenue of $66,000 and a net decrease in other combined net revenue of $47,000. The primary reason for the decrease in our overall casino revenue at GHC is a result of the opening of larger and newer gaming facilities in the City of Black Hawk, including The Lodge. Costs and Expenses GHC's costs and expenses totaled $4,159,000 during the three months ended September 30, 2001 compared to $4,190,000 for the same period of 2000. The overall decrease of $31,000 or 1% is due to decreases in gaming taxes of $29,000, bus program costs of $24,000, slot participation costs of $46,000 and other net costs and expenses of $28,000. These reductions were offset by an increase in marketing related costs of $54,000 and labor costs of $42,000. Adjusted EBITDA When GHC's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $1,371,000 for the three months ended September 30, 2001 compared to $1,453,000 for the same period of 2000. The decrease in Adjusted EBITDA of $82,000 or 6% is the result of increased competition and the opening of larger and newer gaming facilities in the City of Black Hawk, including The Lodge. Interest Expense Interest expense at GHC was $106,000 for the three months ended September 30, 2001 compared to $188,000 for the same period of 2000. The decrease of $82,000 or 44% is primarily due to paying down our debt levels at various times since September 30, 2000 as well as a $12,000 credit to interest expense in connection with our interest rate swap activity during the three months ended September 30, 2001 (see Item 1 Note 4 above). Depreciation and Amortization The depreciation and amortization of GHC totaled $444,000 for the three months ended September 30, 2001 compared to $464,000 for the same period of 2000. The decrease of $20,000 or 4% is generally due to assets reaching full amortization offset by an increase in other depreciated assets. Income before income taxes As a result of the factors discussed above, GHC generated income before income taxes of $827,000 for the three months ended September 30, 2001 compared to $825,000 for the same period of 2000, a decrease of $2,000. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) GOLD DUST WEST UNAUDITED RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 On January 4, 2001, BHWK purchased the assets and operating business of the Gold Dust West Casino with operations beginning January 5, 2001. Therefore, there are no comparisons to the prior periods presented. See BHWK's 8-K filing dated March 19, 2001 for pro-forma results. Net Revenues GDW generated net revenues of $4,877,000 during the three months ended September 30, 2001. The revenues by operating department included casino revenue of $4,366,000 or 90%, food and beverage revenue of $375,000 (net of $345,000 in promotional allowances) or 8%, hotel revenue of $119,000 (net of $13,000 in promotional allowances) or 2% and other revenues of $17,000. Costs and Expenses GDW's costs and expenses totaled $3,679,000 during the three months ended September 30, 2001. The costs and expenses by operating departments included casino operations of $1,319,000 or 36%, food and beverage operations of $625,000 or 17%, hotel operations of $64,000 or 2%, marketing, general, and administrative of $1,671,000 or 45%. Adjusted EBITDA When GDW's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $1,198,000 for the three months ended September 30, 2001. Interest Expense Interest expense at GDW was $458,000 for the three months ended September 30, 2001 resulting from borrowings associated with its acquisition by BHWK. Depreciation and Amortization Depreciation and amortization at GDW totaled $520,000 for the three months ended September 30, 2001. Depreciation and amortization primarily relates to buildings, equipment, and intangible assets. Income before income taxes As a result of the factors discussed above, GDW generated income before income taxes of $223,000 for the three months ended September 30, 2001 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) CORPORATE UNAUDITED RESULTS OF OPERATIONS -- FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2000 Generally, our corporate operations are not a profit center, but rather a managerial division that directs the overall operations of the Company, including the specific efforts related to being a publicly traded company. Net Revenue No net revenue is generated at our corporate level after elimination of inter-company transactions. Costs and Expenses Our costs and expenses totaled $499,000 for the three months ended September 30, 2001 compared to $627,000 for the same period of 2000. The decrease of $128,000 or 20% is due to a prior year $101,000 non-recurring write off of costs incurred in the pursuit of potential new gaming projects and opportunities as well as a current year decrease in consulting costs of $34,000, and shareholder relations costs of $30,000. These decreases in costs were partially offset by increases in legal costs of $20,000, travel and entertainment costs of $11,000 and other net costs of $6,000. Net Corporate Overhead As no revenues are generated at the corporate level, our net corporate overhead is equal to our total corporate costs and expenses. The decrease in our net corporate overhead of $128,000 or 20% serves to increase our consolidated Adjusted EBITDA. Depreciation and Amortization Depreciation and amortization at the corporate level was $3,000 for both the three months ended September 30, 2001 and 2000. Privatization and other non-recurring costs See the discussion under unaudited consolidated results of operations - for the three months ended September 30, 2001 compared to the three months ended September 30, 2000 above. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) UNAUDITED CONSOLIDATED RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000. Net Revenues We generated net revenues of $73,618,000 during the nine months ended September 30, 2001 compared to $60,741,000 for the same period of 2000. The increase in net revenues of $12,877,000 or 21% is the result of net revenues generated from GDW (acquired January 4, 2001) of $13,800,000 and an increase in net revenues generated at The Lodge of $297,000, offset by decreases in net revenues at GHC of $1,220,000. Generally, we believe the primary reason for the decrease in net revenues at GHC for the nine months ended September 30, 2001 over the same period of 2000 is the result of the opening of larger and newer gaming facilities in the City of Black Hawk, including The Lodge. The increase in net revenues at The Lodge, despite the intense competition within the City is generally attributable to the overall growth in the market. Costs and Expenses Our total costs and expenses were $55,852,000 for the nine months ended September 30, 2001 compared to $44,588,000 for the same period of 2000. The overall increase of $11,264,000 or 25% was the result of costs and expenses associated with GDW of $10,130,000 as well as increases in costs and expenses at The Lodge, and BHWK of $1,427,000 and $34,000 respectively. These expenses were partially offset by a reduction in costs and expenses at GHC of $327,000. Adjusted EBITDA When our total costs and expenses are subtracted from our net revenues, the result is Adjusted EBITDA of $17,766,000 for the nine months ended September 30, 2001 compared to $16,153,000 for the same period of 2000. The increase of $1,613,000 or 10% is primarily the result of the factors discussed above. Our Adjusted EBITDA ratio (Adjusted EBITDA divided by our net revenues) is 24% for the nine months ended September 30, 2001 compared to 27% for the same period of 2000. Interest Income We had interest income totaling $145,000 during the nine months ended September 30, 2001 compared to $229,000 for the same period of 2000. The decrease of $84,000 or 36% is due primarily to the reductions in interest rates and invested cash balances. Interest Expense We had interest expense totaling $4,088,000 during the nine months ended September 30, 2001 compared to $2,702,000 for the same period of 2000. The increase of $1,386,000 or 51% is primarily the result of interest on borrowings associated with the acquisition of GDW of $1,378,000 and increases in interest expense at The Lodge of $272,000. The increases were partially offset by reductions in interest expense incurred at GHC of $264,000. Privatization and other non-recurring costs During the current nine months ended September 30, 2001, we incurred privatization and other non-recurring costs of approximately $1,266,000. The costs associated with the buyout offer (See Item 1 Note 5 above) through September 30, 2001 were $1,131,000. These costs include fees paid to financial advisors hired to identify strategic alternatives and consult with the Company regarding those alternatives as well as fees paid to legal counsel and the Special Committee of the Board of Directors in its analysis of the buyout offer. In addition, included in these costs is a total of $135,000 in fines ($75,000 on behalf of GHC and $60,000 on behalf of The Lodge) assessed by the Colorado Division of Gaming pursuant to the issuance of a stipulation and agreement for each property alleging certain violations of Internal Control Minimum Procedures. Depreciation and Amortization We had depreciation and amortization of $5,725,000 for the nine months ended September 30, 2001 compared to $4,266,000 for the same period of 2000. The increase of $1,459,000 or 34% is primarily due to the depreciation and amortization incurred by the GDW of $1,426,000 and an increase in depreciation and amortization expense at The Lodge and Corporate of $42,000, $3,000 respectively. These increases were offset by a decrease in total depreciation and amortization at GHC of $12,000. Depreciation and amortization primarily relates to buildings, equipment, and intangible assets. Minority Interest Minority interest for the nine months ended September 30, 2001 totaled $1,458,000 compared to $1,844,000 for the same period of the prior year. Minority interest represents the 25% share of The Lodge's income (before eliminating inter-company transactions), which is owned by affiliates of our chief executive officer. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) UNAUDITED CONSOLIDATED RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (continued) Income Taxes Our effective income tax rate for the nine months ended September 30, 2001 and 2000 resulted in income tax expense of $2,365,000 and $2,725,000. The unique tax characteristics of the individual components of our income before income taxes are what determine our overall effective tax rate. Due to the significant costs incurred in association with the buyout offer (see privatization and other non-recurring costs above) and the non-deductible nature of a substantial portion of those costs, the Company's effective income tax rate for the nine months ended increased to 44% as compared to 36% for the comparable period of the prior year. With the exception of costs associated with the buyout offer and assuming continued profitability at our current levels (and no change in current tax law), we expect that our effective income tax rate to return to the 36% range next year. Net Income As a result of the factors discussed above, we reported net income of $3,009,000 for the nine months ended September 30, 2001 compared to $4,844,000 for the same period of 2000, a decrease in net income of $1,836,000 or 38%. Earnings Per Share We reported basic earnings per share for the nine months ended September 30, 2001 and 2000 of $.73 and $1.18, respectively and diluted earnings per share for the same time periods of $.70 and $1.17, respectively. The decrease in basic and diluted earnings per share of $.45 or 38% and $.47 or 40% respectively, are the result of significant privatization costs as well as reduced profitability. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) THE LODGE UNAUDITED RESULTS OF OPERATIONS -- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Net Revenues The Lodge generated net revenues of $44,255,000 during the nine months ended September 30, 2001 compared to $43,958,000 for the same period of 2000. The increase in our net revenues at The Lodge of $297,000 or 1% is primarily due to an increase in casino revenue (net of cash redemptions) of $120,000, one time sales tax and workers compensation refunds of $247,000 and $57,000 respectively, and a net increase in other combined net revenue of $6,000. These increases were offset by a decrease in net hotel revenue of $133,000. As discussed above, we believe the slight increase in casino revenue is primarily due to market growth in the City of Black Hawk. Costs and Expenses The Lodge's costs and expenses (after eliminating inter-company transactions) totaled $32,073,000 during the nine months ended September 30, 2001 compared to $30,645,000 for the same period of 2000. The overall increase of $1,427,000 or 5% is due to increases in labor costs of $814,000, marketing and media costs of $458,000, gaming taxes of $59,000, bus program costs of $34,000, utilities of $51,000, and other net costs and expenses of $72,000. These increases were offset by a reduction in slot participation expenses of $61,000. Adjusted EBITDA When The Lodge's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $12,182,000 for the nine months ended September 30, 2001 compared to $13,313,000 for the same period of 2000. The decrease in Adjusted EBITDA of $1,131,000 or 8% is primarily the result of a more competitive market and increased marketing efforts within the City of Black Hawk. Interest Expense Interest expense at The Lodge was $2,333,000 for the nine months ended September 30, 2001 compared to $2,061,000 for the same period of 2000. The increase of $272,000 or 13% is primarily due to a net $110,000 charge to interest expense in connection with our interest rate swap activity during the nine months ended September 30, 2001 (see Item 1 Note 4 above). An additional $162,000 in interest expense was incurred due to increase in average debt levels held during the current year as compared to the prior year. Depreciation and Amortization Depreciation and amortization of The Lodge totaled $2,949,000 for the nine months ended September 30, 2001 compared to $2,907,000 for the same period of 2000. The increase of $42,000 or 1% is generally due to an increase in depreciable assets. Income before income taxes As a result of the factors discussed above, The Lodge generated income before income tax (after eliminating inter-company transactions and before minority interest) of $6,977,000 for the nine months ended September 30, 2001 compared to $8,498,000 for the same period of 2000, a decrease of $1,521,000 or 18%. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) THE GILPIN HOTEL CASINO UNAUDITED RESULTS OF OPERATIONS -- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Net Revenues GHC generated net revenues of $15,563,000 during the nine months ended September 30, 2001 compared to $16,783,000 for the same period of 2000. The decrease in our net revenues at GHC of $1,220,000 or 7% is primarily due to a decrease in casino revenue (net of cash redemption) of $1,440,000 and a net decrease in other combined net revenue of $88,000. Sales tax and workers compensation refunds of $287,000 and $21,000 respectively partially offset the reductions in revenue. The primary reason for the decrease in our casino revenue at GHC is a result of the opening of larger and newer gaming facilities in the City of Black Hawk, including The Lodge. Costs and Expenses GHC's costs and expenses totaled $11,985,000 during the nine months ended September 30, 2001 compared to $12,312,000 for the same period of 2000. The overall decrease of $327,000 or 3% is due to decreases in gaming taxes of $339,000, bus program costs of $122,000, slot participation expenses of $52,000, and other net costs and expenses of $62,000. These reductions were offset by increases in marketing costs of $225,000 and utilities of $23,000. Adjusted EBITDA When GHC's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $3,578,000 for the nine months ended September 30, 2001 compared to $4,471,000 for the same period of 2000. The decrease in Adjusted EBITDA of $893,000 or 20% is primarily the result of increased competition and the opening of larger and newer gaming facilities in the City of Black Hawk, including The Lodge. Interest Expense Interest expense at GHC was $377,000 for the nine months ended September 30, 2001 compared to $641,000 for the same period of 2000. The decrease of $264,000 or 41% is primarily due to paying down our debt levels at various times since September 30, 2000 offset by a net $26,000 charge to interest expense in connection with interest rate swap activity during the nine months ended September 30, 2001 (see Item 1 Note 4 above). Depreciation and Amortization The depreciation and amortization of GHC totaled $1,340,000 for the nine months ended September 30, 2001 compared to $1,352,000 for the same period of 2000. The decrease of $12,000 or 1% is generally due to assets reaching full amortization offset by an increase in other depreciated assets. Income before income taxes As a result of the factors discussed above, GHC generated income before income taxes of $1,891,000 for the nine months ended September 30, 2001 compared to $2,538,000 for the same period of 2000, a decrease of $647,000 or 25%. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) GOLD DUST WEST UNAUDITED RESULTS OF OPERATIONS -- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 On January 4, 2001, BHWK purchased the assets and operating business of the Gold Dust West Casino with operations beginning January 5, 2001. Therefore, there are no comparisons to the prior periods presented. See BHWK's 8-K filing dated March 19, 2001 for pro-forma results. Net Revenues GDW generated net revenues of $13,800,000 during the nine months ended September 30, 2001. The revenues by operating department included casino revenue of $12,477,000 or 90%, food and beverage revenue of $956,000 (net of $959,000 in promotional allowances) or 7%, hotel revenue of $319,000 (net of $35,000 in promotional allowances) or 2% and other revenues of $48,000. Costs and Expenses GDW's costs and expenses totaled $10,130,000 during the nine months ended September 30, 2001. The costs and expenses by operating departments included casino operations of $3,749,000 or 37%, food and beverage operations of $1,706,000 or 17%, hotel operations of $179,000 or 2%, marketing, general, and administrative of $4,496,000 or 44%. Adjusted EBITDA When GDW's costs and expenses are subtracted from net revenues, the result is Adjusted EBITDA of $3,670,000 for the nine months ended September 30, 2001. Interest Expense Interest expense at GDW was $1,378,000 for the nine months ended September 30, 2001 resulting from borrowings associated with its acquisition by BHWK. Depreciation and Amortization Depreciation and amortization at GDW totaled $1,426,000 for the nine months ended September 30, 2001. Depreciation and amortization primarily relates to buildings, equipment, and intangible assets. Income before income taxes As a result of the factors discussed above, GDW generated income before income taxes of $884,000 for the nine months ended September 30, 2001 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) CORPORATE UNAUDITED RESULTS OF OPERATIONS -- FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Generally, our corporate operations are not a profit center, but rather a managerial entity, which directs the overall operations of the Company, including the specific efforts related to being a publicly traded company. Net Revenue No net revenue is generated at our corporate level after elimination of inter-company transactions. Costs and Expenses Our costs and expenses totaled $1,665,000 for the nine months ended September 30, 2001 compared to $1,631,000 for the same period of 2000. The increase of $34,000 or 2% is due to increases in compensation related costs of $57,000, travel and entertainment of $48,000, director's fees of $24,000, and other net costs and expenses of $6,000. These increases were offset by a prior year $101,000 non-recurring write off of costs incurred in the pursuit of potential new gaming projects and opportunities. Net Corporate Overhead As no revenues are generated at the corporate level, net corporate overhead is equal to costs and expenses. The increase in our net corporate overhead of $34,000 or 2% decreases our consolidated Adjusted EBITDA. Depreciation and Amortization Depreciation and amortization at the corporate level was $10,000 and $7,000 for the nine months ended September 30, 2001 and 2000 respectively. Privatization and other non-recurring costs See the discussion under unaudited consolidated results of operations - for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000 above. 23 Liquidity and Capital Resources ------------------------------- The net cash provided by operating activities was $9,964,000 during the nine months ended September 30, 2001 compared to net cash provided by operating activities of $9,547,000 for the same period of 2000. Net cash used in investing activities for the nine months ended September 30, 2001 was $29,004,000. The uses of funds included payments for equipment purchases and additions to our casinos of $3,075,000 and payments to acquire the Gold Dust West of $26,002,000. These uses of funds were partially offset by the proceeds from the sale of equipment of $73,000. Net cash used in investing activities for the nine months ended September 30, 2000 was $2,355,000. The primary uses of funds included payments for equipment purchases and additions to our casinos totaling $1,390,000 and payments related to the acquisition of the Gold Dust West of $1,036,000 (including a $500,000 earnest money deposit), and other investing activity payments of $7,000. These uses of funds were partially offset by the proceeds from the sale of equipment totaling $78,000. The net cash provided by financing activities during the nine months ended September 30, 2001 totaled $24,834,000. These sources of funds included proceeds from the reducing and revolving line of credit of $36,500,000 and other financing activities of $60,000. These sources were reduced by payments on bonds of $178,000, payments on long-term debt of $8,021,000, payments to amend the reducing and revolving credit facility of $571,000, and distributions to the 25% minority interest owners of The Lodge of $2,956,000 representing the portion of earnings of The Lodge which are applicable to the minority interest owners. The net cash used in financing activities during the nine months ended September 30, 2000 totaled $8,485,000. These uses of funds included payments on bonds totaling $175,000, payments on long-term debt of $7,302,000 and distributions to the 25% minority interest owner of The Lodge of $1,111,000 representing the portion of earnings of The Lodge which are applicable to the minority interest owners. These uses of funds were partially offset by other financing activities of $103,000. As of September 30, 2001 the Company had working capital of approximately $6,522,000 compared to a negative working capital of approximately $99,000 at December 31, 2000. We believe our current working capital position, earnings from our existing operations and the remaining availability from our reducing and revolving credit facility are sufficient to meet our short-term cash requirements, which are generally operating expenses and interest payments on indebtedness. However, any significant development of other projects by us may require additional financing, other joint venture partners, or both. Buyout of common stock On April 27, 2001, BHWK executed a merger agreement with Gameco, Inc. (see Item 1 Note 5 above). In connection with the merger agreement, BHWK has incurred approximately $1,000,000 in privatization costs consisting principally of investment banking, legal, accounting and other fees. Total privatization costs are expected to be approximately $2,000,000. Pursuant to accounting principles generally accepted in the United States of America ("GAAP") these costs as well as future privatization costs will be expensed as incurred. Furthermore, a majority of these costs are not deductible for income tax purposes. On November 9, 2001, the Board of Directors granted to Gameco an extension until April 1, 2002 in which to arrange for financing and closing of the transaction. Gold Dust West Acquisition On January 7, 2000 we entered into an agreement to purchase the assets and operating business of a gaming casino and motel located in Reno, Nevada known as the Gold Dust West. On December 22, 2000 we obtained the appropriate Nevada gaming approvals and licensing, and closed on the purchase transaction January 4, 2001 for $27,198,000 including $698,000 in transaction costs. Approximately $26,000,000 of the acquisition cost was funded from the amended reducing and revolving credit facility described below. Reducing and Revolving Credit Facility On December 21, 2000, we entered into the first amendment to our existing reducing and revolving credit facility with an effective date of January 4, 2001 (the acquisition date of the assets and operating business of the Gold Dust West Casino). The first amendment to our credit agreement increased the aggregate reducing and revolving credit facility to $75,000,000 from $65,000,000. Some of the more important terms of the amended credit agreement are: (i) the facility is a four year reducing commitment in the aggregate amount of $75,000,000; (ii) the available balance of the facility may be used for working capital and/or to finance other possible growth opportunities; (iii) the facility bears interest which is based on either the prime rate as published by Wells Fargo or the London Interbank Offering Rate ("LIBOR") each of which is added to an applicable margin based on our financial ratios. The reduction schedule of the credit facility was amended as follows; two quarterly reductions in availability will commence January 1, 2002 at $1,875,000 each, the next four quarterly reductions in availability are $2,812,500 each, with the following four quarterly reductions in availability of $3,750,000 each until April 16, 2004 when the balance of the facility is due. The credit agreement contains a number of affirmative and negative covenants which, among other things, require us to maintain certain financial ratios and refrain from certain actions without the syndicate group's concurrence; and (vi) substantially all of our assets, and those of the Gilpin Hotel Venture, GVI, The Lodge Casino, and Gold Dust West Casino are pledged as security for repayment of the credit facility. The credit agreement also contains customary events of default provisions. 24 Liquidity and Capital Resources (continued) ------------------------------------------- We are a party to an Interest Rate Swap Agreement. This derivative financial instrument is used in the normal course of business to manage exposure to fluctuations in interest rates and involves market risk, as the instrument is subject to interest rate fluctuations and potential credit risk. This derivative transaction is used to partially hedge interest rate risk in our variable rate debt. Prior to February 16, 2001, the interest Rate Swap Agreement provided that, on a quarterly basis, the Company pay a fixed rate of 5.18% on the notional amount of $35,000,000 and receives a payment based on LIBOR applied to the notional amount. Gains or losses on the interest rate exchange are included in interest expense as realized or incurred. On February 16, 2001, we terminated the interest rate swap agreement and concurrently entered into a new interest rate swap agreement, with the same counterparty, with an initial notional amount of $50,000,000 including scheduled reductions of $10,000,000 each at December 31, 2002 and December 31, 2003 until final maturity on April 16, 2004. The new interest rate swap agreement provides that, on a quarterly basis, we pay a fixed rate of 5.46% on the notional amount of $50,000,000 and receive a payment based on LIBOR applied to the notional amount. The fair value of the $35,000,000 interest rate swap upon termination of approximately $250,000 was used to pay down the fixed interest rate on the new $50,000,000 interest rate swap. The new interest rate swap agreement has been designated and documented as a cash-flow hedge, and therefore, the change in the fair value of the hedge is recorded in accumulated other comprehensive income (loss) net of taxes to the extent effectiveness (as defined by SFAS No. 133) has been determined. All income or expense associated with the interest rate swap affecting earnings is recognized in the income statement. 25 Item 3. Quantitative and Qualitative Disclosure about Market Risk. ------- ---------------------------------------------------------- Our primary exposure to market risks relates to our reducing and revolving credit facility, which is variable rate debt. We are exposed to interest rate risk on this debt, which totaled $59 million and $32 million at September 30, 2001 and 2000 respectively. If market interest rates increase, our cash requirements for interest would also increase. Conversely, if market interest rates decrease, our cash requirements for interest would also decrease. In an effort to minimize our exposure to interest rate risk on our credit facility, at September 30, 2001 and 2000 we had partially hedged our exposure to interest rate risk by participating in interest rate swaps. Under the terms of the swap agreements, we receive a variable rate interest payment and pay a fixed rate interest payment on a notional amount of $50 million and $35 million at September 30, 2001 and 2000 respectively. This has reduced our exposure to interest rate risk to $9 million not hedged with the interest rate swap at September 30, 2001. The annual increase or decrease in cash requirements for interest, after considering the impact of the interest rate swap agreement, should market rates increase or decrease by 10% compared to the interest rate levels at September 30, 2001 would be approximately $51,000. 26 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ------- Not Applicable Item 2. Changes in Securities ------- None Item 3. Defaults Upon Senior Securities ------- None Item 4. Submission of Matters to a Vote of Security Holders ------- None Item 5. Other Information ------- None Item 6. Exhibits and Reports on Form 8-K ------- ( a ) Exhibits: None ( b ) Reports on Form 8-K Date Item No's. Reported None ------------------- 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Black Hawk Gaming & Development Company, Inc. Registrant Date: November 13, 2001 By: /s/ Jeffrey P. Jacobs --------------------- Jeffrey P. Jacobs, Chairman of the Board of Directors and Chief Executive Officer /s/ Stephen R. Roark -------------------- Stephen R. Roark, President and Chief Financial Officer 28

BLACK HAWK GAMING & DEVELOPMENT CO INC 10-Q