BLACK HAWK GAMING &
DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF
JACOBS ENTERTAINMENT, INC.)
Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001 and 2000 and Independent
Auditors' Report
EXHIBIT 99.5
Significant Guarantor Information
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Black Hawk Gaming & Development Company, Inc. Black Hawk, Colorado We have audited the accompanying consolidated balance sheets of Black Hawk Gaming & Development Company, Inc. and subsidiaries (a wholly-owned subsidiary of Jacobs Entertainment, Inc.) (the "Company"), as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Black Hawk Gaming & Development Company, Inc. and subsidiaries (a wholly-owned subsidiary of Jacobs Entertainment, Inc.) as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, on January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. As discussed in Notes 2 and 4, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. As discussed in Note 1 to the consolidated financial statements, on February 22, 2002, Black Hawk Gaming & Development Company, Inc. was acquired by an entity formed by its principal stockholder. DELOITTE & TOUCHE LLP Denver, Colorado March 20, 2003
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
ASSETS 2002 2001
------------ -------------
CURRENT ASSETS:
Cash and cash equivalents $ 16,743 $ 15,677
Accounts receivable 360 117
Inventories 584 552
Prepaid expenses 1,450 1,511
Deferred income tax 547
------------ -------------
Total current assets 19,137 18,404
LAND 26,221 18,974
GAMING FACILITIES:
Building and improvements 60,596 63,573
Equipment 19,636 24,766
Accumulated depreciation (13,424) (19,032)
------------ -------------
Total gaming facilities 66,808 69,307
OTHER ASSETS:
Goodwill 15,611 19,016
Construction in progress 2,128 604
Debt issue costs 6,464 1,736
Other assets 322 875
Deferred income tax 778
------------ -------------
TOTAL $ 136,691 $ 129,694
============ =============
(Continued)
-2-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(DOLLARS IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,061 $ 4,636
Income taxes payable 666
Accrued payroll 552 556
Gaming taxes payable 2,520 2,767
Property taxes payable 663 754
Slot club liability 940 949
Due to parent 4,484
Current portion of long-term debt 413 387
------------ ------------
Total current liabilities 14,633 10,715
LONG-TERM DEBT AND OTHER LIABILITIES:
Long term debt 95,783 58,800
BID bonds payable 4,499 4,912
------------ ------------
Total long-term debt 100,282 63,712
Interest rate swap liability 1,911
Deferred income tax liability 702
------------ ------------
Total liabilities 114,915 77,040
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 7,412
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value;
10,000,000 shares authorized;
none issued and outstanding
Common stock; $.001 par value;
40,000,000 shares authorized;
100 and 4,154,400 shares issued
and outstanding, respectively 4
Additional paid-in capital 11,396 18,753
Accumulated other comprehensive loss (1,173)
Retained earnings 10,380 27,658
------------ ------------
Total stockholders' equity 21,776 45,242
------------ ------------
TOTAL $ 136,691 $ 129,694
============ ============
(Concluded)
See notes to consolidated financial statements.
-3-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(a wholly-owned subsidiary of Jacobs Entertainment, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS FROM JANUARY 1, 2002 THROUGH FEBRUARY 22, 2002, AND
FEBRUARY 23, 2002 THROUGH DECEMBER 31, 2002, AND THE YEARS ENDED DECEMBER 31,
2001 AND 2000
(DOLLARS IN THOUSANDS)
JANUARY 1, FEBRUARY 23, FOR THE FOR THE
2002 THROUGH 2002 THROUGH YEAR ENDED YEAR ENDED
FEBRUARY 22, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2002
------------ ------------ ------------ ------------
REVENUES:
Casino revenue $ 14,523 $ 83,515 $ 100,699 $ 81,988
Food and beverage revenue 1,624 8,801 11,931 9,153
Hotel revenue 189 1,271 1,392 1,048
Other 96 587 1,626 744
------------ ------------ ------------ ------------
Total revenues 16,432 94,174 115,648 92,933
Promotional allowances (2,462) (13,310) (17,099) (14,058)
------------ ------------ ------------ ------------
Net revenues 13,970 80,864 98,549 78,875
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Casino operations 4,333 26,689 31,368 26,014
Food and beverage operations 1,512 8,366 10,745 8,210
Hotel operations 130 521 640 469
Marketing, general and
administrative 4,778 24,598 32,093 24,800
Privatization and other non-
recurring costs 3,882 1,509
Depreciation and amortization 2,510 5,385 7,789 5,746
------------ ------------ ------------ ------------
Total costs and expenses 17,145 65,559 84,144 65,239
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (3,175) 15,305 14,405 13,636
Interest income 13 27 182 285
Other income 119
Interest expense (2,881) (11,931) (5,271) (3,424)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE
MINORITY INTEREST AND
INCOME TAXES (5,924) 3,401 9,316 10,497
MINORITY INTEREST 127 (2,030) (2,060)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE
INCOME TAXES (5,797) 3,401 7,286 8,437
------------ ------------ ------------ ------------
INCOME TAXES 3,117 2,976
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (5,797) $ 3,401 $ 4,169 $ 5,461
============ ============ ============ ============
See notes to consolidated financial statements.
-4-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS TOTAL
BALANCES,
JANUARY 1, 2000 4,110 $ 4 $ 18,466 $ 18,028 $ 36,498
Stock issued for compensation 2 10 10
Exercise of stock options 15 93 93
Net income 5,461 5,461
--------- --------- ---------- --------- ------------- --------
BALANCES,
DECEMBER 31, 2000 4,127 4 18,569 23,489 42,062
Stock issued for compensation 3 26 26
Exercise of stock options 24 158 158
Comprehensive income:
Transition adjustment as a result of
the adoption of Statement of Financial
Accounting Standards No. 133, net of
income taxes $ 368 368
Reclassification adjustment for
amortization of cumulative
transition adjustment, included in
net income, net of income taxes (158) (158)
Unrealized loss on interest rate swap,
net of income taxes (1,383) (1,383)
Net income 4,169 4,169
--------- --------- ---------- --------- ------------- --------
Total comprehensive income 2,996
--------
BALANCES,
DECEMBER 31, 2001 4,154 4 18,753 27,658 (1,173) 45,242
Exercise of stock options 6 6
Privatization merger (4,054) (4) 4
Push down of JEI basis:
Elimination of retained earnings applicable
to shares acquired on February 22, 2002 14,882 (14,882)
Effect of recording goodwill and debt
resulting from the February 22, 2002
acquisition (29,471) (29,471)
Capital contribution-acquisition
of minority interest 7,222 7,222
Comprehensive loss:
Realized loss on interest rate swap,
net of income taxes 1,173 1,173
Net loss (2,396) (2,396)
--------- --------- ---------- --------- ------------- --------
Total comprehensive loss (1,223)
--------
BALANCES,
DECEMBER 31, 2002 100 $ $ 11,396 $ 10,380 $ $ 21,776
========= ========= ========== ========= ============= ========
See notes to consolidated financial statements.
-5-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS FROM JANUARY 1, 2002 THROUGH FEBRUARY 22, 2002,
AND FEBRUARY 23, 2002 THROUGH DECEMBER 31, 2002, AND THE YEARS ENDED
DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS)
JANUARY 1, FEBRUARY 23, FOR THE FOR THE
2002 THROUGH 2002 THROUGH YEAR ENDED YEAR ENDED
FEBRUARY 22, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2000
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (5,797) $ 3,401 $ 4,169 $ 5,461
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,510 5,385 7,789 5,746
Change in fair value of interest rate swap, net 74
Minority interest (127) 2,030 2,060
(Gain) loss on sale of equipment (194) 42 133 146
Noncash compensation 26 13
Deferred taxes 20 401
Due (to) from parent 4,484
Changes in operating assets and liabilities, net of the
impact of acquisition in 2001:
Accounts receivable, inventories, prepaid expenses
and other assets 1,805 (4,553) (687) (551)
Accounts payable, accrued expenses and other
current liabilities (1,339) 944 117 (325)
------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (3,142) 9,703 13,671 12,951
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Construction and equipping of gaming facility (340) (5,081) (4,967) (2,407)
Acquisition costs related to the Gold Dust West (2) (696)
Deposit related to the Gold Dust West (500)
Acquisition of the Gold Dust West, net of cash acquired (26,000)
Proceeds from the sale of land 142
Proceeds from the sale of equipment 229 110 91
------------ ------------ ------------ ------------
Net cash used in investing activities (198) (4,852) (30,859) (3,512)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from reducing and revolving credit facility 36,500
Payments on BID bonds (387) (362) (340)
Payment to amend reducing and revolving credit facility (571)
Payments on long-term debt and GHC revolving
line of credit (421) (378)
Payments on reducing and revolving credit facility (7,600) (9,100)
Distributions to minority interest owner (64) (3,357) (1,435)
Exercise of stock options 6 158 93
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 6 (451) 24,347 (11,160)
------------ ------------ ------------ ------------
(Continued)
-6-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS FROM JANUARY 1, 2002 THROUGH FEBRUARY 22, 2002, AND
FEBRUARY 23, 2002 THROUGH DECEMBER 31, 2002, AND THE YEARS ENDED DECEMBER 31,
2001 AND 2000
(Dollars in thousands)
JANUARY 1, FEBRUARY 23, FOR THE FOR THE
2002 THROUGH 2002 THROUGH YEAR ENDED YEAR ENDED
FEBRUARY 22, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2002 2001 2000
------------ ------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (3,334) $ 4,400 $ 7,159 $ (1,721)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 15,677 12,343 8,518 10,239
============ ============ ============= ============
CASH AND CASH EQUIVALENTS, END
OF PERIOD 12,343 16,743 15,677 8,518
------------ ------------ ------------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 524 $ 6,312 $ 5,388 $ 3,392
============ ============ ============= ============
Cash paid for income taxes $ 470 $ 2,357 $ 2,893
============ ============= ============
Non-cash financing $ 95,783
============
See notes to consolidated financial statements.
(Concluded)
-7-
BLACK HAWK GAMING & DEVELOPMENT COMPANY, INC.
(A WHOLLY-OWNED SUBSIDIARY OF JACOBS ENTERTAINMENT, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. BUSINESS
Black Hawk Gaming & Development Company, Inc. and subsidiaries (a
wholly-owned subsidiary of Jacobs Entertainment, Inc.) (the "Company" or
"BHWK") is an owner, developer and operator of gaming properties in
Black Hawk, Colorado and Reno, Nevada. Through April 23, 1998, the
Company owned a 50% interest in the Gilpin Hotel Venture ("GHV"), which
owned the Gilpin Hotel Casino, which the Company developed and has
managed since 1992. On April 24, 1998, the Company acquired the other
50% interest in GHV and related land for $10 million (see Note 4).
In November 1996, the Company entered into an Amended and Restated
Purchase Agreement and an Operating Agreement to form Black Hawk/Jacobs
Entertainment LLC (the "LLC") for the purpose of developing and managing
a casino/hotel/parking complex in Black Hawk, Colorado, The Lodge Casino
at Black Hawk (The Lodge). During the second quarter of 1998, the
Company completed the development of the casino portion of The Lodge,
which opened for business on June 24, 1998. On August 17, 1998, the
hotel portion of the project opened, and on November 6, 1998, the
parking garage opened. The total cost of the casino/hotel/parking
complex was approximately $74 million (see Note 5).
On January 4, 2001, the Company purchased the assets and operating
business of the Gold Dust Motel, Inc. d/b/a Gold Dust West (the "GDW"),
located in Reno, Nevada, for $26.5 million (see Note 7).
In addition, included within the Company is BHWK corporate
("Corporate"). Generally, Corporate operations are not a profit center,
but rather a managerial entity which directs the overall operations of
the Company.
On February 22, 2002, Jacobs Entertainment, Inc. ("JEI"), an entity
formed by the Company's principal stockholder, Chairman of the Board and
Chief Executive Officer, Jeffrey P. Jacobs, acquired all of the
outstanding shares of the Company that he did not already own, for
$12.00 per share resulting in a total aggregate purchase price of
$36,980. The Company's stockholders approved this transaction on January
4, 2002 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The accompanying consolidated financial statements
include the accounts of the Company, the GHV, and beginning on January
4, 2001, the Company's 100% ownership interest in the GDW. All
inter-company transactions and balances have been eliminated in
consolidation. Through February 22, 2002, the Company also recorded
minority interest, which reflects the portion of the equity in earnings
of the LLC applicable to the 25% minority interest owners of the LLC
(see Note 3).
Cash Equivalents - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash
equivalents.
-8-
Inventory - Inventory consists of food and beverages, chips and tokens
and uniforms and are recorded at the lower of cost (first-in, first-out
method) or market.
Gaming Facilities - Building and improvements and equipment are
depreciated using the straight-line method over the estimated useful
lives of the assets (39 years for building and improvements, and 5 to 7
years for equipment). Costs of major improvements are capitalized, while
costs of normal repairs and maintenance are charged to expense as
incurred. Gains or losses on disposal of assets are recognized as
incurred.
Debt Issue Costs - Debt issue costs are capitalized and amortized, using
the straight-line method (which approximates the effective interest
method), over the life of the related loan.
Goodwill - Through February 22, 2002, goodwill is amortized using the
straight-line method over 15 years. See Note 3 for discussion on the
composition of goodwill after February 22, 2002 and Note 4 for
additional discussion regarding goodwill and other intangible assets.
Slot Club Liability - The Company's casinos offer customers the ability
to become members in their respective slot clubs. Once a member, the
customer can insert a special card into slot and video poker machines
while playing in the Company's casinos to earn "points." Based on their
point totals, members receive various cash rewards and gift prizes. The
Company accrues the cost of points as they are earned by the members of
the slot clubs.
Outstanding Gaming Chip and Token Liability - When customers exchange
cash for gaming chips and tokens, the Company has a liability as long as
those chips and tokens are not redeemed or won by the house. That
liability is established by determining the difference between the total
chips and tokens placed in service and the actual inventory of chips and
tokens in custody or under the control of the casinos. The chip and
token liability is adjusted periodically to reflect an estimate of chips
and tokens that will never be redeemed, such as chips and tokens that
have been lost or taken as souvenirs.
Casino Revenues - Casino revenues are the net winnings from gaming
activities, which is the difference between gaming wins and losses.
Hotel, Food and Beverage, and Other Revenue - The Company recognizes
hotel, food and beverage and other revenue at the time that goods or
services are provided.
Promotional Allowances - Gross revenues include the retail amount of
rooms, food and beverages provided gratuitously to customers. When
computing net revenues, the retail amount of rooms, food and beverages
and coupons, gratuitously provided to customers, as well as slot club
player point redemptions, is deducted from gross revenues as promotional
allowances. The estimated cost of such complimentary services for rooms,
food, and beverages is charged to casino operations and was $3,554,
$4,149 and $3,273 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Privatization and Other Non-Recurring Costs - During the years ended
December 31, 2002 and 2001, the Company incurred $3,882 and $1,509,
respectively, in relation to the acquisition of its remaining shares on
February 22, 2002 described in Notes 1 and 3, primarily consisting of
legal and accounting fees. Such costs are expensed in the accompanying
2002 and 2001 consolidated statements of income.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting
for Income Taxes. SFAS No. 109 requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Deferred income taxes reflect the net tax
-9-
effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used
for income tax purposes. During 2002, the Company changed its tax status
from a C-Corporation to an S-Corporation. Accordingly, no provision for
income taxes has been recorded in the accompanying consolidated
financial statements subsequent to the effective date of this election.
See Note 12.
Minority Interest - The Company records minority interest, which
reflects the portion of the equity and earnings of the LLC which are
applicable to the minority interest owners of the LLC.
Stock Issued for Services - Common stock was issued, or accrued for
issuance, to directors in 2001 and 2000 for services, and was valued at
the market value as of the date awarded. Included in marketing, general
and administrative expenses in the consolidated statements of income for
the years ended December 31, 2001 and 2000 is $14 and $12, respectively,
of expenses related to stock issued or accrued for services. No stock
was issued for services in 2002.
Employee Stock Compensation Plans - The Company used the intrinsic value
method to account for stock options and similar stock-based employee
compensation plans. The exercise price of stock options issued to
employees equaled the market price of the stock on the measurement date,
and therefore, the Company did not record compensation expense on stock
options granted to employees. Options granted to non-employees were
valued at estimated fair value and charged to operations as earned. See
Note 11 for discussion of the Company's previous stock options plans.
Since the Company followed the intrinsic value method to account for
stock options issued to employees, no compensation expense was
recognized since options were granted at market price. Had compensation
cost for the Company's plans been determined based on the fair value of
the options at the grant date, the Company's net income would have been
reduced to the pro forma amounts indicated below:
2001 2000
--------------- ----------------
Net income - as reported $ 4,169 $ 5,461
Net income - pro forma $ 4,088 $ 5,323
The weighted average fair value of the stock options granted was $0 in
2001 and $4.06 in 2000. The fair value of each stock option granted is
estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions used for grants in 2000: risk-free
interest rate of 5.11%; expected dividend yield of 0%; expected life of
three years; and expected volatility of 124.07% (see Note 11).
Operating Segments - As of January 4, 2001, the Company acquired the GDW
(see Note 7). This acquisition expanded the Company's operations into a
second gaming jurisdiction other than Black Hawk, Colorado creating a
new operating segment as defined by SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS No. 131") (see
Note 15).
Derivative Financial Instruments - The Company uses derivative
instruments to manage exposures to interest rate risk. The Company's
primary objective for holding derivatives is to minimize the risks
associated with the impact of interest rate exposure. Specifically, 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
Company does not enter into derivative transactions for trading
purposes, or for fixed rate debt.
-10-
Derivative financial instruments taken alone may expose the Company to
varying degrees of market and credit risk in excess of amounts
recognized in the financial statements. However, when used for hedging
purposes, these instruments typically reduce overall interest rate risk.
The Company controls the credit risk of its financial contracts through
credit approvals, limits, and monitoring procedures. As the Company
enters into derivative transactions only with high quality institutions,
no losses associated with non-performance on its derivative financial
instrument have occurred or are expected to occur.
Effective January 1, 2001 the Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS
No. 133, as amended and interpreted, 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 has been designated in a fair-value hedge, the changes
in the fair value of the derivative and the hedged item are recognized
in earnings. If the derivative has been designated in a cash-flow hedge,
changes in the fair value of the derivative are recorded in other
comprehensive income net of taxes, and recognized in the income
statement when the hedged item affects earnings. SFAS No. 133 defines
new requirements for designation and documentation of hedging
relationships as well as ongoing effectiveness assessments in order to
use hedge accounting. For a derivative that does not qualify as a hedge,
changes in fair value are recognized in current earnings.
The adoption of SFAS No. 133 resulted in the Company recording a $368
gain (net of $200 in taxes) in accumulated other comprehensive loss as a
transition adjustment for its derivative instrument which had been
designated in a hedging relationship that addressed the variable cash
flow exposure of a forecasted transaction prior to adopting SFAS No.
133. (See Note 9).
Use of 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 amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates used by the Company include the
estimated useful lives for depreciable and amortizable assets and
estimated cash flows in assessing the recoverability of long-lived
assets. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made in the 2001
and 2000 financial statements to conform with the classifications used
in 2002. These reclassifications had no effect on the Company's
financial position or net income.
Recently Issued Accounting Standards - In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, Business
Combinations ("SFAS No. 141"). SFAS No. 141 improves the transparency of
the accounting and reporting for business combinations by requiring that
all business combinations be accounted for under the purchase method.
This Statement is effective for all business combinations initiated
after June 30, 2001. The Company adopted SFAS No. 141 on July 1, 2001,
and the adoption of SFAS No. 141 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 ("SFAS No. 142") (see Note 4).
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 supersedes current accounting guidance relating to impairment of
long-lived assets and provides a single accounting methodology for
long-lived assets to
-11-
be disposed of, and also supersedes existing guidance with respect to
reporting the effects of the disposal of a business. SFAS No. 144 was
adopted January 1, 2002, without a material impact on the Company's
financial position or results of operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
With Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This
Statement requires recognition of a liability for a cost associated with
an exit or disposal activity when the liability is incurred, as opposed
to when the entity commits to an exit plan under EITF No. 94-3. SFAS No.
146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not anticipate that
the adoption of this statement will have a material effect on its
financial position or results of operations.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement
No. 123" ("SFAS No. 148"). This Statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for fiscal years ending after December 15, 2002.
The Company does not anticipate that the adoption of this statement will
have a material effect on its financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB Interpretation No. 34". This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken
in issuing the guarantee. The guarantee recognition and measurement
provisions of this Interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of periods ending
after December 15, 2002. The Company has adopted disclosure requirements
effective for the year ended December 31, 2002 and will adopt the
recognition and measurement provisions on a prospective basis. The
Company does not expect the recognition and measurement provisions to
have a material affect on the Company's statement of position or results
of operations.
In January 2003, the FASB issued FIN 46 "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
interpretation explains how to identify a variable interest entity and
how to assess its interest in the variable interest to decide if
consolidation is appropriate. FIN 46 requires entities to be
consolidated by their primary beneficiaries if the variable interest
entity does not effectively disperse risk among parties involved. This
interpretation applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an
enterprise acquired an interest after that date. For variable interest
entities in which an enterprise had acquired an interest in before
February 1, 2003, it applies in the first fiscal year or interim period
beginning after June 15, 2003. The Company has not yet completed its
assessment on whether FIN 46 will affect its financial condition and
results of operations. However, the Company does not anticipate that the
adoption of FIN 46 will have a material effect on its financial position
or results of operations.
-12-
3. ACQUISITION OF THE COMPANY
Prior to February 22, 2002, JEI owned 32% of the outstanding shares of
the Company. On February 22, 2002, JEI acquired the remaining shares of
the Company through a cash merger for $36 million using proceeds from
the issuance of debt on that date. As a result of becoming a
wholly-owned subsidiary of JEI and collateralizing this debt with
Company assets, the Company has applied the principles of push down
accounting and, accordingly, has recorded goodwill, debt, and the
elimination of minority interests in the LLC in the accompanying
consolidated financial statements. Furthermore, the principles of push
down accounting were applied to the separate reporting units of the
Company, consisting of the separate casino operations of the Gilpin
Hotel Casino, The Lodge Casino at Black Hawk, and the Gold Dust West
Casino. The Company allocated the $36 million acquisition price to the
respective reporting units based upon their individual pro-rata
contribution to operating income less depreciation, and has recorded the
goodwill associated with each reporting unit reflecting the difference
between the allocated purchase price and the proportionate share of the
fair market value of net assets acquired which was based upon an
independent valuation of the Company's net assets. Furthermore, the debt
issued to acquire the Company has also been pushed down to these
reporting units using a similar allocation methodology.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
SFAS No. 142 applies to intangibles and goodwill acquired after June 30,
2001, as well as goodwill and intangibles previously acquired. Under
SFAS No. 142, 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. The Company adopted
SFAS No. 142 on January 1, 2002, has completed its transitional
impairment test at January 1, 2002, and has determined that no
impairment of its goodwill balances exits. In addition, the Company has
reassessed the useful lives of its identifiable intangible assets
without any change to the previously established amortization periods of
such assets. The Company also performed its annual impairment test as of
September 30, 2002 and determined that goodwill was not impaired.
The amortization expense and net income of the Company for the years in
the period ended December 31, 2001 and 2000 are as follows:
2001 2000
------------- --------------
Reported net income $ 4,169 $ 5,461
Add back: Goodwill amortization 1,456 438
------------- --------------
Adjusted net income $ 5,625 $ 5,899
============= ==============
5. GILPIN HOTEL VENTURE
In May 1991, the Company entered into an agreement to purchase a
one-half interest in undeveloped land and an historic hotel property
known as the Gilpin Hotel, both located in Black Hawk, Colorado.
Simultaneously, the Company entered into a joint venture agreement (the
"Agreement") to form GHV with Gilpin Ventures, Inc. ("GVI"), the owners
of the remaining one-half interest in the properties, for the purpose of
developing and operating a limited-stakes gaming and restaurant
facility, the Gilpin Hotel Casino (the "Gilpin"). The Gilpin opened for
business in October 1992. Each party owned 50% of GHV. Under the terms
of the Agreement, the Company was the manager of the joint venture.
On April 24, 1998, the Company acquired the other 50% interest in GHV
and related land for $10,000. The acquisition was accounted for by the
Company under the purchase method of accounting and
-13-
accordingly, 100% of GHV's results of operations are included in the
accompanying financial statements.
6. BLACK HAWK/JACOBS ENTERTAINMENT LLC
In December 1994, the Company signed a joint venture agreement with
Jacobs Entertainment, Inc. ("Jacobs") of Cleveland, Ohio, to develop a
major casino/hotel/parking structure complex in Black Hawk, Colorado,
named The Lodge Casino at Black Hawk. Construction of the 250,000 square
foot project began in January 1997. The casino portion of the project
was completed and opened for business on June 24, 1998. As a result of
the refinements during the development process, it was decided to
incorporate a three-story overflow parking structure into The Lodge
project. Two stories of the overflow parking structure provide parking
for The Lodge, and the third-story of the structure provides a portion
of the parking for the Gilpin Hotel Casino. The hotel portion of the
project and the garage were completed during August 1998 and November
1998, respectively.
On November 12, 1996, the Company entered into an agreement with
Diversified Opportunities Group, Inc. ("Diversified") and BH
Entertainment Ltd. ("BH") (both affiliates of Jacobs) whereby
Diversified, BH and the Company created the LLC in which the Company is
a 75% member and the Jacobs' affiliates are a 25% member.
7. GOLD DUST WEST CASINO - ACQUISITION
On January 4, 2001, the Company purchased the assets and operating
business of the GDW, a casino and motel located in Reno, Nevada, for
$26,500. This transaction was recorded using the purchase method of
accounting for business combinations, and accordingly, 100% of the GDW's
operations are included in the Company's results for the period
subsequent to the acquisition date.
The Company obtained an appraisal of the assets of the GDW at the date
of acquisition, and the total purchase price, including approximately
$698 of transaction costs, was allocated to the GDW assets as follows:
Cash $ 45
Land 3,560
Building, furniture, fixtures and equipment 7,701
Other assets 96
Acquisition costs 698
Goodwill 15,098
---------------
Total purchase price $ 27,198
===============
Assuming the GDW acquisition had occurred on January 1, 2000, for the
year ended December 31, 2000, net revenues would have been $97,899 and
net income would have been $6,295. 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.
-14-
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2002 2001
-------------- --------------
Senior secured notes due 2009, with interest only payable each February 1, and
August 1, beginning August 1, 2002 at a fixed interest rate of 11 7/8%. $ 95,783
Reducing and revolving credit facility amended January 4, 2001, upon acquisition
of GDW; a four year reducing and revolving facility totaling $75 million;
interest accrues at either the prime rate published by Wells Fargo Bank or the
LIBOR rate plus an applicable margin based upon financial ratios maintained by
the Company (approximately 8.94% for the quarter ended December 31, 2001); two
quarterly reductions in availability commence January 2002 at $1,875 each, the
next four quarterly reductions in availability commencing July 2002 of $2,813
each, with the following four quarterly reductions in availability commencing
July 2003 of $3,750 each, until April 16, 2004, when the balance of the facility
is due. Substantially all of the assets of the Company, GHV, the LLC and the GDW
are pledged as collateral under the facility $ 58,800
Bonds payable; issued in two series with interest payments varying between 6.25%
and 6.50%; principal and interest payments approximating $360 are due
semi-annually beginning in June 2000 continuing until December 2011; secured by
the street and other infrastructure improvements made by the LLC 4,912 5,299
-------------- --------------
100,695 64,099
Less current portion 413 387
-------------- --------------
Total $ 100,282 $ 63,712
============== ==============
On February 8, 2002, JEI completed a $125,000 private placement of 11
7/8% Senior Secured Notes (the "Notes") due 2009, with interest payable
on each February 1, and August 1, with payments beginning August 1,
2002. The Notes are principally secured by the assets and stock of the
Company. As of December 31, 2002, debt issue costs of $8,681 have been
incurred related to the issuance of the Notes. These costs are being
amortized over the life of the related debt, using the effective
interest method. As discussed in Note 3, the Company has applied the
principles of push down accounting, and accordingly has recognized its
pro-rata allocation of the Notes of $95,783 and the debt issue costs of
$6,464 in the accompanying consolidated financial statements. The Notes
contain a number of affirmative and negative covenants which among other
things require JEI to maintain certain financial ratios and refrain from
certain actions without prior approval from the Trustee of the Notes. As
of December 31, 2002, JEI is in compliance with all such debt covenants.
Effective July 12, 2002, JEI entered into a $10,000 line of credit
("LOC") agreement with Foothill Capital Corporation, expiring July 12,
2007. The LOC bears interest at the prime rate published by Wells Fargo
Bank, plus 1.75% (6.0% as of December 31, 2002). The LOC is
collateralized by the land, buildings and related improvements of The
Lodge and the Gilpin Hotel and Casino. The security interests under the
terms of the LOC are contractually senior to the Notes discussed above.
On December 21, 2000, the Company entered into the first amendment to
its 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 GDW. On January 4, 2001, the Company borrowed
$30,500 on this credit facility, of which $27,198 was used to fund the
acquisition. The first amendment to the Company's
-15-
credit agreement increased the aggregate reducing and revolving credit
facility to $75,000. Debt issue costs of $483 were incurred on this
transaction and are being amortized over the life of the related debt,
in accordance with the Company's accounting policy. On February 22,
2002, this debt was paid off using proceeds from the senior secured
notes.
In conjunction with the Company's acquisition on February 22, 2002,
discussed in Note 1, $1,543 in capitalized debt issue costs related to
the Company's reducing and revolving credit facility were charged to
operations during the first quarter of 2002.
Scheduled principal payments as of December 31, 2002, are as follows:
2003 $ 413
2004 441
2005 472
2006 504
2007 538
Thereafter 98,327
--------------
Total $ 100,695
==============
9. DERIVATIVE FINANCIAL INSTRUMENT
As discussed in Note 2, the Company was a party to an interest rate swap
agreement with off-balance-sheet risk. This derivative transaction was
used to hedge interest rate risk in the Company's variable rate debt.
Prior to its termination on February 16, 2001, the interest rate swap
agreement ("IRS No. 1") provided that, on a quarterly basis, the Company
paid a fixed rate of 5.18% on the notional amount of $35,000 and
received a payment based on LIBOR applied to the notional amount. Gains
or losses on the interest rate exchange were included in interest
expense as realized or incurred. From January 1, 2001 through February
16, 2001, the Company recorded a $318 charge to interest expense due to
the devaluation of IRS No. 1. Although the transition adjustment was
reflected in other comprehensive loss, subsequent changes in the value
of IRS No. 1 are reflected in the income statement because the swap was
not designated as a hedging instrument as defined by SFAS No. 133. As a
result of terminating IRS No. 1, the Company reclassified $158 (net of
$86 in taxes) of the transition gain from other comprehensive loss to
interest expense representing the amortization over its original term.
On February 16, 2001, the Company terminated IRS No. 1 and
simultaneously entered into a new interest rate swap agreement ("IRS No.
2"), with the same counterparty, with an initial notional amount of
$50,000 including scheduled reductions of $10,000 each at December 31,
2002 and December 31, 2003, until final maturity on April 16, 2004. IRS
No. 2 provides that, on a quarterly basis, the Company pays a fixed rate
of 5.46% on the notional amount of $50,000 and receives a payment based
on LIBOR applied to the notional amount. IRS No. 2 was documented and
designated as a cash flow hedge as defined by SFAS No. 133. Derivative
losses included in other comprehensive loss for the year ended December
31, 2001 amounted to $1,383 net of $778 in taxes reflecting the decline
in market value of IRS No. 2.
Derivative losses included in accumulated other comprehensive loss were
charged to earnings at the time interest expense was recognized on the
Wells Fargo Bank debt. Derivative losses of $426 net of $240 in taxes on
IRS No. 2 were reclassified to interest expense in 2001.
In conjunction with the Company's acquisition on February 22, 2002,
discussed in Note 1, the Company terminated its $50,000 interest rate
swap with a charge to operations of $2,655.
-16-
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value of the Company's
financial instruments has been determined by the Company using available
market information and generally accepted valuation methodologies.
However, considerable judgment is required to interpret market data in
order to develop the estimates of fair value. Accordingly, the estimates
herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts. The asset (liability) amounts for
the Company's financial instruments are as follows:
2002 2001
------------------------------ ------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- ------------ -------------- ------------
Liabilities - Debt $ 100,695 $ 105,484 $ 64,099 $ 64,099
Interest Rate Swap
Agreement 1,911 1,911
The estimation methodologies utilized by the Company are summarized as
follows:
Debt - The fair value of variable-rate debt at December 31, 2001 is
estimated to be equal to its carrying amount. The fair value of senior
secured notes issued in 2002 is based upon quoted market rates. The fair
value of other fixed rate debt is estimated to be equal to its carrying
amount, based on the prevailing market interest rates for debt of
similar dollar amount, maturity and risk.
Interest Rate Swap Agreement - The fair value of the interest rate swap
agreement is based on the present value of estimated payments that would
be received or paid by the Company over the term of the swap, based on
the forward interest rate swap curve as of December 31, 2001.
The estimated fair value of the Company's 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.
-17-
11. STOCK OPTIONS
In conjunction with the Company's acquisition discussed in Note 1, all
options outstanding on that date became 100% vested, and the Company
recognized a $3,121 charge to operations on February 22, 2002
representing the difference between the respective options' exercise
price and the per share acquisition price of $12.00. All outstanding
options were terminated upon the Company's acquisition by JEI.
The Company had two stock option plans: the 1994 Employees' Incentive
Stock Option Plan ("1994 Plan") and the 1996 Incentive Stock Option Plan
("1996 Plan"). The 1994 Plan provided for the grant of incentive stock
options to officers, directors and employees of the Company for 300,000
shares of common stock. The 1996 Plan provided for the grant of stock
options, including incentive stock options and non-qualified stock
options for 500,000 shares of common stock. Stock option transactions
are summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE EXERCISE PRICE
SHARES PRICE PER SHARE PER SHARE
----------- ----------------------------------------- --------------
Outstanding at
January 1, 2000 590,300 $ 5.63 -- $ 8.38 $ 6.07
-----------
Granted 45,000 $ 6.46 $ 6.46
Exercised (15,000) $ 6.19 $ 6.19
Forfeited (4,250) $ 8.38 $ 8.38
-----------
Outstanding at
December 31, 2000 616,050 $ 5.63 -- $ 8.38 $ 6.08
-----------
Exercised (24,167) $ 6.19 -- $ 8.38 $ 6.53
Forfeited (77,633) $ 5.63 -- $ 8.38 $ 6.93
-----------
Outstanding at
December 31, 2001 514,250 $ 5.63 -- $ 8.38 $ 5.93
Exercised (514,250) $ 5.63 -- $ 8.38 $ 5.93
-----------
Outstanding at
December 31, 2002
===========
Options granted under the 1994 Plan generally vested proportionately
over three years on June 30 following the grant date. Options granted
under the 1996 Plan generally vested proportionately over three years on
each of the first, second, and third anniversary dates of the grant.
-18-
12. INCOME TAXES
The Company's income tax expense varies from the amount expected by
applying the federal tax rate due to the following items:
JANUARY 1,2002
THROUGH
FEBRUARY 22, 2002 2001 2000
----------------- -------------- --------------
Expected federal income tax expense (benefit) $ (1,970) $ 2,477 $ 2,869
Valuation allowance 1,791
Non-deductible privatization costs 251 406
Other, net (72) 234 107
----------------- -------------- --------------
Total $ $ 3,117 $ 2,976
================= ============== ==============
The Company's deferred income taxes at December 31, 2001, is comprised
of the following:
2001
--------------
Deferred income tax assets:
Accrued expenses $ 547
Derivative financial instrument 778
--------------
Total gross deferred income tax assets 1,325
Deferred income tax liabilities:
Land and gaming facilities basis differences 172
Start-up costs and intangible assets 424
Derivative financial instrument 106
--------------
Total gross deferred income tax liabilities 702
--------------
Net deferred income tax asset (liability) $ 623
==============
Net deferred income tax expense allocated to stockholders' equity was
$672, $(672) and $0 for the years ended December 31, 2002, 2001 and
2000, respectively. Total deferred income tax expense was $20 and $401
in 2001 and 2000, respectively.
Although realization is not assured, management has evaluated the
available evidence about future taxable income and other possible
sources of realization of deferred income tax assets. A valuation
allowance against deferred income tax assets at December 31, 2001, was
not considered necessary because management believed it is more likely
than not the deferred income tax asset will be fully realized. The
Company had no deferred tax assets at December 31, 2002 as described
below.
On March 11, 2002, the Company and the LLC received notice from the
Internal Revenue Service asserting deficiencies in federal corporate
income taxes for the Company's 1998 tax year. The proposed adjustment
indicates an increase to taxable ordinary income for the 1998 tax year
of $1,193, and relates to the deductibility of depreciation taken
against certain costs incurred by the LLC to build and improve public
assets. The Company and the LLC have analyzed these matters and believe
it has meritorious defenses to the deficiencies asserted by the Internal
Revenue Service. The Company and the LLC will
-19-
contest the asserted deficiencies through the administrative appeals
process. The Company and the LLC believe that any amounts assessed for
the 1998 and future tax years will not have a material effect on the
Company's financial position or results of operations. Due to the
preliminary nature of this proceeding, management is unable to
reasonably estimate the amount, or range of amounts, of any potential
income tax liability associated with the notice.
In conjunction with the Company's acquisition on February 22, 2002,
discussed in Note 1, effective on this date the Company filed an
election to change its tax status as a C-Corporation to an
S-Corporation. Subsequent to the conversion to an S-Corporation, no
provision for federal income taxes has been reflected in the Company's
financial statements as the stockholders will report any taxable income
or loss of the Company on their personal tax returns. Furthermore, the
Company has provided a valuation allowance against its net income tax
benefit at February 22, 2002 due to uncertainties surrounding its
ultimate collectibility.
13. RELATED PARTIES
The Company and JEI shared a management fee of 5% of adjusted gross
gaming proceeds for the gaming operations of the LLC. For the first year
of operations, the sharing ratio of this management fee was disbursed
60% to the Company and 40% to JEI. For all subsequent periods of
operations, the management fee was disbursed 50% to the Company and 50%
to Diversified. During the periods ended December 31, 2002, 2001 and
2000, JEI was paid $228, $1,541 and $1,453, respectively, for management
fees from the LLC. On February 22, 2002 in conjunction with the
Company's acquisition discussed in Note 1, the management fee was
terminated.
Effective October 1, 1997, the Company entered into an agreement with an
affiliate of an officer, director and significant stockholder of the
Company to assist the Company in its efforts to research, develop,
perform due diligence and possibly acquire new gaming opportunities. The
agreement, as amended, expired December 31, 2002. The annual cost to the
Company under the agreement was $450, $225, and $225 in 2002, 2001 and
2000 respectively.
14. COMMITMENTS AND CONTINGENCIES
Along with the Company, the LLC and other LLC members were named as
defendants in an action for trespass brought in late January 1998. The
action was dismissed without prejudice on January 3, 1999. A trustee was
appointed by the court on December 22, 1998 to represent the purported
interests of the former plaintiff, if any. The trustee filed a similar
action in September 1999 against the previous defendants, including the
Company, containing essentially the same allegations as the previous
case. During 2002, the Company settled this action for $58. The full
amount of the settlement has been accrued as of December 31, 2001, and
is included as a component of accounts payable and accrued expenses, and
marketing, general and administrative expenses, in the accompanying
consolidated financial statements.
On June 25, 1999, a complaint against the LLC and John Does 1-3 was
filed by a casino operating downstream from these casinos. The complaint
alleges, among other things, that the plaintiff is being damaged by
subsurface water flows onto its property from the LLC property and the
properties of John Does 1-3. The LLC has denied all liability and has
turned the matter over to its insurance carrier for defense. The Company
does not believe the suit has merit and will continue to defend against
the allegations alleged by the plaintiff. We are unable to reasonably
estimate the amount or range of amounts, if any associated with this
litigation. However, the Company does not believe the suit will result
in any material liability.
-20-
The Company is also involved in routine litigation arising in the
ordinary course of business. These matters are believed by the Company
to be covered by appropriate insurance policies.
On January 1, 1997, the Gilpin Hotel Casino Employees' 401(k) Plan
(re-named Black Hawk Gaming & Development Company's 401(k) Plan on March
31, 1999) (the "Plan") was organized and began accepting contributions
on September 1, 1997. The Plan is a defined contribution plan covering
eligible employees of the Company. The Plan allows eligible employees to
make tax-deferred contributions that are matched by the Company up to a
specified level. The Company contributed approximately $263, $274 and
$237 to the Plan for the years ended December 31, 2002, 2001 and 2000,
respectively.
15. SEGMENT INFORMATION
As defined by SFAS No. 131, the Company has two geographically defined
reportable segments comprised of (1) the Gilpin and The Lodge, in Black
Hawk, Colorado and (2) the GDW, in Reno, Nevada. The Corporate
operations represent all other revenues and expenses, and they are also
shown. All inter-segment and inter-company transactions and balances
have been eliminated.
The casinos in Black Hawk, Colorado, primarily serve the residents of
metropolitan Denver, Colorado. As such, the Company believes that
significantly all revenues are derived from within 150 miles of that
geographic area.
The casino in Reno, Nevada, caters to the "locals" market. The Company
believes that significantly all revenues are derived from Reno, Nevada
and surrounding areas.
The accounting policies of these segments are the same as those
described in Note 2.
-21-
Segment financial information as of and for the years ended December 31,
2002, 2001 and 2000 is presented as follows. Segment financial
information as of and for the year ended December 31, 2000 is not
presented for the Reno, Nevada segment as the Company did not operate in
that segment prior to January 2001.
2002 2001 2000
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Net revenues:
Black Hawk, Colorado $ 75,960 $ 80,038 $ 78,875
Reno, Nevada 18,874 18,511
-------------- -------------- --------------
Total net revenues $ 94,834 $ 98,549 $ 78,875
============== ============== ==============
Depreciation and amortization:
Black Hawk, Colorado $ 6,454 $ 5,753 $ 5,736
Reno, Nevada 1,404 2,020
Corporate 37 16 10
-------------- -------------- --------------
Total depreciation and amortization $ 7,895 $ 7,789 $ 5,746
============== ============== ==============
Operating income:
Black Hawk, Colorado $ 14,786 $ 15,397 $ 15,769
Reno, Nevada 3,788 2,731
Corporate (6,444) (3,723) (2,133)
-------------- -------------- --------------
Total operating income 12,130 14,405 13,636
============== ============== ==============
Interest income:
Black Hawk, Colorado $ 29 $ 136 $ 261
Reno, Nevada 2 20
Corporate 9 26 24
-------------- -------------- --------------
Total interest income $ 40 $ 182 $ 285
============== ============== ==============
Interest expense:
Black Hawk, Colorado $ (12,610) $ (3,420) $ (3,424)
Reno, Nevada (2,202) (1,851)
-------------- -------------- --------------
Total interest expense $ (14,812) $ (5,271) $ (3,424)
============== ============== ==============
Income before minority interest and income taxes:
Black Hawk, Colorado $ 8,525 $ 12,113 $ 12,606
Reno, Nevada 88 900
Corporate (6,090) (3,697) (2,109)
-------------- -------------- --------------
Total income before minority interest
and income taxes $ 2,523 $ 9,316 $ 10,497
============== ============== ==============
-22-
DECEMBER 31, DECEMBER 31,
2002 2001
------------------ -----------------
Total assets:
Black Hawk, Colorado $ 113,416 $ 96,033
Reno, Nevada 23,962 30,090
Corporate 8,081 23,783
Total assets 145,459 149,906
------------------ -----------------
Corporate adjustments and eliminations (8,768) (20,212)
------------------ -----------------
Consolidated total assets $ 136,691 $ 129,694
================== =================
Additions to long lived assets:
Black Hawk, Colorado $ 3,580 $ 2,766
Reno, Nevada 1,719 2,126
Corporate 122 75
------------------ -----------------
Total additions to long lived assets $ 5,421 $ 4,967
================== =================
Long-term debt:
Black Hawk, Colorado $ 77,982 $ 41,412
Reno, Nevada 22,300 22,300
------------------ -----------------
Total long-term debt $ 100,282 $ 63,712
================== =================
* * * *
-23-