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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
Commission File Number: 0-31737
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(Exact name of registrant as specified in its charter)
Colorado 75-2740870
(State of incorporation) (I.R.S. Employer Identification No.)
111 Richman St., Black Hawk, Colorado 80422
(Address of principal executive offices) (Zip Code)
(303)582-3600
(Registrant's telephone number, including area code)
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.
[X] Yes [ ] No
- --------------------------------------------------------------------------------
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
FORM 10-Q
INDEX
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, June 30, 2002 (unaudited) and December 31, 2001 2
Condensed Consolidated Statements of Operations for the three months and six months ended
June 30, 2002 and 2001 (unaudited) 3
Condensed Consolidated Statement of Comprehensive Loss for the
three months and six months Ended June 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Redeemable Preferred Stock and Stockholders'
Equity for the period from December 31, 1998 through June 30, 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the three
months and six months ended June 30, 2002 and 2001 (unaudited) 6
Notes to Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10 - 12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 6,827,982 $ 9,667,138
Cash and cash equivalents, restricted 2,340,950 5,012,476
Short-term investments, restricted -- 6,480,236
Accounts receivable 303,861 223,511
Inventories 290,265 282,745
Prepaid expenses 1,146,295 859,704
Other current assets 26,433 --
------------- -------------
Total current assets 10,935,786 22,525,810
Property and Equipment, net 123,469,180 124,599,615
OTHER ASSETS:
Base stock inventories/uniforms, net of accumulated amortization 272,579 279,062
Funds held in escrow and security deposits 237,750 235,151
Franchise Fees 40,000 40,000
Deferred financing costs, net of accumulated amortization
of $3,306,259 and $2,475,409, respectively 4,571,332 5,252,182
------------- -------------
TOTAL ASSETS $ 139,526,627 $ 152,931,820
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,683,432 $ 4,029,205
Trade accounts payable and accrued expenses 3,574,352 1,684,980
Accounts payable related parties 1,616,011 4,925,732
Construction accounts payable 5,514,118 7,344,158
Accrued interest 4,380,784 3,976,906
Other current liabilities 1,571,726 256,157
------------- -------------
Total current liabilities 22,340,423 22,217,138
NON CURRENT LIABILITIES
Long-term debt, less current portion 125,099,008 128,420,658
Warrants issued on common stock 713,720 3,568,600
------------- -------------
Total non current liabilities 125,812,728 131,989,258
REDEEMABLE PREFERRED STOCK
Series A - 11% dividend, $100 redemption value, 29,000 shares outstanding 2,900,000 2,900,000
Series B - 7% dividend, $100 redemption value, 30,000 shares outstanding 1,790,627 1,754,637
Accrued dividends on preferred stock 1,247,040 968,576
------------- -------------
Total redeemable preferred stock 5,937,667 5,623,213
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 10,000,000 shares authorized,
1,000,000 shares outstanding 10,000 10,000
Additional paid in capital 12,241,250 12,241,250
Deficit accumulated during the development stage (26,815,441) (19,209,132)
Other comprehensive income -- 60,093
------------- -------------
Total stockholders' equity (14,564,191) (6,897,789)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,526,627 $ 152,931,820
============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
OPERATING REVENUES:
Casino $ 15,249,418 $ -- $ 31,081,029 $ --
Food and beverage 1,825,936 3,482,834
Other 284,663 479,490
------------- ------------- ------------- -------------
17,360,017 35,043,353
Less: Promotional allowances (958,890) (1,701,571)
------------- ------------- ------------- -------------
Net operating revenues 16,401,127 33,341,782
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Casino 9,111,228 18,423,177
Food and beverage 2,018,258 3,748,369
Other operating expenses 511,464 994,397
General and administrative 2,765,581 5,613,248
Start up costs (23,664) 128,032 (23,664) 330,342
Management fees 555,627 1,137,323
Depreciation and amortization 2,093,208 4,153,453
------------- ------------- ------------- -------------
Total operating expenses 17,031,702 128,032 34,046,303 330,342
------------- ------------- ------------- -------------
Operating Income (630,575) (128,032) (704,521) (330,342)
OTHER INCOME (EXPENSE):
Interest income 13,343 585,457 116,207 1,394,726
Interest expense (4,775,818) (1,550,622) (9,594,411) (3,598,639)
Change in valuation of warrants 2,854,880 2,854,880
------------- ------------- ------------- -------------
Other expense, net (1,907,595) (965,165) (6,623,324) (2,203,913)
------------- ------------- ------------- -------------
Net loss (2,538,170) (1,093,197) (7,327,845) (2,534,255)
Preferred stock dividends 140,065 132,250 278,464 264,500
------------- ------------- ------------- -------------
Net loss attributable to
common stock $ (2,678,235) $ (1,225,447) $ (7,606,309) $ (2,798,755)
============= ============= ============= =============
Loss per share
Basic $ (2.68) $ (1.23) $ (7.61) $ (2.80)
Diluted $ (2.68) $ (1.23) $ (7.61) $ (2.80)
Weighted Average Shares
Basic 1,000,000 1,000,000 1,000,000 1,000,000
Diluted 1,000,000 1,000,000 1,000,000 1,000,000
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net loss $ (7,327,845) $ (1,093,197) $ (7,327,845) $ (2,534,255)
------------- ------------- ------------- -------------
Unrealized gain (loss) on securities held
for sale -- (109,167) (60,093) (37,282)
------------- ------------- ------------- -------------
Comprehensive loss $ (7,327,845) $ (1,202,364) $ (7,387,938) $ (2,571,537)
============= ============= ============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Redeemable
Preferred Stock Common Stock
------------------------------ -----------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
Balance at December 31, 1998 1,000 10
------------- ------------- ------------- -------------
Balance at December 31, 1999 1,000 10
Issuance of common stock 999,000 9,990
11% Series A preferred stock 29,000 $ 2,900,000
7% Series B preferred stock 30,000 3,000,000
Warrants for common stock attached to
Series B preferred stock (1,315,330)
Preferred stock dividends 417,322
------------- ------------- ------------- -------------
Balance at December 31, 2000 59,000 $ 5,001,992 1,000,000 $ 10,000
Amortization of value of warrants attached to
Series B preferred stock 69,967
Preferred stock dividends 551,254
------------- ------------- ------------- -------------
Balance at December 31, 2001 59,000 $ 5,623,213 1,000,000 $ 10,000
Amortization of value of warrants attached to
Series B preferred stock 35,990
Preferred stock dividends 278,464
------------- ------------- ------------- -------------
Balance at June 30, 2002 59,000 $ 5,937,667 1,000,000 $ 10,000
============= ============= ============= =============
Deficit
Accumulated
Additional During the Other Total
Paid In Development Comprehensive Stockholders'
Capital Stage Income Equity
------------- ------------- ------------- -------------
Balance at December 31, 1998 990 (4,304,641) (4,303,641)
Net loss (676,400) (676,400)
------------- ------------- ------------- -------------
Balance at December 31, 1999 990 (4,981,041) (4,980,041)
Issuance of common stock 12,240,260 12,250,250
Preferred stock dividends (417,322) (417,322)
Net loss (5,354,482) (5,354,482)
Unrealized gain on investments available for
sale 286,686 286,686
------------- ------------- ------------- -------------
Balance at December 31, 2000 12,241,250 (10,752,845) 286,686 1,785,091
Preferred stock dividends (551,254) (551,254)
Net loss (7,905,033) (7,905,033)
Unrealized gain on investments available for
sale (226,593) (226,593)
------------- ------------- ------------- -------------
Balance at December 31, 2001 12,241,250 (19,209,132) 60,093 (6,897,789)
Preferred stock dividends (278,464) (278,464)
Net loss (7,327,845) (7,327,845)
Unrealized gain on investments available for
sale (60,093) (60,093)
------------- ------------- ------------- -------------
Balance at June 30, 2002 $ 12,241,250 $ (26,815,441) $ -- $ (14,564,191)
============= ============= ============= =============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
Cash flows used in operating activities 2002 2001 2002 2001
------------- ------------- ------------- -------------
Net Loss $ (2,538,170) $ (1,093,197) $ (7,327,845) $ (2,534,255)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization expense 2,093,208 4,153,453
Amortization of deferred financing costs 416,845 347,022 830,850 688,925
Amortization of debt discount 86,030 85,680 171,990 171,406
Amortization of preferred stock issuance cost 18,086 17,191 35,990 34,440
Change in valuation of warrants (2,854,880) (2,854,880)
Changes in working capital:
Accounts receivable (78,772) (80,350)
Inventory 28,605 (7,520)
Prepaid expenses 52,904 (286,591)
Other current assets (7,841) (26,433)
Trade accounts payable (322,694) 1,889,372
Accounts payable related parties (380,652) (3,309,721)
Accrued interest 3,560,875 (2,921,476) 403,878 673,447
Other current liabilities 340,417 1,315,569
------------- ------------- ------------- -------------
Net cash provided (used) in operating
activities 413,961 (3,564,780) (5,092,238) (966,037)
------------- ------------- ------------- -------------
Cash flows from investing activities:
Decrease (increase) in funds held in escrow 50,000 (2,599) 50,000
Increase in base stock inventory/uniforms (90,479) (90,479)
Increase in property and equipment (1,205,586) (9,341,337) (2,926,056) (26,473,665)
Decrease (increase) in cash - restricted, cost (7,287) (7,363) 2,671,526 3,304,937
Decrease (increase) in investments, cost 15,652,954 6,420,143 23,575,803
(Decrease) increase in construction accounts
payable (802,511) (2,400,930) (1,830,040) 479,235
------------- ------------- ------------- -------------
Net cash provided (used) in investment
activities (2,105,863) 3,953,324 4,242,495 936,310
------------- ------------- ------------- -------------
Cash flows from financing activities:
Deferred offering costs incurred (48,412) (150,000) (24,173)
Payment of notes payable (1,146,081) (1,839,413)
------------- ------------- ------------- -------------
Net cash (used) provided by financing
activities (1,146,081) (48,412) (1,989,413) (24,173)
------------- ------------- ------------- -------------
Net change in cash and cash equivalents (2,837,983) 340,132 (2,839,156) (53,900)
Cash and cash equivalents, beginning of period 9,665,965 229,204 9,667,138 229,204
------------- ------------- ------------- -------------
Cash and cash equivalents, end of period $ 6,827,982 $ 569,336 $ 6,827,982 $ 175,304
============= ============= ============= =============
Non Cash Items:
Construction in progress due to retainage $ -- $ (786,880) $ 208,122 $ (1,405,393)
Interest paid, net of capitalized interest $ 690,003 $ 4,519,601 $ 8,145,955 $ 6,500,000
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Windsor Woodmont Black Hawk Resort Corp., a Colorado corporation (the
"Company") was incorporated on January 9, 1998. Windsor Woodmont, LLC (the
"LLC") was formed as a limited liability company, under the laws of the state of
Colorado, on July 17, 1997. These companies were formed for the purpose of
developing an integrated limited stakes gaming casino, entertainment and parking
facility in Black Hawk, Colorado (the "Project"), which opened December 20,
2001. Prior to December 20, 2001, the Company and the LLC were development stage
enterprises.
The Company was a wholly owned shell company subsidiary of the LLC with
no significant assets, liabilities or operating activity. In connection with the
financing transactions in 2000 described in Note 2, the LLC contributed all of
its assets and liabilities to the Company in exchange for stock of the Company
and the contribution has been accounted for as a recapitalization of entities
under common control whereby the assets and liabilities are recorded at the
historical cost basis of the LLC. The Company has substantially completed the
Project, and is currently operating the Project, which is managed by Hyatt
Gaming Management, Inc. ("Hyatt Gaming"). The LLC's ownership in the Company was
subsequently reduced through the refinancing of the LLC's debt by conversion
into the Company's common stock and the issuance of additional common stock for
cash.
The financial information at June 30, 2002, and for the three months
and six months ended June 30, 2002 and 2001 is unaudited. The financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. The results of operations for the
three months and six months ended June 30, 2002 are not necessarily indicative
of the results that will be achieved for the entire year.
These financial statements should be read in conjunction with the
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001.
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation which have no effect on
previously reported net income.
2. NOTES PAYABLE
Notes payable consisted of the following at June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
--------------- ---------------
13% First Mortgage Notes, net of discount, due March 15, 2005 $ 99,107,088 $ 98,943,164
15.5% Second Mortgage Notes, net of discount, due March 15, 2010 9,714,765 9,706,699
FF&E Note, interest at prime + 6.75% (11.5% at March 31, 2002) 19,066,670 20,800,000
Black Hawk Business Improvement Bonds, $975,000 at 6% interest,
due December 1, 2005 + $2,025,000 at 6.75% interest,
due December 1, 2011 2,893,917 3,000,000
--------------- ---------------
$ 130,782,440 $ 132,449,863
Less current maturities 5,683,432 4,029,205
--------------- ---------------
Long-term debt $ 125,099,008 $ 128,420,658
=============== ===============
On March 14, 2000 the Company issued first mortgage notes with a face amount of
$100 million, and with a $1.64 million discount related to the assignment of
value to the warrants attached thereto. Simultaneously, the Company issued
second mortgage notes with a face amount of $7.5 million, and with a $0.16
million discount related to the assignment of value to the warrants attached
thereto. The terms of the second mortgage notes stipulated that prior to Project
opening, interest would be accrued and would be added to principal upon the
opening of the Project.
7
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
NOTES TO FINANCIAL STATEMENTS
Accordingly, $2,340,233 in accrued interest at December 20, 2001 (the Project
opening date) was added to the second mortgage note principal balance.
The Company made a timely interest payment to Hyatt Gaming Management,
Inc. under the subordinated loan documents on March 18, 2002. The Company and
Hyatt Gaming Management, Inc. are involved in discussions whereby this interest
payment may be re-characterized as a payment of a portion of the pre-opening
expense payable to Hyatt Gaming Management, Inc. In the event this payment is
recharacterized, the Company anticipates that Hyatt Gaming Management, Inc. will
extend the due date of the interest payment; however, there is no assurance that
Hyatt will extend the due date.
On October 2, 2001, the Company entered into a loan agreement with
Wells Fargo Bank, as the administrative and collateral agent for the Lenders, to
provide a $20,800,000 credit facility to acquire furniture, fixtures and
equipment for the Project.
In December 2001, the Company obtained proceeds from a special
improvement district bonds issued by the Black Hawk Business Improvement
District. The bonds are in the form of a $975,000 issue bearing 6% interest and
due December 1, 2005 and a $2,025,000 issue bearing 6.75% interest and due
December 1, 2011. These bonds are the obligations of the Black Hawk Business
Improvement District, and are payable from property tax assessments levied on
the Project. The Black Hawk Business Improvement District has notified the
Company that it will assess the Project twenty semi-annual payments of $211,083,
which was arrived at by amortizing the $3,000,000 at 7% over twenty semi-annual
equal payments. The difference in the interest rate used for the assessment and
the interest rate on the bonds is designed to cover estimated administrative
costs of the Black Hawk Business Improvement District related to this bond
issue. The Company has accounted for the proceeds from this bond offering in
accordance with the provisions of EITF (Emerging Issues Task Force) Issue 91-10:
Accounting for Special Assessments and Tax Increment Financing Entities, and has
recorded an obligation for the total tax assessment. The Company has capitalized
the cost of the improvements involved.
Substantially all of the Company's assets are pledged as collateral for
long-term debt. Among other things, the terms of our various loan agreements
require our insurance be placed with carriers with an A. M. Best & Company
rating of A or higher. Our property and liability coverages were negotiated with
TIG Insurance Company, an A rated carrier prior to opening; however, a few days
before the coverage was bound, TIG Insurance Company's A. M. Best rating was
downgraded from A to B++. Due to the timing of the downgrade, coverage was bound
with TIG, but we immediately began to replace the coverage with A rated
carriers. As of March 22, 2002, the Company was in compliance with all debt
covenants.
3. WARRANTS ISSUED ON COMMON STOCK
Warrants issued in connection with the Company's various financing
transactions (see Note 2), contain a "put option" permitting the warrant holder
to redeem the warrant for cash. The value of the warrants were provided by the
Company's Placement Agent, U.S. Bancorp Libra. The warrants issued with the
first mortgage notes and second mortgage notes were valued at $1.64 million and
$160,000, respectively. The warrants issued with the Series B preferred stock
were valued at $1.37 million. The value of warrants issued to the Placement
Agent was $383,000. Due to the cash based put option features of the warrants,
the total warrant value has been recorded as a liability in the accompanying
consolidated balance sheet and recorded at fair value each reporting period. As
of June 30, 2002 and December 31, 2001 a liability for the fair market value of
the warrants of $713,720 and $3,568,600, respectively, was recorded in the
accompanying consolidated balance sheet with the corresponding non-operating
income resulting from the reduction in fair market value at June 30, 2002 from
December 31, 2001in the amount of $2,854,880 was recorded in the accompanying
consolidated statement of operations for the three months and six months ended
June 30, 2002.
4. COMMITMENTS AND CONTINGENCIES
Gaming Regulation Licensing
The Company's ability to conduct gaming operations in the State of
Colorado is subject to the licensability and qualifications of the Company and
its common stockholders. The Company received the required gaming licenses on
September 20, 2001. Additionally, upon receipt of a gaming license, such
licensing and qualifications are reviewed periodically by the gaming authorities
in Colorado and there are no guarantees such licenses will be renewed.
8
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
NOTES TO FINANCIAL STATEMENTS
Management Agreement
On February 2, 2000, the Company entered into a management agreement
which was amended on March 14, 2000 (the "Management Agreement") with Hyatt
Gaming, which, in exchange for a fee, will manage the casino operations. The
management fee will be equal to a basic fee of 3% of the adjusted gross receipts
and an incentive fee equal to 5% of the earnings before interest, taxes,
depreciation and amortization for the appropriate fiscal year. The incentive fee
shall be paid only to the extent earnings before interest, taxes, depreciation
and amortization is positive and will be subordinated in payment to the notes
issued in the Private Placement. The Management Agreement can be terminated by
either party upon delivery of written notice if certain major gaming license
related events transpire.
Subdivision Agreement
The LLC entered into a subdivision agreement with the City of Black
Hawk, which has been assigned to the Company whereby the Company was required to
dedicate an additional right-of-way for Richman Street, and to make certain
improvements to Richman Street and to the portion of Highway 119 that abuts the
Project's property. The improvements have been completed, and the Company has
conveyed title to the improvements to the City of Black Hawk, free and clear of
all liens or encumbrances, including those under the indenture governing the
first mortgage notes. These conditions were met by the Company prior to the
opening of the Project's operations on December 20, 2001.
Success Fee
The Company has agreed to pay Daniel P. Robinowitz, the Company's
former Chairman of the Board, President and Chief Executive Officer of the
Company, a "success fee" of up to $800,000. The success fee will be earned when
construction of the Project is complete and the casino is open, and will only be
paid if funds, as defined, are available. While the Project opened on December
20, 2001, final completion of construction has not occurred, and the
availability of funds for this success fee is not assured. Accordingly, no costs
have been accrued under this agreement as of June 30, 2002.
Legal Proceedings
The Company is involved in certain legal proceedings, claims and
litigation, including those described below. The results of legal proceedings
cannot be predicted with certainty. Except as otherwise indicated below,
management does not believe that the Company has potential liability related to
any current legal proceedings and claims that would have material adverse effect
on the Company's financial condition, liquidity or results of operations. For
further information concerning legal proceedings, please see Part II, Item 1.
Legal Proceedings.
Environmental Issues
The Project is located in a 400-square mile area that has been
designated by the United States Environmental Protection Agency ("EPA") as the
Clear Creek/Central City National Priorities List Superfund Site under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
as a result of hazardous substance contamination caused by historical mining
activity in Black Hawk. This is a broad national priorities list site, within
which the EPA has identified several priority areas of contamination from
historical mining activities, including draining mines and mine dumps, for
active investigation and/or remediation. To date, the EPA has not identified the
Project site as being within a priority area nor has it identified contamination
from the Project site to require remediation.
The Company has been informed that the Superfund Division of the
Colorado Department of Public Health and the Environment ("CDPHE"), working with
the EPA, has sampled surface water in or near North Clear Creek near where a
portion of the Project site called Silver Gulch discharges surface water into
North Clear Creek. The Company has been informed that based on the results of
those samples, the EPA and the Colorado Superfund Division have expressed
preliminary concern that soil and rock associated with historic mining
operations in Silver Gulch may be a source of contamination to North Clear
Creek. Subsequent to these initial concerns the Company placed an impervious cap
over mine tailings in Silver Gulch and continues to perform surface water
monitoring.
The Project site could be among properties suspected of being a source
of contamination. If investigation or remediation of the Project site were
required, the Company could incur substantial expense.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q that are not historical or current
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
In addition, we may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission (the "Commission"), in press
releases and in reports to shareholders. The forward-looking statements included
in this Quarterly Report are based on current expectations that involve a number
of risks and uncertainties. These forward-looking statements are based on
assumptions that competitive and market conditions affecting our casino will not
change materially or adversely, that we will retain key management personnel,
that our forecasts will accurately anticipate market demand and that there will
be no material adverse change in our operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although management believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking information will be realized.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In addition, our business and operations are subject to substantial
risks, which increase the uncertainty inherent in such forward-looking
statements. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives or plans will be achieved. The Private Securities Litigation Reform
Act of 1995 contains a safe harbor for forward-looking statements on which we
rely in making such disclosures. In connection with this safe harbor we are
hereby identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
our behalf. Any such statement is qualified by reference to the cautionary
statements included in this Quarterly Report.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the condensed consolidated financial statements of
Windsor Woodmont Black Hawk Resort Corp., including the respective notes thereto
and other financial information included elsewhere in this report.
The following discussion should also be read in conjunction with the
Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001.
RESULTS OF OPERATIONS
Prior to the opening of the casino on December 20, 2001 we were in the
development stage. Prior to March 17, 2000 all costs were borne by Windsor
Woodmont, LLC, and such costs were reimbursed with proceeds of the first
mortgage notes offering and related transactions. Future operating results will
be subject to significant business, economic, regulatory and competitive
uncertainties and contingencies, many of which are beyond our control.
As operations commenced on December 20, 2001, the Company does not have
historical operating results for comparable purposes other than interest expense
on its outstanding indebtedness, net of interest capitalized, and interest
income on its invested cash balances. Management had planned a "soft" opening
for the casino. The properties grand opening multi-media advertising and
marketing campaign was launched on January 29, 2002.
Three Months Ended June 30, 2002 and Six Months Ended June 30, 2002
The Company's Management Agreement with Hyatt Gaming Management, Inc.
("Hyatt") vests the management and operation of the casino in Hyatt. The results
of such operations to date are that the budgeted revenues and operating margins
have not been achieved. Consequently, Hyatt's operation of the Company's casino
is not generating adequate cash flow to be assured that the Company will be able
to pay its debt service obligations when they become due. See also Liquidity and
Capital Resources in Item 2.
Total revenue for the three months ended June 30, 2002 was $17,360,017,
$16,401,127 net of promotional allowances. This included $15,249,418in casino
revenue, $1,825,936 in food and beverage revenue, and $284,663 of other revenue.
Total revenue for the six months ended June 30, 2002 was $35,043,353,
$33,341,782 net of promotional
10
allowances. This included $31,081,029in casino revenue, $3,482,834 in food and
beverage revenue, and $479,490 of other revenue.
Casino operating expenses for the three months ended June 30, 2002
totaled $9,111,228, including $3,197,023 in state and local gaming taxes and
device fees. Casino operating expenses for the six months ended June 30, 2002
totaled $18,423,177, including $6,580,990 in state and local gaming taxes and
device fees. The operating expenses consist principally of salaries, wages and
benefits, marketing costs, and other operating expenses of the casino.
Food and beverage expenses for the three months ended June 30, 2002
totaled $2,018,258, including $1,240,448 in cost of goods sold. Food and
beverage expenses for the six months ended June 30, 2002 totaled $3,748,369,
including $2,224,373 in cost of goods sold. Other food and beverage expenses
consist principally of salaries, wages and benefits, and other operating
expenses of the food and beverage operations.
Other operating expenses for the three months ended June 30, 2002
totaled $511,464. Other operating expenses for the six months ended June 30,
2002 totaled $994,397. Other operating expenses consist of salaries, wages and
benefits, contract entertainment expense, and other operating expenses.
General and administrative expenses for the three months ended June 30,
2002 totaled $2,765,581. General and administrative expenses for the six months
ended June 30, 2002 totaled $5,613,248. General and administrative expenses
consist of salaries, wages and benefits, utilities, insurance, property taxes,
maintenance and repairs, cleaning supplies, and other operating expenses.
Management fees are fees to Hyatt under the management agreement, and
consist of two components: a base management fee, which is payable currently,
and an incentive fee which is payable annually if certain financial ratios are
met. The base management fee for the three months ended June 30, 2002 totaled
$456,882. The base management fee for the six months ended June 30, 2002 totaled
$919,355. The incentive management fee for the three months ended June 30, 2002
totaled $98,745. The incentive management fee for the six months ended June 30,
2002 totaled $217,968. Based on operating results to date, the required
financial ratios are not expected to be met, and the incentive management fee,
while accrued currently, will not be payable this year.
Depreciation and amortization expense for the three months ended June
30, 2002 totaled $2,093,208. Depreciation and amortization expense for the six
months ended June 30, 2002 totaled $4,153,453. These expenses relate to property
and equipment placed in service at commencement of operations.
Interest expense for the three months ended June 30, 2002 totaled
$4,775,818, including $416,845 in amortization of debt issuance costs. Interest
expense for the six months ended June 30, 2002 totaled $9,594,411, including
$830,850 in amortization of debt issuance costs. As operations commenced on
December 20, 2001, interest capitalization ceased, and therefore there was no
interest capitalized during the three months or six months ended June 30, 2002.
Three Months Ended June 30, 2001 and Six Months Ended June 30, 2001
The Company did not have any historical operating results other than
interest expense on the Company's outstanding indebtedness, interest income on
the Company's restricted cash and short-term investments, start up costs, and
the capitalization of certain costs.
General and administrative expenses represent salaries and project
development services which were not capitalized to our casino project. We
capitalized salaries which, in management's opinion, are directly attributable
to the development of our casino.
Start up costs are expensed as incurred. The start up costs for the
three months and six months ended June 30, 2001 were incurred by the Company in
accordance with the provisions of the management agreement with Hyatt Gaming
Management, Inc.
Interest charges for the three months ended June 30, 2001 totaled
$4,039,802, including $341,903 in amortization of debt issuance costs. Of this
total, $2,489,180 was capitalized and $1,550,622 was expensed.
Interest charges for the six months ended June 30, 2001 totaled
$8,068,218, including $688,925 in amortization of debt issuance costs. Of this
total, $4,469,579 was capitalized and $3,598,639 was expensed.
11
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2001, we completed a $20.8 million
financing to purchase furniture, fixtures and equipment for our casino, and we
completed a $3.0 million financing from the issuance of special improvement
district bonds by the Black Hawk Business Improvement District.
During the year ended December 31, 2000, we completed debt financing
totaling $107.5 million, a series B preferred stock offering totaling $3.0
million and a common stock offering totaling $4.0 million, net of commissions
paid. We also converted $7.4 million face amount of notes payable to common
stock, and had $1.65 million in accrued interest forgiven. In addition, we
reduced accounts payable and accrued expenses a total of $3.7 million utilizing
$2.9 million in series A preferred stock and $0.8 million of common stock issued
to Windsor Woodmont, LLC.
The Company made a timely interest payment to Hyatt Gaming Management,
Inc. under the subordinated loan documents on March 18, 2002. The Company and
Hyatt Gaming Management, Inc. are involved in discussions whereby this interest
payment may be re-characterized as a payment of a portion of the pre-opening
expense payable to Hyatt Gaming Management, Inc. In the event this payment is
recharacterized, the Company anticipates that Hyatt Gaming Management, Inc. will
extend the due date of the interest payment; however, there is no assurance that
Hyatt will extend the due date.
Total cash, cash equivalents and short-term investments, including
restricted cash, was $9,168,932 at June 30, 2002, compared to $21,159,850 at
December 31, 2001. Total current assets at June 30, 2002, amounted to
$10,935,786 with current liabilities amounting to $22,340,423 as of that date.
Accordingly, the Company had negative working capital of $11,404,637 on that
date. In September the Company has interest payments due on its first and second
mortgage notes of approximately $7,300,000, and has accrued $5,514,118 for
construction accounts payable. Further, the Company has commitments for the
purchase of property and equipment of approximately $540,000, which are expected
to be funded prior to December 31, 2002. The Company does not have any other
external sources of cash to provide funds to meet its obligations, and, as noted
above, current casino operations are not generating adequate cash flow to be
assured that the Company will be able to pay these obligations when they come
due. The Company has hired special counsel to assist in negotiations with its
creditors in restructuring the Company's debt obligations. For further details,
see "Notes Payable," and " Commitments and Contingencies" in the Notes to
Consolidated Financial Statements.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain legal proceedings, claims and litigation,
including those described below. Further, we may become involved in other such
proceedings in the future. The results of legal proceedings cannot be predicted
with certainty. Except as otherwise indicated below, management does not believe
that the Company has potential liability related to any current legal
proceedings and claims that would have material adverse effect on our financial
condition, liquidity or results of operations.
On July 6, 2001, Paul, Hastings, Janofsky & Walker ("Paul Hastings"), a
Los Angeles and New York Based law firm, which acted as issuers counsel for the
Company in securing the $107,500,000 financing for the Company's casino project,
filed suit in Los Angeles County Court seeking damages of approximately $470,000
in legal fees and costs in connection with securing the financing. This case has
been settled for a total of $150,00, $50,000 of which has been paid, and the
balance of $100,000 which is due on December 20, 2002.
On August 1, 2001, First Place LLC ("First Place") filed a lawsuit in
the Gilpin County District Court against the Company asserting that it had an
ownership interest in approximately 6,300 square feet of property upon which our
casino is built and operating. First Place is seeking a declaratory judgment
adjudicating the respective interests of it and the Company in this strip of
property. The Company referred the issue to its title insurance company, First
American Title, which is defending and has agreed to indemnify the Company
pursuant to a $33,500,000 owners title insurance policy. A trial was conducted
in the case from June 18 to June 20, 2002. At the conclusion of the trial, the
court determined that First Place has an ownership interest in approximately
3,000 square feet of the property in dispute and that the Company owns at least
a one-half interest in the balance of the property in dispute. The Court's
ruling further acknowledged that the Court was not resolving all issues and
claims between the parties given the limited issues raised in the case. The
Court ruling has not yet been reduced to writing and finalized. Although the
ultimate outcome of the disputes with First Place cannot be predicted,
management does not believe that an adverse result would have a material adverse
impact on our financial condition, liquidity or results of operations, given the
existence and availability of a significant title insurance policy.
On October 22, 2001, GF Gaming ("GF"), a gaming company operating a
casino in Central City, Colorado filed an appeal with the Colorado Gaming
Commission challenging the issuance of licenses to the Company and Hyatt Gaming
on the grounds that the Colorado Gaming Commission failed to consider whether
the casino facility met the historic architecture intent of the Colorado gaming
laws. In December, 2001, the Colorado Gaming Commission dismissed the appeal
based upon lack of standing and lack of jurisdiction. In February 2002, GF filed
a notice of appeal to continue its challenge in the Colorado Court of Appeals.
The Company intends to vigorously defend this appeal and believes that the Court
of Appeals will uphold the Colorado Gaming Commission's ruling. An adverse
decision would have a material adverse effect on our financial condition,
liquidity and results of operations.
PCL Construction Services, Inc. ("PCL") acted as the general contractor
for the Company in the construction of the Black Hawk Casino by Hyatt project.
The substantial completion date for the project was originally to have been
October 29, 2001 and was subsequently amended by change order to November 15,
2001. In fact, construction of the casino was not at a point where the casino
could open for business until December 20, 2001. PCL has submitted a pay
application to the Company seeking payment of what PCL believes to be a majority
of the balance due on the contract - approximately $1,240,000 in the form of
cost to complete and approximately $3,600,000 in retainage as of December 31,
2001. In addition to these amounts, the Company and PCL have disagreed over the
scope and proper amount of certain additional change notices and change orders.
The precise amount in dispute over change notices and change orders has not yet
been quantified by the parties. On February 15, 2002, the Company wrote PCL a
letter advising PCL that PCL's pay applications would not be processed until
such time as PCL had completed the project, including all required punch list
items, until there had been final resolution of any further issues relative to
change orders and change notices, and until PCL and the Company had reached an
agreement relative to the amount of the Company's setoffs and claims for project
mismanagement and completion delay by PCL. PCL and approximately twelve of PCL's
subcontractors have sent the Company notice of intent to file liens and recorded
mechanic's liens. In late May, 2002, the Company initiated litigation against
PCL seeking damages for PCL's misrepresentations and nondisclosures in
conjunction the performance of this job, resulting, among other things, in a
delayed opening and loss of revenues. In mid-June, 2002 PCL initiated separate
litigation against the Company seeking to foreclose on its mechanic's lien and
for breach of contract. A third separate case for breach of contract against PCL
and foreclosure of mechanic's lien against the Company, has been filed by
Sturgeon Electric, one of PCL's largest subcontractors. It is likely that all
three of these cases will be consolidated. Given that these cases have only
recently been filed and no discovery has been conducted, it is not possible to
predict the outcome of this litigation, however, management does not believe
that an adverse result would have a material adverse effect on our financial
condition, liquidity or results of operations.
13
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
On June 11, 2002, I. C. Deal resigned as Chairman of the Board of
Directors, remaining a director. Jerry L. Dauderman was elected Chairman and
Chief Executive Officer. Timothy G. Rose was re-elected as President and Chief
Operating Officer.
On August 13, 2002, Deloitte & Touche LLP ("Deloitte"), verbally
advised management that it would not accept the engagement as the Company's new
independent auditors. The Company's audit committee will begin the process of
engaging a new independent audit firm as soon as possible. At the present time
the Company is without an independent auditor, and this Form 10-Q has not been
reviewed by an independent audit firm as required by Rule 10-01(d) of Regulation
S-X. The Company will engage its new independent auditor to review the
accompanying financial statements upon appointment.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K
Form 8-K filed May 21, 2002 reporting a change in auditors from Arthur
Andersen, LLP ("Andersen") to Deloitte & Touche LLP ("Deloitte"). The selection
of Deloitte was subject to completion of Deloitte's customary client acceptance
procedures. As noted above in Item 5. Deloitte has verbally advised management
that it would not accept the engagement as the Company's new independent
auditors.
The reports by Andersen on the Company's financial statements during
the preceding two years contained no adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope, or accounting
principles.
During the preceding two fiscal years and through May 20, 2002, there
were no disagreements between the Company and Andersen on any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedure, which, if not resolved to Andersen's satisfaction, would
have caused Andersen to make reference to the subject matter of the
disagreements in connection with Andersen's report on the Company's financial
statements.
Exhibits
Exhibit 99.1 Certification of Officers Pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
14
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.
Date: August 14, 2002
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
/s/ Jerry L. Dauderman
-------------------------------------------------
Chairman of the Board and Chief Executive Officer
15
INDEX TO EXHIBIT
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
99.1 Certification of Officers Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f
2002.