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FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 0-31737
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(Name of small business issuer in its charter)
Colorado 75-2740870
------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 Richman St.
Black Hawk, Colorado 80422
(Address of principal executive office)
Issuer's Telephone Number: (303) 582-3600
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value (Title of class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
State issuer's operating revenues for its most recent fiscal year: $65,863,813
We are unable to determine the aggregate market value for the 580,767 shares of
the common stock, $0.01 par value per share, held by non-affiliates because
there is no trading market for our common stock.
The number of shares of common stock of the registrant outstanding as of
December 31, 2002 was 1,000,000.
While the registrant is currently involved in Chapter 11 Bankruptcy proceedings,
no securities have been distributed under a plan confirmed by the court.
Document incorporated by reference:
Document Part of Form 10-K into which Incorporated
-------- -----------------------------------------
Windsor Woodmont Black Hawk Resort Corp.'s Part III
Definitive Proxy Statement for its Annual Meeting
of Stockholders to be held May 28, 2003
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Description of Business ..................................................... 1
Item 2. Description of Property ..................................................... 26
Item 3. Legal Proceedings ........................................................... 26
Item 4. Submission of Matters to a Vote of Security Holders ......................... 27
PART II
Item 5. Market for Common Equity and Related Stockholder Matters .................... 27
Item 6. Selected Financial Data ..................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................. 34
Item 8. Financial Statements ........................................................ 34
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure .................................... 34
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ......................... 35
Item 11. Executive Compensation ...................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management .............. 35
Item 13. Certain Relationships and Related Transactions .............................. 35
Item 14. Controls and Procedures ..................................................... 35
Item 15. Exhibits and Reports on Form 8-K ............................................ 35
SIGNATURES .................................................................................... 37
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PART I
ITEM 1. BUSINESS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below under "Factors That May Affect Future
Results," as well as those discussed elsewhere in this Form 10-K.
We have based the Black Hawk market data and other statistical
information in this Annual Report, including parking data, on information
supplied by the Colorado Division of Gaming (the "Division of Gaming"), the City
of Black Hawk and various public announcements and filings made by some of the
casinos in the Black Hawk market. We have also relied on other sources that we
believe are reliable. While we believe that the information is accurate, we have
not independently verified any of this information or such announcements and
filings, and it is possible they may not be accurate in all material respects.
In addition, the gaming markets in Colorado and in Black Hawk are subject to
continual changes, including changes in the number and size of casinos in such
markets. Because of these changes, our estimates of the Casino's expected
position in Colorado and in Black Hawk in terms of size, comparable amenities,
parking and nearby competition could become inaccurate at any time.
As used in this Annual Report, the terms "our company," "we" and "us"
refer to Windsor Woodmont Black Hawk Resort Corp., the term "First Mortgage
Notes" refers to the $100 million principal amount of 13% First Mortgage Notes
due 2005 which we issued under an indenture dated March 14, 2000. The term
"Casino" refers to the integrated casino, entertainment and parking facility
constructed in Black Hawk, Colorado, operated under the trade name "Black Hawk
Casino by Hyatt." No representation or warranty, express or implied, is made by
any of the Hyatt companies as to the accuracy or completeness of the information
in this Annual Report, and nothing contained in this Annual Report is, or shall
be relied upon as, a promise or representation by any of the Hyatt Companies.
OVERVIEW
Windsor Woodmont Black Hawk Resort Corp. ("Windsor Woodmont" or the
"Company") was incorporated in the State of Colorado on January 9, 1998. The
Company owns the Black Hawk Casino by Hyatt, an upscale, integrated gaming,
entertainment and parking facility located in Black Hawk, Colorado,
approximately 40 miles from Denver (the "Casino"). The Casino opened on December
20, 2001. The Casino is located at 111 Richman Street, Black Hawk, Colorado, at
the desirable four-corners intersection of Highway 119 and Richman Street in the
center of the Black Hawk gaming district. Since its opening, the Casino has been
managed by Hyatt Gaming Management, Inc. ("Hyatt Gaming") pursuant to a
professional management agreement.
During 2002, we experienced difficulty generating sufficient cash flow
from operations to meet our financial obligations under the First Mortgage Notes
and the Second Mortgage Notes, pursuant to the applicable agreements. Under the
terms of the applicable agreements, our obligation to make the September 15,
2002, interest payments was deferred until October 15, 2002. Our failure to pay
the interest on the First Mortgage Notes and the Second Mortgage Notes when due
on October 15, 2002 constituted an "Event of Default" under the applicable
agreements. On October 23, 2002, we received notice from SunTrust Bank
("SunTrust"), as Trustee under the indenture governing the First Mortgage Notes,
that the First Mortgage Notes were due and payable immediately.
On November 1, 2002, SunTrust, as Trustee under the indenture governing
the First Mortgage Notes obtained a court order for the appointment of a
receiver. The receiver operated the Company from November 1, 2002 until the
filing of the Chapter 11 Case (defined below).
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PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On November 7, 2002 (the "Petition Date"), we filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"), in the United States Bankruptcy Court for the District of
Colorado (the "Bankruptcy Court") as Case No. 02-28089-ABC (the "Chapter 11
Case"). As of the Petition Date, the Bankruptcy Court assumed jurisdiction over
the assets and liabilities of the Company. The receiver was removed and we are
currently acting as a debtor-in-possession on behalf of the bankruptcy estate
and as such, are authorized to operate the business subject to Bankruptcy Court
supervision. On or about March 17, 2003, the Office of the United States Trustee
appointed the Official Committee of Unsecured Creditors (the "Unsecured
Creditors Committee") to represent the interests of general unsecured creditors
in the Chapter 11 Case.
The holders of the First Mortgage Notes, SunTrust, as Trustee under the
indenture governing the First Mortgage Notes, Hyatt Gaming and the Unsecured
Creditors Committee, among other creditor constituencies, are represented by
counsel in the Chapter 11 Case, receive notice of all actions taken by the
Company in the Chapter 11 Case, and have been actively involved in the Chapter
11 Case.
Prior to the Petition Date we retained Irell & Manella LLP as our lead
reorganization counsel in the Chapter 11 Case. We retained Alvarez & Marsal,
Inc. as our financial advisor in connection with the Chapter 11 Case and for the
preparation of a plan of reorganization. Other professionals have been retained
by us in our Chapter 11 Case. All professionals have been employed pursuant to
orders of the Bankruptcy Court. The payment of the fees and expenses of the
professionals employed by us in the Chapter 11 Case are subject to review and
approval by the Bankruptcy Court, after notice and an opportunity for a hearing.
We have incurred, and will continue to incur, significant costs associated with
our Chapter 11 Case.
We determined to file our Chapter 11 Case based upon a decline in our
profitability resulting from below-planned revenues in the second and third
quarters of 2002. As a debtor-in-possession, we are authorized to continue to
operate as an ongoing business, but may not engage in transactions outside the
ordinary course of business without the approval of the Bankruptcy Court, after
notice and an opportunity for a hearing.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
or enforce pre-petition contractual obligations, as well as most other pending
actions against us or property of our estate, are stayed. If a plan of
reorganization can be confirmed by the Bankruptcy Court, substantially all
pre-petition liabilities will be subject to restructuring. Any plan of
reorganization is voted upon by creditors and equity holders and is subject to
the approval of the Bankruptcy Court. A plan of reorganization must be confirmed
by the Bankruptcy Court upon certain findings being made by the Bankruptcy Court
as required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity security holders if certain requirements of the Bankruptcy Code are
met.
As provided by the Bankruptcy Code, we have an initial period of 120
days from the Petition Date to file a plan of reorganization and an initial
period of 180 days from the Petition Date to solicit and obtain acceptances to
the plan. Our initial exclusivity periods were March 7, 2003 for the filing of a
plan and May 6, 2003 to obtain acceptance of such plan. On or about January 31,
2003, we petitioned the Bankruptcy Court and were granted an extension of time
with respect to our exclusive right to file a plan and solicit and obtain
acceptances thereto until May 6, 2003 and July 7, 2003, respectively. We may
seek further extensions of its exclusivity periods. If we do not file a plan of
reorganization or if such plan is not accepted by the required number of
creditors or equity holders during the exclusivity periods, a party in interest
may subsequently file its own plan of reorganization.
Although we expect to file a reorganization plan that provides for
emergence from Bankruptcy, there can be no assurance that a reorganization plan
will be proposed or confirmed by the Bankruptcy Court, or that any such plan
will be consummated.
On December 6, 2002, we filed with the Bankruptcy Court our Schedules
of Assets and Liabilities and Statements of Financial Affairs, which were
amended on or about March 12, 2003 (the "Schedules"). The Schedules set forth,
among other things, our assets and liabilities as shown by our books and
records, subject to the assumptions contained in certain notes filed in
connection therewith. All of the Schedules are subject to further amendment or
modification with notice to those impacted by the amendment or modification. In
the Schedules, we
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listed over 250 disputed and undisputed pre-petition claims against our
Bankruptcy estate reflecting claims of approximately $149 million. Thereafter,
the Bankruptcy Court set the deadline for filing proofs of claim and interests
with the Bankruptcy Court as January 23, 2003, and subsequently set a
supplemental bar date of March 17, 2003 for certain creditors and interested
parties who did not receive notice of the prior bar date. Accordingly, with the
exception of a general 30-day bar date for claims arising from the rejection of
executory contracts and unexpired leases, the deadlines for filing proofs of
claim against us have now passed. The Claims Register prepared by the Bankruptcy
Court and obtained on April 8, 2003 reflects that 123 proofs of claim have been
filed in the Chapter 11 Case in an aggregate amount of approximately $160
million. We also may face additional claims in the future, including, without
limitation, claims arising from our rejection of executory contracts and/or
unexpired leases.
Under the Bankruptcy Code, we may assume or reject executory contracts
or unexpired leases subject to the approval of the Bankruptcy Court and our
satisfaction of certain other requirements. In the event we choose to reject any
executory contracts or unexpired leases, parties affected by these rejections
may file claims with the Bankruptcy Court as provided by the Bankruptcy Code
and/or orders of the Bankruptcy Court. Unless otherwise agreed, the assumption
of an executory contract or unexpired lease will require us to cure all prior
defaults under such executory contract or unexpired lease, including all
pre-petition liabilities, some of which may be significant. In addition, we
expect that liabilities that will be subject to compromise through the Chapter
11 process will arise in the future as a result of the rejection of executory
contracts or unexpired leases, and from the determination by the Bankruptcy
Court (or agreement by parties in interest) of allowed claims for items that we
now claim as contingent or disputed. Conversely, we would expect that the
assumption of executory contracts or unexpired leases may convert some
liabilities shown on our financial statements as subject to compromise to
post-petition liabilities. Due to the uncertain nature of many of the potential
claims, we are unable to project the magnitude of such claims with any degree of
certainty.
On December 23, 2002, we filed a motion for Bankruptcy Court approval
of the rejection of the management agreement with Hyatt Gaming (the "Hyatt
Management Agreement"). The rejection of the Hyatt Management Agreement will,
among other things, eliminate the payment of the management fee to Hyatt Gaming
under the Hyatt Management Agreement, thereby reducing operating costs and
increasing net revenue. On April 10, 2003, we entered into a settlement
agreement with Hyatt Gaming where Hyatt Gaming has agreed, among other things,
that it will not contest the rejection of the Hyatt Management Agreement and the
transition of management of the Casino to us (the "Hyatt Settlement and Release
Agreement"). The Hyatt Settlement and Release Agreement also fixes the amount
and priority of Hyatt Gaming's claims in the Chapter 11 Case (including the
claims based on the rejection of the Hyatt Management Agreement, the claims
under the Second Mortgage Note and claims under the Hyatt Management Agreement)
and provides for treatment of Hyatt Gaming's claims under a plan of
reorganization in the Chapter 11 Case. The Hyatt Settlement and Release
Agreement is contingent upon the Bankruptcy Court's approval. A motion to
approve the Hyatt Settlement and Release Agreement was filed on or about April
10, 2003. On April 25, 2003, the Bankruptcy Court entered an order approving the
Hyatt Settlement and Release Agreement. The order approving the Hyatt Settlement
and Release Agreement will be entered as a final order on the Rejection Date
(defined below). See "Hyatt Settlement and Release Agreement."
On February 7, 2003, we entered into a stipulation with David R.
Belding, our furniture, fixture and equipment lender (the "FF&E Lender"),
pursuant to which we and the FF&E Lender have reached agreement relative to the
amount and priority of the FF&E Lender's claim and the treatment of such claim
under a plan of reorganization in the Chapter 11 Case (the "FF&E Agreement"). A
motion to approve the FF&E Agreement was filed on or about February 14, 2003.
The Bankruptcy Court has not yet ruled on the motion to approve the FF&E
Agreement. See "FF&E Agreement."
During the Chapter 11 Case, we continue to operate our business in the
ordinary course without interruption and without material impact on our
employees, customers and suppliers. As of the Petition Date, we had
approximately $9.6 million in cash available. Additionally, on January 13, 2003,
the Bankruptcy Court ruled that our post-petition gaming revenues were not the
cash collateral of our lenders. Based upon such cash availability, we do not
require, and do not expect to obtain, debtor-in-possession financing in our
Chapter 11 Case.
At this time it is not possible to predict the effect of the Chapter 11
reorganization on our business, various creditors and equity security holders or
when we will be able to conclude our Chapter 11 Case. Our future results are
dependent upon, among other things, the confirmation and implementation of a
plan of reorganization.
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The Financial Statements contained herein have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets
and satisfaction of liabilities in the ordinary course of business, and in
accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code." Our ability to continue
as a going concern, as described above, is predicated upon, among other things,
the confirmation of a reorganization plan and the ability to generate cash flow
from operations sufficient to satisfy our future obligations under a plan.
COMPANY BACKGROUND
During 1997 and 1998, Windsor Woodmont, LLC purchased 48 separate
parcels of land in Black Hawk, Colorado, to assemble a 106 acre tract of land
with an aggregate of approximately 119,000 gross gaming-zoned square feet.
Windsor Woodmont, LLC is a Colorado limited liability company that was formed
for the purpose of assembling and developing the land on which the Casino is
built. In March 2000, Windsor Woodmont LLC contributed the real property owned
by it in Black Hawk and assigned all its rights under certain agreements entered
into in connection with the Casino to the Company. The Company then issued the
$100 million principle amount First Mortgage Notes. The proceeds were used to
finance the development and construction of the Casino.
The members of Windsor Woodmont, LLC are individuals and entities
affiliated with real estate development companies based in Dallas, Texas. These
companies are diversified real estate development companies, which over the past
42 years have developed various types of real estate projects, including hotels,
office buildings, mixed-use projects, shopping centers, multi-family residential
housing and land developments.
DESCRIPTION OF CASINO
GENERAL. The Casino is an upscale gaming facility providing patrons
with a broad selection of gaming activities, dining and entertainment. The
Casino is built on the largest single parcel of real estate ever assembled for
casino development in Black Hawk. It is the largest casino in Black Hawk, with
approximately 425,000 square feet, 57,000 of which is used for gaming. The
Casino features the largest number of gaming machines in Black Hawk with 1,166
state of the art slot machines and 20 table games. The interior decor resembles
the Rocky Mountain surroundings by using rocks, wood, and landscapes natural to
Colorado as part of the interior design.
RESTAURANTS. The Casino features a full array of dining options.
Restaurants available include: the Hickory Grill Restaurant, a steak and seafood
restaurant, the Kitchens of the World Action Buffet, a high quality
action-station buffet and a food court featuring: Wolfgang Puck's Express
restaurant, Chips All-American Burger and Krispy Kreme donuts that are delivered
fresh daily. In addition, the Casino includes an indoor/outdoor plaza area
featuring Starbucks Coffee and a gift shop.
PARKING. The Casino includes an approximately 300,000 square foot
parking garage, with the capacity to park approximately 800 vehicles in covered
parking spaces, 650 adjacent valet spaces, and is able to accommodate buses and
motor coaches. This represents one of the largest on-site parking facilities in
Black Hawk. The Casino also features Black Hawk's largest porte cochere leading
directly into the Casino.
ENTERTAINMENT. Our non-gaming amenities are located throughout the
gaming floor. The focal point is the Wild Fire Lounge, a 5,000 square foot area
surrounded by four, seven-story tall two-sided fireplaces. The center of the
circular bar features a stage for showcasing live entertainment. The area also
has four retractable large-screen televisions for special sports or other
broadcast venues. The Casino also includes a Margarita Bar on the Casino floor
and televisions in the food court to entertain guests. The Casino also contains
the Vista Gallery, a stationary exhibit gallery on the second floor overlooking
the gaming floor.
BUSINESS STRATEGY
Our business strategy is to complete our restructuring under the
Chapter 11 Case as expeditiously as possible. During the course of the Chapter
11 Case, we intend to initiate a broad strategic and operational restructuring,
improve our business discipline and reduce our cost structure, all with the goal
of developing positive cash flow from operations. Key elements to our
restructuring will be to reduce our management costs by the removal of Hyatt
Gaming, major improvement in our slot product, focus our marketing efforts to
high worth casino
4
player segments and a complete re-positioning of the property resulting in a
prominent position in Black Hawk by offering patrons a quality entertainment
experience through superior customer service in an up-scale, friendly and
exciting environment.
We are dedicated to providing a high level of customer satisfaction and
loyalty by offering a spacious, single-floor Las Vegas style casino featuring
both gaming and non-gaming entertainment using a upscale and distinctive design.
The Casino is built on the largest single parcel of real estate ever assembled
for casino development in Black Hawk. We recognize that consistent quality and a
comfortable atmosphere can differentiate the Casino and offer us a competitive
advantage. We believe the distinctive design of the Casino combined with a
complete new re-positioning and its comprehensive amenities attracts a wider
cross section of Denver metropolitan area residents.
MARKETING STRATEGY
We believe that the Casino has an excellent location and offers
sufficient and convenient parking. In addition, the Casino has an opportunity to
expand the Black Hawk market by way of numbers of patrons and to reach
higher-spending patrons by offering a higher level of quality and service than
currently exists in Black Hawk. Additionally, the size of the Casino will allow
us to better absorb peak period demand. Our marketing strategy emphasizes the
following elements:
TARGETED CUSTOMER BASE. We target potential customers with
above-average household income levels in the Denver metropolitan area who tend
to have disposable income for gaming and entertainment purposes as well as other
recreational gaming customers. We exploit this customer base through our Players
Advantage Club, preferred player recognition program. The Players Advantage Club
allows members to receive valuable rewards and exciting promotional offers in
conjunction with their casino play. Rewards include: complementary meals, cash
back, invitations to special events and parties, and tickets to sporting events.
EFFECTIVE DIRECT MARKETING. We attract customers to the Casino by
marketing in the Colorado market through the use of radio and print
advertisements, billboards, our Players Advantage Club, on-going promotions,
gaming tournaments, sweepstakes and most importantly an increased focus on
direct mail marketing. The marketing emphasizes the Casino's gaming, quality
dining facilities, varied entertainment activities and on-site parking. We also
utilize its web site at www.blackhawkcasinobyhyatt.com to enhance its marketing
programs.
CUSTOMER SERVICE. The Casino has a management team committed to
superior service, quality and innovation. We promote repeat business by
designing and implementing marketing and promotional programs that encourage
patron loyalty. These programs are designed to attract new customers to the
Casino and maintain high recognition of our brand name. Colorado hosts
approximately 23 million visitors annually. We believe that future development
of a hotel and casino patronage from such visitors will have a beneficial impact
on the Casino.
ADDITIONAL MARKETING STRATEGIES. Other marketing strategies include:
database management/direct mail marketing, innovative slot and table game
merchandising and quantifiable drive-in marketing programs. We believe that when
provided with upscale amenities, customers will stay in the Casino longer and
spend more than existing Black Hawk customers currently spend. We believe that
effective use of database marketing is among the most efficient means to
communicate with active and potential customers. Hyatt Gaming utilizes player
tracking systems to develop effective marketing and promotional programs by
identifying segments of the population most likely to be attracted to our
facility and then tailors promotions that appeal to this core group of
customers.
COMPETITION
The casino industry in Black Hawk is highly competitive. We believe the
primary competitive factors in Black Hawk are location, availability and
convenience of parking, type and layout as well as the number of slot machines
and gaming tables, types and pricing of restaurants and other amenities, name
recognition, customer service, experienced management and overall atmosphere.
Certain of our current and future competitors have or may have more gaming
experience than us and/or greater financial resources.
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Of the 21 gaming facilities operating in Black Hawk, six have over 700
gaming positions. We consider these larger gaming facilities to be our main
competitors. These larger gaming facilities have on-site or nearby parking and
have brand names established in the local market, such as the Isle of Capri, The
Lodge at Black Hawk, Colorado Central Station, the Riviera Black Hawk and the
Mardi Gras Casino. The Riviera Black Hawk, which opened in early February 2000,
features approximately 1,000 gaming machines, and the Mardi Gras Casino, which
opened in early March 2000, features approximately 700 gaming machines. Colorado
Central Station, opened in December 1993 and has been one of the most successful
casinos in Colorado, is located near the Casino and has approximately 770 gaming
machines and approximately 700 valet parking spaces. The Isle of Capri, which
opened in December, 1998, is located near the Casino and features approximately
1,130 gaming machines and 1,100 parking spaces. Other competitors in Black Hawk
include the Gilpin Hotel Casino, Canyon Casino, Fitzgerald's Casino and
Bullwhackers Black Hawk.
Casinos offering hotel accommodations for overnight stay may have a
competitive advantage over the Casino. Currently two casinos offer hotel
accommodations, with the total number of hotel rooms in Black Hawk being 287.
The Lodge at Black Hawk provides 50 and the Isle of Capri provides 237 rooms. In
addition, Harvey's Wagon Wheel Casino Hotel located in Central City, has 118
hotel rooms.
On December 26, 2002, Isle of Capri Black Hawk, LLC announced it had
entered into a definitive agreement to acquire the Colorado casino operations of
International Game Technology, Inc. which consists of the Colorado Central
Station Casino in Black Hawk and a 20% interest in the Colorado Grand Casino in
Cripple Creek. According to the announcement, Isle of Capri intends to expand
its operations in Black Hawk, including additional casino space and hotel rooms.
On April 22, 2003, Isle of Capri Black Hawk, LLC announced it had completed the
acquisition of the Colorado Central Station Casino and the Colorado Grand
Casino. If Isle of Capri completes the planned expansion, it could attract
gaming patrons and customers who are currently patrons of the Casino. If this
happens, it could have a material adverse effect upon the Casino.
We also face increased competition from casinos in Central City.
Historically, Black Hawk has enjoyed an advantage over Central City because the
majority of customers have to drive by and through Black Hawk to reach Central
City. On November 2, 1999, the voters in Central City granted authority to the
Business Improvement District for the sale of approximately $45.2 million in
bonds which would be allocated towards the planning, design and construction of
a nine mile roadway directly connecting Central City with Interstate 70. This
roadway could result in improved access to both Central City and Black Hawk and
enable patrons to reach Central City without driving through Black Hawk. As of
March 13, 2003, no bonds had been issued in connection with the construction of
the roadway. The Casino also competes, to a limited extent, with the casinos
located in Cripple Creek, because both Black Hawk and Cripple Creek compete for
patrons from Denver. Cripple Creek is located approximately 110 miles to the
south of Black Hawk and 45 miles west of Colorado Springs.
Currently, limited stakes gaming in Colorado is constitutionally
authorized in Central City, Black Hawk, Cripple Creek and two Native American
reservations in southwest Colorado. However, gaming could be approved in other
Colorado communities in the future. The legalization of gaming closer to Denver
would likely have a material adverse impact on our future operating results. The
Casino will also indirectly face competition from other forms of gaming,
including the Colorado state-run lottery, the Power Ball multi-state lottery,
charitable bingo, horse and dog racing, as well as other forms of entertainment.
For additional information concerning competition see "FACTORS THAT MAY AFFECT
OUR FUTURE RESULTS -- We Face Competition From Other Gaming Operations That
Could Have a Material Adverse Effect on our Future Operations" and "Additional
Legalization of Gaming in Colorado or the Imposition of a tax on Gaming Revenues
Could Adversely Effect our Business."
The information contained in this discussion of competition was derived
from publicly available data, except where otherwise stated. While we regard
these sources as reliable, no assurances can be made regarding the accuracy of
such information.
OPERATING RESTRICTIONS
An amendment to the Colorado State Constitution permits limited gaming
in the cities of Central City, Black Hawk and Cripple Creek, Colorado. The
amendment defines "limited gaming" as the use of slot machines and the card
games of blackjack and poker, each with a maximum single bet of $5.00. The
amendment restricts limited gaming to the commercial districts of Black Hawk,
Central City and Cripple Creek, as such commercial districts were defined in
city ordinances on specific dates. Limited gaming is governed by the amendment
and the regulations of the Colorado Gaming Commission and Colorado Revised
Statutes Section 12-47.1-101, et seq., ("hereinafter referred to as the Colorado
Limited Gaming Act"). In the case of the City of Black Hawk, limited
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gaming is restricted by the amendment to the commercial district of Black Hawk
as it existed on May 4, 1978. The amendment also restricts gaming to structures
that conform to the architectural styles and designs that were common to the
areas prior to World War I and that conform to applicable city ordinances. Under
the amendment, no more than 35% of the square footage of any building and no
more than 50% of any one floor of such building may be used for gaming. Gaming
operations may be conducted 365 days a year but are prohibited between the hours
of 2:00 a.m. and 8:00 a.m. Pursuant to the Colorado Limited Gaming Act, no
limits are imposed on total patron losses and casinos are not allowed to extend
credit to the patrons. Persons under the age of 21 are prohibited from
participating in gaming or lingering in gaming areas.
Colorado law requires licensees to maintain detailed books and records
that accurately account for all monies and business transactions. Books and
records must be furnished upon demand to the Colorado Gaming Commission or the
Division of Gaming. Detailed and extensive playing procedures, standards,
requirements and rules of play are established for poker, blackjack and slot
machines. Licensees must adopt comprehensive internal control procedures
governing their gaming operations. Such procedures must be approved in advance
by the Division of Gaming and, in certain cases, the Colorado Gaming Commission,
and include the areas of accounting, surveillance, security, cashier operations,
key control and fill and drop procedures, among others.
No gaming may be conducted in Colorado unless all appropriate licenses
are approved by and obtained from the Colorado Gaming Commission. Violations of
Colorado gaming laws or regulations may be criminal offenses and the person or
entity violating such laws and regulations may be subject to criminal penalties
and/or administrative fines, and may have its gaming license suspended or
revoked.
EMPLOYEES
Windsor Woodmont currently employees four full-time, paid employees.
The Casino currently employs approximately 572 full-time, paid employees. All
Casino personnel retained to provide services at the Casino are employees of
Hyatt Gaming. Upon the Rejection Date (defined below), Hyatt Gaming will
terminate all employees of the Casino and we will make offers of employment to
certain of the employees. See "Material Agreements -- Hyatt Settlement and
Release Agreement." We believe that we will be able to retain and/or attract a
sufficient number of qualified individuals to operate the Casino. We have
retained a new general manager to manage the Casino upon termination of the
Hyatt Management Agreement.
ADDITIONAL RECENT DEVELOPMENTS
On March 25, 2002, Garry Saunders was appointed a member of the audit
committee of the Company. On July 17, 2002, Mr. Saunders was appointed the
Chairman of the audit committee replacing Jerry Dauderman.
On April 10, 2002, the stockholders of the Company approved the 2002
Stock Incentive Plan as recommended by the Board of Directors. The 2002 Stock
Incentive Plan authorizes the granting of stock options for up to 45,000 shares
of the Company's common stock in the form of stock awards, stock appreciation
rights, phantom stock or performance awards.
On June 11, 2002, Irving C. Deal resigned from his position as Chairman
of the Board of Directors and Chief Executive Officer of the Company. Mr. Jerry
Dauderman was elected the Chairman of the Board of Directors and Chief Executive
Officer to fill the vacancy created by Mr. Deal.
On August 16, 2002, Jess Ravich resigned from his position as a Member
of the Board of Directors of the Company.
On December 9, 2002, Donald J. Malouf resigned from his position as
Secretary, member of the Board of Directors and member of the audit committee of
the Company. Mr. Michael Armstrong was appointed to the fill the position of
Secretary created by the resignation of Mr. Malouf.
7
THE HYATT COMPANIES
The Hyatt Settlement and Release Agreement. On April 10, 2003, we
entered into the Hyatt Settlement and Release Agreement. On April 25, 2003, the
Bankruptcy Court entered an order approving the Hyatt Settlement and Release
Agreement. The order approving the Hyatt Settlement and Release Agreement will
be entered as a final order upon the conclusion of the appeals period (the
"Rejection Date"). The duration of the appeals period is ten days beginning upon
the entry of the order by the Bankruptcy Court with the order becoming final on
the Rejection Date in the absence of an appeal. The Rejection Date is currently
set for May 6, 2003; however, we entered into a stipulation with Hyatt to extend
the Rejection Date to be on the fourth business day after we provide written
notice to Hyatt, but in any event will not be later than May 19, 2003. We
entered into this stipulation with Hyatt to provide additional time for the
orderly transition for the management of operations. See "Material Agreements -
Hyatt Settlement and Release Agreement."
GENERAL. The Hyatt Companies name is associated with hotels and resorts
in North America, Central America, South America, the Caribbean, Europe, Hawaii
and the Asia Pacific region. The first Hyatt Hotel opened in 1957. The Hyatt
Companies operate 114 hotels and resorts in 85 cities in the United States,
Canada and the Caribbean, and 79 additional hotels and resorts in 35 countries.
In addition, the Hyatt Companies operate eight casinos in addition to the
Casino, including the Grand Victoria Resort & Casino by Hyatt in Rising Sun,
Indiana; the Regency Mendoza Argentina Casino Mendoza, Mendoza, Argentina; the
Hyatt Regency Lake Tahoe Resort & Casino in Incline Village, Nevada; the Hyatt
Regency Aruba Resort & Casino in Palm Beach, Aruba; the Hyatt Regency Casino
Thessaloniki in Thessaloniki, Greece; the Hyatt Cerromar Beach Resort & Casino
in Dorado, Puerto Rico; the Hyatt Regency Lake Las Vegas in Henderson, Nevada;
and, under a special arrangement, Casino Niagara in Ontario, Canada.
HYATT GAMING. Hyatt Gaming was initially established to manage and
operate the Grand Victoria riverboat gaming complex in Rising Sun, Indiana. An
affiliate of Hyatt Gaming controls the ownership of the Rising Sun development,
and Hyatt Gaming operates the Rising Sun property under a project management
agreement entered into on January 5, 1996. In addition, Hyatt Gaming has entered
into a gaming services agreement with Falls Management Company under which Hyatt
Gaming provides a comprehensive set of operating services to Falls Management
Company, enabling it to perform its duties and obligations as the operator of
Casino Niagara.
Hyatt Gaming has entered into consulting agreements with Hyatt Gaming
Services, L.L.C. relating to the operation of Casino Niagara and the Grand
Victoria in Rising Sun. Hyatt Gaming Services, L.L.C., a wholly owned subsidiary
of Hyatt Gaming, was formed in 1998 to provide consulting services and advice to
developers, owners, operators and managers of gaming casinos. Hyatt Gaming
Services, L.L.C. has consulting agreements and provides a range of operating and
other services, with respect to all eight of the casinos operated by the Hyatt
Companies.
REGULATORY STRUCTURE
COLORADO REGULATORY AGENCIES. The Colorado Division of Gaming (the
"Division of Gaming"), a division of the Colorado Department of Revenue, is
responsible for the regulation and enforcement of limited gaming in Colorado.
The Division of Gaming licenses, implements, regulates and supervises the
conduct of limited gaming under Colorado Constitution Article XVIII, Section 9,
the Colorado Limited Gaming Act. The Division of Gaming has broad authority to
sanction, fine, suspend and revoke a gaming license for violations of the
Colorado Limited Gaming Act and the rules and regulations promulgated by the
Limited Gaming Control Commission (the "Colorado Gaming Commission"). Violations
of several provisions of the Colorado Gaming Regulations also can result in
criminal penalties. The Colorado Limited Gaming Act created the Colorado Gaming
Commission to promulgate the rules and regulations governing the licensing,
conducting and operating of limited gaming and to ensure compliance with such
gaming rules and regulations.
GAMING LICENSES. All applicants for Colorado gaming licenses must
complete comprehensive applications and forms, pay required fees and provide all
information required by the Colorado Gaming Commission and the Division of
Gaming. The Division of Gaming requires an extensive background investigation of
each applicant and persons or entities associated with the applicant. The
Division of Gaming may enter into agreements with the Colorado Bureau of
Investigation and state and local law enforcement agencies for the conduct of
investigation, identification, or registration of applicants, criminal records
checks and investigation of violations of the Colorado Limited Gaming Act. The
investigation may cover the background, personal history, financial
associations, past associations with casino owners and operators, character,
record and reputation of the applicant and its associated persons. The applicant
pays the full cost of the background investigation. There is no limit on the
cost or duration of the background investigation and the length or delay in the
approval process may have a material, adverse impact on the ability of the
applicant and the associated gaming establishment to timely obtain its gaming
license. Applicants who do not provide all requested information during a
background investigation may be denied a gaming license. In addition, all
persons loaning monies, goods or real or personal property to a licensee or
applicant, or
8
entering into any agreement with a licensee or applicant, must provide any
information requested by the Division of Gaming or the Colorado Gaming
Commission; and in the discretion of the Division of Gaming or the Colorado
Gaming Commission, these persons must supply all information relevant to a
determination of any such person's suitability for licensure and must submit to
a full background investigation if ordered by the Colorado Gaming Commission.
Failure to promptly provide all information requested or to submit to a
suitability or background investigation may result in:
- the denial of a gaming license application;
- the suspension or revocation of an existing license;
- termination of any lease, note arrangement or agreement
between the applicant or licensee and the person requested to
provide the information; and
- other sanctions such as the imposition of fines.
Applicants and licensees may be required by the Colorado Gaming
Commission to pay the costs of background, suitability or other investigations
associated with the applicant or licensee. Investigations for suitability,
background or any other reason may delay the license application or the
performance under any agreement with a licensee. All agreements, contracts,
leases and arrangements in violation of the Colorado Limited Gaming Act or the
rules are void and unenforceable. If the Colorado Gaming Commission determines
that a person or entity is unsuitable to own interests in the gaming licensee,
then the applicant and/or licensee could be sanctioned, which may include the
loss by the Casino of approvals or licenses.
In addition, the Colorado regulations prohibit a licensee or affiliated
company thereof from paying dividends, interest or other remuneration to any
unsuitable person, or recognizing the exercise of any voting rights by any
unsuitable person. Further, the Casino may repurchase the shares of anyone found
unsuitable at the lesser of cost or fair market value with indebtedness
subordinated to the notes and the Second Mortgage Notes held by Hyatt Gaming.
In addition to its authority to deny an application for a license based
on suitability, the Colorado Gaming Commission has jurisdiction to disapprove a
change in corporate position of the licensee and may have such authority with
respect to any entity or person which is required to be found suitable by the
Colorado Gaming Commission. The Colorado Gaming Commission has the power to
require the licensee to suspend or dismiss managers, officers, directors and
other key employees, or sever relationships with other persons who refuse to
file appropriate applications or to whom the authorities find unsuitable to act
in such capacity; and may have such power with respect to any entity which is
required to be found suitable. Specifically, it should be noted that there are
limited exceptions applicable to licensees that are publicly traded entities
and, generally speaking, no person, including persons who may acquire an
interest in a licensee in a foreclosure, may sell, lease, purchase, convey or
acquire any interest in a retail gaming or operator license or business without
the prior approval of the Colorado Gaming Commission after investigation by the
Division of Gaming.
Persons found unsuitable by the Colorado Gaming Commission may be
required to terminate immediately any interest in, association or agreement
with, or relationship to a licensee. A finding of unsuitability with respect to
any officer, director, employee, associate, lender or beneficial owner of a
licensee or applicant also may jeopardize the licensee's license or the
applicant's application. The grant of a license may be conditioned upon the
termination of any relationship with unsuitable persons.
Licensees have a continuing duty to report to the Colorado Gaming
Commission and the Division of Gaming information concerning persons, including
identifying those who have a 5% or greater ownership interest, financial or
equity interest in the licensee, or who have the ability to control or exercise
a significant influence over the licensee, or who loan money to the licensee.
Therefore, the requisite information regarding the holders of the notes and
warrants will have to be periodically reported to the Colorado Gaming Commission
and the Division of Gaming. Any person licensed by the Colorado Gaming
Commission and any associated person of a licensee must report criminal
convictions and criminal charges to the Colorado Gaming Commission.
9
Under Colorado law, it is a criminal violation for any person to have a
legal, beneficial, voting or equitable interest, or right to receive profits, in
more than three retail gaming licenses in Colorado. The Colorado Gaming
Commission has defined when a person is considered to have an interest in a
licensee for purposes of this multiple-license prohibition.
No manufacturer or distributor of slot machines or associated
equipment, may, without notification being provided to the Division within ten
days, knowingly have an interest in any casino operator, allow any of its
officers or any other person with a substantial interest in such business to
have such an interest, employ any person if that person is employed by a casino
operator, or allow any casino operator or person with a substantial interest in
a operator to have an interest in the manufacture's or distributor's business. A
"substantial interest" means the lesser of (i) as large an interest in an entity
as any other person or (ii) any financial or equity interest equal to or greater
than 5%.
SUPPORT OR KEY EMPLOYEE LICENSE. Gaming employees must hold either a
support or key employee license issued by the Division of Gaming. Every retail
gaming licensee must have a key employee in charge of all limited stakes gaming
activities when limited stakes gaming is being conducted. All persons employed
by the Casino and involved, directly or indirectly, in gaming operations in
Colorado are required to obtain a gaming license. All licenses must be renewed
annually except for key and support employees which must be renewed every two
years.
CONVEYANCE. With limited exceptions applicable to licensees that are
publicly traded entities, no person may sell, lease, purchase, convey or acquire
any interest in a retail gaming or operator license or business without the
prior approval of the Colorado Gaming Commission. Also, no person may own gaming
equipment without being licensed. Such prohibition could impair the ability of
the holders of the First Mortgage Notes to liquidate our assets upon any
foreclosure of the liens securing the notes.
There cannot be a change in our control without the Colorado Gaming
Commission's prior approval. Also, there can be no change in our capital stock
without the Colorado Gaming Commission's prior approval.
All agreements, contracts, leases or arrangements in violation of
applicable Colorado law or regulations are void and unenforceable. The Colorado
Gaming Commission or the Director of the Division of Gaming may require changes
in gaming contracts (which are any agreements with a licensee, such as the
indenture governing the First Mortgage Notes) or termination of a gaming
contract.
PUBLICLY TRADED CORPORATIONS. In addition to the other requirements of
the gaming laws, the Colorado Gaming Commission has enacted a special rule, Rule
4.5, which establishes reporting procedures and approval requirements for
transfers of interest and other involvement with publicly traded corporations
directly or indirectly involved in gaming in Colorado. We are deemed to be a
"publicly traded corporation" under Rule 4.5 and we are required to file
periodic reports under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). While we are deemed "publicly traded" for purposes of Rule 4.5,
the following provisions apply.
Under Rule 4.5, licensees to whom Rule 4.5 applies must include in
their articles of organization or similar charter documents certain specified
provisions that:
- restrict the rights of the licensee to issue voting interests
or securities except in accordance with the Colorado gaming
laws;
- limit the rights of persons to transfer voting interests or
securities of a licensee except in accordance with the
Colorado gaming laws; and
- provide that holders of voting interests or securities of a
licensee found unsuitable by the Colorado Gaming Commission
may be required to sell their interests or securities back to
the issuer at the lesser of, in general terms, the holder's
investment or the market price as of the date of the finding
of unsuitability. Alternatively, and with authorization by the
Colorado Gaming Commission, the holder may, in limited
circumstances, transfer the voting interests or securities to
a suitable person as
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determined by the Colorado Gaming Commission. Until the voting
interests or securities are held by suitable persons:
- the issuer may not pay dividends or interest on them;
- the interests or securities may not be voted or
entitled to any vote and they may not be included in
the voting of securities of the issuer; and
- the issuer may not pay any remuneration in any form
to the holder of the securities or interests.
Our Amended and Restated Articles of Incorporation contain these provisions:
Under Rule 4.5 persons who acquire direct or indirect beneficial
ownership of: (i) 5% or more of any class of voting securities of a publicly
traded corporation involved in gaming in Colorado; or (ii) 5% or more of the
beneficial interest in a gaming licensee directly or indirectly through any
class of voting securities of any holding company or intermediary company of a
licensee must notify the Colorado gaming authorities within 10 days of such
acquisition, are required to submit all requested information and are subject to
a finding of suitability. All persons who fall under these requirements are
referred to in this discussion as "qualifying persons." Licensees must notify
any qualifying persons of these requirements. A qualifying person whose
interests equal 10% or more must apply to the Colorado Gaming Commission for a
finding of suitability within 45 days after acquiring these securities.
Licensees must also notify any qualifying persons of these requirements. Whether
or not notified, qualifying persons are responsible for complying with these
requirements.
A qualifying person who is an institutional investor under Rule 4.5 and
whose interests equal 15% or more must apply to the Colorado Gaming Commission
for a finding of suitability within 45 days after acquiring the interests. A
qualifying person who is an institutional investor and whose interests equal 10%
or more, but less than 15%, may not be required to apply for suitability,
provided the person fulfills certain reporting requirements.
Rule 4.5 requires persons found unsuitable by the Colorado Gaming
Commission to be removed from any position as an officer, director, shareholder
or employee of a licensee, or from a holding or intermediary company of a
licensee. Unsuitable persons also are prohibited from any beneficial ownership
of the voting securities of any of those entities. Licensees, or affiliated
entities of licensees, are subject to loss of license or other disciplinary
action for paying dividends to persons found unsuitable by the Colorado Gaming
Commission, or for recognizing voting rights of, or paying a salary or any
remuneration for services to, unsuitable persons. Licensees or their affiliated
entities also face disciplinary action for failing to pursue efforts to require
unsuitable persons to relinquish their interests. The Colorado Gaming Commission
may determine that anyone with a material relationship to a licensee, or
affiliated company, must apply for a finding of suitability.
TAXES. The Amendment to the Colorado State Constitution further
provides that, in addition to any other applicable license fees, up to a maximum
of 40% of the adjusted gross proceeds of gaming operations may be payable by a
licensee for the privilege of conducting limited gaming in the State of
Colorado. Adjusted gross proceeds of gaming operations is generally defined as
the total amounts wagered, less all payments to players. With respect to games
of poker and other table games, adjusted gross proceeds of gaming operations
means those sums wagered in a hand retained by the licensee as compensation,
which must be consistent with the minimum and maximum amounts established by the
Colorado Gaming Commission. Currently the gaming tax on adjusted gross proceeds
of gaming operations is .25% on adjusted gross gaming proceeds of up to and
including $2 million, 2% over $2 million up to and including $4 million, 4% over
$4 million up to and including $5 million, 11% over $5 million up to and
including $10 million, 16% over $10 million up to and including $15 million, and
20% over $15 million. The gaming tax is paid monthly with licensees required to
file returns by the 15th of the following month. Gaming taxes are established as
of July 1st for the following 12 months.
ANNUAL DEVICE FEES. The municipalities of Central City, Black Hawk and
Cripple Creek assess and collect their own device fees. The current annual
device fee in Black Hawk is $750 per device. A credit is extended for the first
fifty (50) gaming devices. As of March 27, 2003, we had a total of 1,186 gaming
devices and after the credit, pays the annual device fee for 1,136 gaming
devices. There is no statutory limit on state or city device fees, which may be
increased at the discretion of the State or the applicable city. Local device
fees may be prorated
11
according to device usage; Black Hawk currently prorates device fees such that
any device used at any time during a calendar month is subject to the device fee
for such calendar month. In addition, a business improvement fee of
approximately $90 per device and a transportation impact fee of approximately
$106 per device also may apply, depending upon the location of the licensed
premises. In the past, the Colorado Gaming Commission has assessed an annual
state device fee, however the Colorado Gaming Commission has eliminated its
annual device fee for gaming machines. We cannot be certain the Colorado Gaming
Commission will not, in the future, decide to assess this fee. Should the state
impose an annual device fee, it may have a significant effect on business.
ADDITIONAL TAXES AND FEES. Black Hawk also imposes taxes and fees on
other aspects of the business of gaming licensees, such as parking, alcoholic
beverage licenses and other municipal taxes and fees. Black Hawk may impose
increases or additional fees at its discretion which may have a significant
effect upon our operations.
ALCOHOL. The sale of alcoholic beverages in gaming establishments is
subject to strict licensing, control and regulation by state and local
authorities. Alcoholic beverage licenses are revocable and non-transferable.
State and local licensing authorities have full power to deny, limit, condition,
suspend or revoke any such licenses. Persons or entities which directly or
indirectly own 10% or more of a licensee will be required to complete
applications and submit certain personal and financial information and be
subject to investigation. Violation of the state alcoholic beverage laws may
constitute a criminal offense and violators may be subject to criminal
prosecution, incarceration and fines.
There are various classes of retail liquor licenses under the Colorado
State Liquor Code. A retail gaming tavern license or restaurant liquor license
may be issued to persons who are licensed as a limited gaming establishment
under Colorado law. A retail gaming tavern licensee may sell malt, vinous or
spirituous liquors only by individual drinks for consumption on the premises,
and must also make available sandwiches or light snacks or contract with
concessionaires to provide food services within the same building as the
licensed premises. A restaurant liquor license requires the service of meals and
that at least 25% of the total of food and beverage sales come from the sale of
food. In no event may any person hold, or have an interest in, more than three
retail gaming tavern licenses. Also, a person may not have an interest in more
than one class of liquor license. An application for an alcoholic beverage
license in Colorado requires notice, posting and a public hearing before and
approval by the local liquor licensing authority. In Black Hawk, the licensing
authority is the Black Hawk Board of Aldermen. The Colorado Department of
Revenue, through its Liquor Enforcement Division, also must approve the
application. The Casino has been approved by both the local licensing authority
and the State Division of Liquor Enforcement.
MATERIAL AGREEMENTS
FF&E AGREEMENT.
On February 7, 2003, we entered into the FF&E Agreement. A motion to
approve the FF&E Agreement was filed with the Bankruptcy Court on or about
February 14, 2003. Objections to the motion to approve the FF&E Agreement were
filed by certain creditors, including the First Mortgage Note Holders (SunTrust
joined in the objection filed by the First Mortgage Note Holders). The
Bankruptcy Court has not yet ruled on the motion to approve the FF&E Agreement.
Under the terms of the FF&E Agreement, the FF&E Lender will hold a
first-priority allowed secured claim against the furniture, fixtures and
equipment subject to its lien in the amount of $17,808,125.50 as of the Petition
Date, with per diem interest, fees and costs accruing thereafter. During the
Chapter 11 Case, and subject to the availability of cash to us to make such
payments, commencing on January 1, 2003 and continuing on a monthly basis
throughout the pendency of the Chapter 11 Case, we have agreed to: (a) make
monthly principal reduction payments to the FF&E Lender in the amount of
$346,666.00, together with monthly interest payments on the outstanding FF&E
Loan balance calculated at the non-default interest rate provided in the FF&E
Lender's loan documents (the "FF&E Loan Documents"); and (b) continue to fund,
on a monthly basis, the reserve account for furniture, fixtures and equipment
(the "FF&E Reserve") as provided in the FF&E Loan Documents calculated on the
basis of three percent (3%) of our adjusted monthly gross income. The funds in
the FF&E Reserve may be utilized by us during the Chapter 11 Case in accordance
with the terms of the FF&E Loan Documents. The FF&E Lender has agreed to support
a plan of reorganization that provides the following treatment on account of the
FF&E Lender's allowed secured claim. On or before the effective date of a plan,
we have agreed to pay the FF&E Lender: (a) the difference between (i) the
amounts of principal, accrued interest and reasonable fees and costs, which
would have been due to the FF&E Lender under the FF&E Loan
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Documents (including, without limitation, the November and December 2002
principal reduction payments that were not paid during the pendency of the
Chapter 11 Case and the accelerated monthly principal payments commencing
February 1, 2003 and subsequent dates), and (ii) any payments made to the FF&E
Lender during the Chapter 11 Case; and (b) any funds available to us after
funding certain reserves. Thereafter, commencing one month after the effective
date of a plan, we will commence making monthly principal and interest payments
in accordance with the terms of the FF&E Loan Documents as if no default under
the FF&E Loan Documents had ever existed; provided, however, that if our
post-effective date cash flow is such that said monthly payments cannot be made
in full, we will have the right to pay 50% of the principal portion of the
monthly payments for up to two payments during the first six months following
the effective date of such plan.
HYATT SETTLEMENT AND RELEASE AGREEMENT.
On December, 23, 2002, we filed a motion for Bankruptcy Court approval
of the rejection of the Hyatt Management Agreement. The rejection of the Hyatt
Management Agreement will, among other things, eliminate the payment of the
management fee to Hyatt Gaming under the Hyatt Management Agreement, thereby
reducing operating costs and increasing net revenue. On April 10, 2003, we
entered into the Hyatt Settlement and Release Agreement pursuant to which Hyatt
Gaming will not contest the rejection of the Hyatt Management Agreement and the
transition of management of the Casino to us. The Hyatt Settlement and Release
Agreement also fixes the amount of Hyatt Gaming's claims in the Chapter 11 Case
(including the claims based on the rejection of the Hyatt Management Agreement,
the claims under the Second Mortgage Notes and claims under the Hyatt Management
Agreement) and provides for treatment of Hyatt Gaming's claims under a plan of
reorganization in the Chapter 11 Case. A motion to approve the Hyatt Settlement
and Release Agreement was filed on or about April 10, 2003. On April 25, 2003,
the Bankruptcy Court entered an order approving the Hyatt Settlement and Release
Agreement. The order approving the Hyatt Settlement and Release Agreement will
be entered as a final order on the Rejection Date. The Rejection Date is
currently set for May 6, 2003; however, we entered into a stipulation with Hyatt
to extend the Rejection Date to be on the fourth business day after we provide
written notice to Hyatt, but in any event will not be later than May 19, 2003.
We entered into this stipulation with Hyatt to provide additional time for the
orderly transition for the management of operations.
Under the terms of the Hyatt Settlement and Release Agreement, the
Hyatt Management Agreement will be deemed rejected and management of the Casino
will be transitioned to us. Hyatt Gaming will hold an allowed pre-petition
unsecured claim in the Bankruptcy Case in the total amount of $18,318,368.49.
This claim includes the following: (i) an allowed pre-petition unsecured
rejection damage claim in the amount of $5,000,000, (ii) an allowed pre-petition
unsecured claim based on the Second Mortgage Note in the amount of
$10,877,790.74 (provided, however, that, in the event that the collateral that
secures the Second Mortgage Note claim is determined by the Bankruptcy Court to
have a value in excess of the liens senior to the Second Mortgage Note claim
(including, without limitation, the liens of the FF&E Lender and the First
Mortgage Note Holders), Hyatt Gaming's claim based on the Second Mortgage Note
will be secured to the extent of the value of Hyatt Gaming's collateral, with
the balance of such claim being unsecured), (iii) an allowed pre-petition
unsecured claim based on unreimbursed pre-opening Casino expenses in the amount
of $1,532,920.67, and (iv) an allowed pre-petition unsecured claim in the
Bankruptcy Case based on unreimbursed post-opening Casino expenses in the amount
of $907,657.08. We agree to commence making interest-only payments at a rate of
6% per annum one month after the effective date of the reorganization plan. The
interest-only payments will continue until we generate excess cash flow (as
defined in the Hyatt Settlement and Release Agreement), from and after which
time we will make, in addition to the interest-only payments, monthly principal
payments to Hyatt Gaming in the amount of all excess cash flow generated during
the previous month until such time as Hyatt Gaming's pre-petition unsecured
claim is paid in full; provided, however, that in any event we must repay Hyatt
Gaming's allowed unsecured claim in full on or before the seventh anniversary of
the effective date of the plan. We agree to restrict dividends and certain other
payments to equity holders until Hyatt Gaming's pre-petition unsecured claim is
paid in full. Hyatt Gaming agrees to support a plan of reorganization in the
Chapter 11 Case and, after withholding certain amounts to pay employee-related
liabilities, agrees to waive any claim or interest in and to any funds it
possesses from the operation of the Casino. Hyatt Gaming also agrees that, after
it has been paid $2,000,000 in principal on account of its allowed unsecured
claim, the Company, in settlement of certain disputes regarding the management
fees charged by Hyatt Gaming, will have the right to retain for its own account
the next $250,000 in excess cash flow which would have otherwise been paid to
Hyatt Gaming and to reduce the unpaid portion of Hyatt Gaming's allowed
unsecured claim by such amount. Under the Hyatt Settlement and Release
Agreement, Hyatt Gaming agrees to fully cooperate in the transition of the
Casino to us.
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HYATT MANAGEMENT AGREEMENT.
Under the terms of the Hyatt Management Agreement, and until such time
as the order approving the Hyatt Settlement and Release Agreement is entered as
a final order on the Rejection Date, Hyatt Gaming operates and manages the
Casino. Under the Hyatt Management Agreement, Hyatt Gaming may obtain the
services of Hyatt Gaming affiliates to the extent necessary for Hyatt Gaming to
perform its obligations under the Hyatt Management Agreement. Hyatt Gaming has
entered into a consulting agreement with its affiliate, Hyatt Gaming Services,
LLC, to perform obligations under the Hyatt Management Agreement. Hyatt Gaming
retains full responsibility and liability for performance of all obligations
under the Hyatt Management Agreement and will cause Hyatt Gaming Services, LLC
to perform under its consulting agreement in accordance with the terms and
provisions of the Hyatt Management Agreement.
DUTIES OF HYATT GAMING. Under the Hyatt Management Agreement, Hyatt
Gaming operates the Casino, as our agent.
The obligation of Hyatt Gaming to operate, maintain and manage the
Casino includes, without limitation, managing the facility in a manner that is
consistent with the Colorado liquor and gaming laws and regulations, marketing
and advertising services, collection and payment services, service bureau
payroll/personnel systems, establishment and implementation of accounting and
cost controls, legal services, security services and establishment and
implementation of policies and procedures for the operation of the Casino.
TERM. The original term of the Hyatt Management Agreement commenced on
February 2, 2000, and will continue until December 21, 2016, unless terminated
sooner by either us or Hyatt Gaming. Hyatt Gaming has the right to extend the
original term for two successive periods of five years each. In order to renew,
Hyatt Gaming must provide us with notice at least six months but no more than
twelve months prior to the end of the term in force, and Hyatt Gaming must not
have committed an uncured event of default. Renewal terms will be on the same
terms, covenants and conditions as set forth in the Hyatt Management Agreement
for the original term. It is a condition of the exercise by Hyatt Gaming of any
renewal option that the simple average annual percentage return on cash equity
in the Casino, as of the date such renewal option is exercised, is equal to or
greater than 15%.
COMPENSATION. Under the Hyatt Management Agreement, Hyatt Gaming
receives a basic fee equal to 3% of the adjusted gross receipts of the Casino
and an incentive fee equal to 5% of the earnings before interest, taxes,
depreciation and amortization for the appropriate fiscal year. For this purpose,
adjusted gross receipts mean the adjusted gross proceeds of the Casino as
defined by the Colorado Limited Gaming Act with certain adjustments to include
income from sources other than gaming, less all gaming taxes. The incentive fee
is to be paid only to the extent that the earnings before interest, taxes,
depreciation and amortization is a positive number, and will be subordinated and
deferred as set forth in the indenture governing the First Mortgage Notes.
TERMINATION. In the event of a loss of gaming licenses related to the
Casino, we would have 30 days to terminate the Hyatt Management Agreement upon
delivery of written notice by us to Hyatt Gaming of such termination.
Hyatt Gaming has the right to terminate the Hyatt Management Agreement
after written notice of termination in the event that:
- a loss of license event occurs with respect to a casino
license; or
- a loss of license event occurs with respect to Hyatt Gaming or
its affiliates with respect to another casino as a result of
Hyatt Gaming's management of the Casino or investment in the
Second Mortgage Notes.
In addition, the Hyatt Management Agreement provides that we have the
right to terminate the Hyatt Management Agreement in connection with any sale of
the Casino to a third party unaffiliated with us or any of our shareholders
after the third anniversary of the opening date of the Casino upon written
notice and within certain time limitations. The Hyatt Management Agreement
provides for a termination fee to be paid to Hyatt Gaming. The termination fee
under the Hyatt Management Agreement is generally equal to the product of six
times the average of
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the annual management fees earned by and payable to Hyatt Gaming during the
three fiscal years immediately preceding the termination date.
Upon rejection of the Hyatt Management Agreement, the Bankruptcy Court
would make a determination of the damages, if any, related to the rejection of
the Hyatt Management Agreement.
Notwithstanding any termination or rejection of the Hyatt Management
Agreement, we would continue to be liable to Hyatt Gaming for the payment of all
fees and other amounts due to Hyatt Gaming under the Hyatt Management Agreement
to the date of such termination/rejection.
EVENTS OF DEFAULT. The Hyatt Management Agreement sets forth the
following events of default:
- failure to pay the other party amounts due within 15 days of
notice of such failure; or
- failure to perform in any material respect, with certain
exceptions, the terms, covenants, undertakings, obligations or
conditions set forth in the Hyatt Management Agreement, after
proper notice of the failure; or
- any default under the subordinated loan agreement or certain
provisions of the intercreditor, subordination and collateral
agreement; or
- insolvency or failure to pay debts as they become due by
either party; or
- assignment by either party for the benefit of its creditors;
or
- commencement of a bankruptcy or similar proceeding or a
proceeding to appoint a receiver or similar official; or
- any default under any hotel management agreement we
subsequently enter into with Hyatt Gaming.
Upon an event of default, the non-defaulting party may give the
defaulting party notice of intention to terminate the Hyatt Management
Agreement.
ASSIGNMENT. Under the Hyatt Management Agreement, Hyatt Gaming may
assign or delegate any or all of its rights or obligations under the Hyatt
Management Agreement, without our consent, to any assignee affiliate or may
assign all of its rights and obligations under the Hyatt Management Agreement to
any assignee who also acquires all, or substantially all, of the gaming or hotel
assets of Hyatt Corporation or the affiliated group, as defined in Section 1504
of the Internal Revenue Code of 1986, as amended, of which Hyatt Corporation is
a member and assumes its obligations, including those under the Hyatt Management
Agreement. However, upon filing of the Chapter 11 Case, Hyatt Gaming requires
approval from the Bankruptcy Court to assign or delegate any of its rights or
obligations. Under the Hyatt Management Agreement, upon an assignment or
delegation, Hyatt Gaming's obligations under the Hyatt Management Agreement
would terminate unless the assignment is to an affiliate assignee. If the
assignment or delegation is to an affiliate assignee, Hyatt Gaming's obligation
would continue as if the assignment had not taken place. The assignment by Hyatt
Gaming of its rights under the Hyatt Management Agreement beyond what is
provided above requires our approval.
We have the right to sell, hypothecate or convey the Casino or any
portion of the Casino, or to assign our interest in the Hyatt Management
Agreement with the prior approval of Hyatt Gaming. For these purposes a change
of control will be considered an assignment.
INDEMNIFICATION. Under the Hyatt Management Agreement, Hyatt Gaming
will indemnify and hold harmless us and our shareholders, directors, officers,
employees and agents from any damages, liabilities, costs, claims or expenses,
including attorney's fees, attributable to Hyatt Gaming's or any Hyatt Gaming
affiliate's gross negligence, willful misconduct, willful or reckless violation
of any legal requirements or breach of the Hyatt Management Agreement, or based
on any self-insurance placed with Hyatt Gaming in accordance with a Hyatt Gaming
self-insurance bid accepted by us. The cost of such indemnification will be
borne solely by Hyatt Gaming
15
or such Hyatt Gaming affiliate, as the case may be. If the loss is attributable
to any other reason or cause, the cost of such indemnification will be paid by
Hyatt Gaming out of our operating accounts and will be charged against adjusted
net profits and earnings before interest, taxes, depreciation and amortization,
and will be without recourse to Hyatt Gaming or its affiliates.
We will indemnify and hold harmless Hyatt Gaming and its affiliates and
their respective directors, officers, employees and agents from any and all
liabilities, losses, damages, costs and expenses arising out of or incurred in
connection with the management and operation of the Casino or Hyatt Gaming's
position as our agent which are not covered by insurance. This indemnity does
not include losses attributable to gross negligence, willful misconduct, willful
or reckless violations of legal requirements or breach of the Hyatt Management
Agreement by Hyatt Gaming, its affiliates or their employees or agents.
NON-COMPETITION. Under the Hyatt Management Agreement, if we or any
affiliate owns, develops, operates or franchises any other casino in Black Hawk
or Central City, Hyatt Gaming will continue to have the right to exercise its
renewal options under the Hyatt Management Agreement; provided, that the renewal
threshold will be reduced from a 15% to 10% simple average annual percentage
return on cash equity after the first full year of operation of such casino.
Notwithstanding the foregoing, Hyatt Gaming will have the exclusive right of
first refusal to manage, in accordance with the terms of the Hyatt Management
Agreement, any gaming or hotel facility owned, developed or operated by us or
any of our beneficiaries or their respective affiliates that is located on or
utilizes any portion of the Casino or the site related property. We have the
right, subject to a first refusal by Hyatt Gaming, to operate any additional
casino project on the site related property through an independent unaffiliated
third party casino management company.
Hyatt Gaming has agreed that neither Hyatt Gaming nor any of its
affiliates will develop, operate or franchise any other casino bearing the name
"Hyatt" at any time during the term of the Hyatt Management Agreement anywhere
within the State of Colorado. Notwithstanding the foregoing, if Hyatt Gaming or
a Hyatt Gaming affiliate controls or shares control as a developer or owner of a
casino in Denver, Colorado or within a five-mile radius of those city limits,
Hyatt Gaming must offer us the opportunity to invest cash equity in order to
acquire up to 45% of Hyatt Gaming's or such Hyatt Gaming affiliate's ownership
interest in such casino on market terms. If such offer is made, Hyatt Gaming or
any Hyatt Gaming affiliate will be free to develop and operate such casino which
can bear the name "Hyatt," regardless of whether we accept Hyatt Gaming's offer.
These restrictions will lapse and be of no further force or effect from and
after the expiration or earlier termination of the Hyatt Management Agreement.
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT.
We have entered into a subordination, non-disturbance and attornment
agreement with Hyatt Gaming and the trustee under the indenture governing the
First Mortgage Notes, on behalf of the holders of the notes. Under this
agreement, Hyatt Gaming agrees that the Hyatt Management Agreement, including,
without limitation, Hyatt Gaming's rights to payment of any amounts, Hyatt
Gaming's rights and remedies and Hyatt Gaming's liens and other interest, is and
will be subject and subordinate to the indenture governing the First Mortgage
Notes, the deed of trust and the other documents governing the First Mortgage
Notes. Notwithstanding the foregoing, we may pay Hyatt Gaming amounts under the
Hyatt Management Agreement as they come due; however, we may not pay incentive
fees payable under the Hyatt Management Agreement during periods when the
indenture governing the First Mortgage Notes prohibits us from making such
payments under the Hyatt Management Agreement. During such restricted periods,
however, the basic fee and other amounts due to Hyatt Gaming under the Hyatt
Management Agreement will continue to be paid by us. If we do not continue to
pay such amounts, Hyatt Gaming may terminate the Hyatt Management Agreement.
NON-DISTURBANCE AND ATTORNMENT. Under the Hyatt Management Agreement,
in the event the land on which the Casino is built, comprised of trust property
under the deed of trust, is acquired by another party in connection with
foreclosure under the deed of trust, Hyatt Gaming retains its rights under the
Hyatt Management Agreement against the new owner. Hyatt Gaming agrees to attorn
to the new owner upon the foreclosure under the deed of trust.
16
Pursuant to the subdivision agreement, in accordance with the approvals
and requirements of the Colorado Department of Transportation and concurrence
with the City of Black Hawk Public Works Department, we have constructed some
improvements to Highway 119. We have also constructed the signals necessary at
the intersection of Richman Street and Highway 119, constructed and installed
landscaping along the Richman Street and Highway 119 frontage in accordance with
the landscaping plan approved by the City of Black Hawk and have constructed and
maintained drainage improvements along the Richman Street and Highway 119
frontages. In addition, we have constructed and are responsible for maintenance
of the channel improvements and flood control facilities that were required as a
result of our request for a conditional letter of map revision permit from the
Federal Emergency Management Agency. Further, in the event of an emergency
requiring an immediate response by the City of Black Hawk related to flood
control structures owned by us, we have agreed to reimburse and indemnify the
City of Black Hawk for all costs and expenses associated with the City of Black
Hawk's response to such emergency. Finally, we have installed and completed, at
our expense, all necessary water lines, sewer lines, fire hydrants, water or
sewer distribution facilities, drainage structures and paved streets, including
curbs and gutters, as approved by the Director of Public Works of the City of
Black Hawk.
Further, we have conveyed marketable title to the improvements to the
City of Black Hawk, free and clear of all liens or encumbrances, including liens
or encumbrances arising under the indenture governing the First Mortgage Notes.
We were required to warrant the improvements for one year after certification by
the Director of Public Works of the City of Black Hawk (or other appropriate
party) that the improvements conform with specifications approved by the
Director of Public Works, as appropriate, except that we have agreed to warrant
water improvement for three years. Subject to a provision for force majeure, we
were required to complete the improvements, including the required inspections
of the improvements, by December 31, 2001, and all improvements were complete.
In addition, upon the City of Black Hawk's acceptance of the improvements, the
City of Black Hawk conveyed to us a certain portion of Richman Street as
realigned, and certain rockbolt easements necessary for us to complete the
development.
PERFORMANCE GUARANTEE. The subdivision agreement required that our
obligation to ensure the performance and completion of the public improvements
be secured by an irrevocable letter of credit or other agreed upon securities to
which the City of Black Hawk is the beneficiary. The amount of the irrevocable
letter of credit or other agreed upon securities was required to be equal to
110% of the estimated costs of the public improvements. This collateral security
requirement was satisfied by an irrevocable letter of credit in the amount of
$919,718. The letter of credit expired pursuant to its terms in September 2002.
MISCELLANEOUS. The City of Black Hawk's remedies for breach of the
subdivision agreement include, but are not limited to, refusing to issue a
building permit or certificate of occupancy, the revocation of any building
permit previously issued under which construction directly related to such
building permit has not commenced, drawing upon the letter of credit or any
other remedy available at law. We will be required to indemnify the City of
Black Hawk and its representatives against any claims arising from our acts or
these or our agents. We may not transfer or assign any of our rights or
obligations under the subdivision agreement without the prior written consent of
the City of Black Hawk.
FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
You should carefully consider the following risks, together with all
other information included in this Annual Report. The realization of any of the
risks described below could have a material adverse effect on our business,
results of operations and future prospects.
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED
RISKS. This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Exchange Act. 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 Annual Report are based on current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based on the following assumptions: a plan of
reorganization submitted by us will be approved by the Bankruptcy Court, the
Hyatt Management Agreement will be rejected and the management of the Casino
transitioned to us, competitive and market conditions affecting the
17
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 further 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, as disclosed elsewhere under other risk factors, 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 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 Annual
Report.
CERTAIN BANKRUPTCY CONSIDERATIONS
WE FACE SIGNIFICANT CHALLENGES IN CONNECTION WITH OUR BANKRUPTCY
REORGANIZATION. On November 7, 2002, we filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Since the
Petition Date, we have been operating the Casino as debtor-in-possession
pursuant to the Bankruptcy Code. There can be no assurance that we will be
successful in reorganizing under the Chapter 11 Case. If we are not successful
in reorganizing under the Chapter 11 Case, we could face liquidation.
Windsor Woodmont management is in the process of developing of a plan
for the reorganization of the Company. After a plan of reorganization is filed
with the Bankruptcy Court, the plan, along with a disclosure statement approved
by the Bankruptcy Court, will be sent to creditors and equity holders in order
to solicit acceptance of the plan and, following such solicitation and approval,
the Bankruptcy Court will consider whether to confirm the plan. When proposed,
the plan of reorganization may not receive the requisite acceptance by creditors
and equity holders or the Bankruptcy Court may not confirm the proposed plan.
Moreover, even if a plan of reorganization receives the requisite acceptance by
creditors and equity holders and is ultimately approved by the Bankruptcy Court,
the plan may not be viable. In addition, due to the nature of the reorganization
process, actions may be taken by creditors or other parties in interest that may
have the effect of preventing or unduly delaying confirmation of a plan of
reorganization in connection with the Chapter 11 Case. Accordingly, there can be
no assurance as to whether or when a plan of reorganization may be approved by
the creditors or equity holders or confirmed by the Bankruptcy Court in the
Chapter 11 Case.
OUR FINANCIAL STATEMENTS ASSUME WE WILL CONTINUE AS A "GOING CONCERN."
Based on current and anticipated levels of operations and assuming confirmation
of a plan of reorganization, we believe that we will continue as a "going
concern." Accordingly, our financial statements included herein have been
prepared assuming we will continue as a "going concern." The continuation of the
Company as a "going concern" is contingent upon, among other things, (i) our
ability to formulate a plan of reorganization that will gain the approval of the
parties required by the Bankruptcy Code and be confirmed by the Bankruptcy
Court, (ii) our ability to generate sufficient cash flows from operations to
meet future obligations. These matters create substantial doubt about our
ability to continue as a "going concern." If the "going concern" basis was not
appropriate for the Company's financial
18
statements, then significant adjustments would be necessary in the carrying
value of assets and liabilities, the revenues and expenses reported, and the
balance sheet classifications used.
The amounts reported in the financial statements included elsewhere in
this Annual Report do not reflect all of the adjustments to the carrying value
of assets or the amount and classification of liabilities that ultimately may be
necessary as the result of the adoption of a plan of reorganization. Adjustments
necessitated by the plan of reorganization could materially change the amounts
reported in the financial statements included herein.
WE ARE SUBJECT TO RESTRICTIONS ON THE CONDUCT OF OUR BUSINESS. We
currently operate the Casino as a debtor-in-possession pursuant to the
Bankruptcy Code. Under applicable bankruptcy law, during the pendency of the
Chapter 11 Case, we are required to obtain the approval of the Bankruptcy Court
for any transaction outside the ordinary course of business. In connection with
any such approval, creditors and other parties in interest may raise objections
to such approval and may appear and be heard at any hearing with respect to any
such approval. The Bankruptcy Court may also have the authority to oversee and
exert control over our ordinary course of operations. As a result of these
restrictions, our ability to respond to changing business and economic
conditions may be significantly restricted, and we may be prevented from
engaging in transactions that might otherwise be considered beneficial.
THE CHAPTER 11 CASE MAY HAVE A MATERIAL ADVERSE EFFECT ON RELATIONSHIPS
WITH SUPPLIERS OR VENDORS. While we have not experienced any significant
disruption in our relationships with our suppliers or vendors, we may have
difficulty maintaining existing or creating new relationships with suppliers or
vendors as a result of the Chapter 11 Case. Suppliers and vendors could stop
providing supplies or services or provide such supplies or services only on
"cash on delivery," "cash on order," or other terms that could have an adverse
impact on our short-term cash flows.
THE ADEQUACY OF OUR CAPITAL RESOURCES IS LIMITED AND WE HAVE LIMITED
ACCESS TO ADDITIONAL FINANCING. In addition to the cash requirements necessary
to fund ongoing operations, we currently are incurring and anticipate that we
will incur significant professional fees and other restructuring costs in
connection with the Chapter 11 Case and the restructuring of our operations.
However, as a result of the uncertainty surrounding our current circumstances,
it is difficult to predict our actual liquidity needs at this time. Although,
based on current and anticipated levels of operations, and efforts to increase
the number of gaming patrons and customers to the Casino, we believe that our
cash flow from operations will be adequate to meet our anticipated cash
requirements during the pendency of the Chapter 11 Case, ultimately such amounts
may not be sufficient to fund operations until such time as we are able to
propose a plan of reorganization that will receive the requisite acceptance by
creditors and equity holders and be confirmed by the Bankruptcy Court. In the
event that cash flows are insufficient to meet future cash requirements, we may
be required to reduce planned capital expenditures or seek additional financing.
We can provide no assurance that reductions in planned capital expenditures
would be sufficient to cover shortfalls or that additional financing would be
available or, if available, offered on acceptable terms. As a result of the
Chapter 11 Case and the circumstances leading to the filing thereof, our access
to additional financing is, and for the foreseeable future will likely continue
to be limited. As the foregoing indicates, our long-term liquidity requirements
and the adequacy of our capital resources are difficult to predict at this time,
and ultimately cannot be determined until a plan of reorganization has been
developed and is confirmed by the Bankruptcy Court in the Chapter 11 Case.
THE REORGANIZATION WILL REQUIRE SUBSTANTIAL EFFORT BY MANAGEMENT. Our
senior management has been and may continue to be required to expend a
substantial amount of time and effort in connection with the reorganization
process. By expending time focusing upon the reorganization effort, management
is unable to focus 100% on our operations which could have a disruptive effect
upon operation of our business.
THERE IS CURRENTLY NO ESTABLISHED MARKET FOR OUR SECURITIES. The First
Mortgage Notes are our only securities which have been registered under the
Securities Act. We do not intend to apply for a listing of the First Mortgage
Notes on a securities exchange or on any automated dealer quotation system.
There is currently no established market for the First Mortgage Notes and we
cannot assure you as to the liquidity of any market that may develop for the
notes, your ability to sell the notes or the price at which you would be able to
sell the notes. If such markets were to exist, the First Mortgage Notes could
trade at prices that may be lower than their principal amount or purchase price
depending on many factors, including our Chapter 11 Case, the prevailing
interest rates and
19
markets for similar securities. Further, there is no established trading market
for our common stock, and we cannot assure you that one will ever develop.
The liquidity of, and trading market for, the First Mortgage Notes also
may be adversely affected by changes in the overall market for high yield
securities and by further adverse changes in our financial performance or
prospects or in the prospects for companies in our industry. As a result, we
cannot assure you that an active trading market will develop for the First
Mortgage Notes.
IF THE REORGANIZATION PLAN IS APPROVED BY CREDITORS AND EQUITY HOLDERS
AND SUBSEQUENTLY CONFIRMED BY THE BANKRUPTCY COURT, WE WILL STILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT AND CONTINUE OPERATIONS. In the
Chapter 11 Case there have been 123 proofs of claim filed, representing
approximately $160 million in claims against us. Our inability to generate
adequate cash prior to and after the approval of any reorganization plan may
impact our ability to repay our restructured debt obligations. Our ability to
make payments on our restructured debt obligations will depend on our ability to
generate cash and secure financing if needed in the future.
Our ability to generate cash will depend upon, among other things:
- future operating performance;
- demand for gaming and entertainment;
- general state of the economy;
- competition, particularly in Black Hawk; and
- regulatory and other factors affecting our operations and
business.
Many of these factors are beyond our control. If we are unable to
successfully restructure our debt and generate sufficient cash flow through
operations, we may be forced to reduce, delay or cancel planned capital
expenditures, or obtain additional equity capital if available, or even
liquidate.
FACTORS RELATED TO OUR OPERATIONS
WE MAY NOT BE ABLE TO MAINTAIN OUR GAMING LICENSE REQUIRED BY THE
COLORADO GAMING COMMISSION TO OPERATE THE CASINO. The Colorado Gaming Commission
approved the issuance of the appropriate and necessary gaming licenses for
operation of the Casino to us and Hyatt Gaming on September 20, 2001. The
licenses were physically issued to us and Hyatt Gaming immediately prior to
opening of our Casino on December 20, 2001. The operation of a Casino gaming
facility in Colorado requires a Colorado Limited Gaming License. A Colorado
gaming license is a non-transferable, revocable privilege in which the licensee
acquires no vested interest. The Colorado Gaming Commission could choose not to
renew that license if it has concerns about our management, operations, business
practices or associations. Our failure to maintain all required licenses to
conduct limited gaming on our premises would have a material, adverse effect
upon our operations. Additionally, any violation of gaming laws or regulations,
could result in the assessment of substantial fines against us and the persons
involved. The suspension, revocation or non-renewal of any of our licenses or
the levy on us of substantial fines could have a material adverse effect on our
business.
WE MAY BE UNABLE TO MAINTAIN OUR LIQUOR LICENSE. In addition to a
gaming license, regulatory approval is necessary to maintain our liquor licenses
from the City of Black Hawk and the State of Colorado. Although we do not
anticipate any problem in maintaining our liquor license, our inability to
obtain any required permit or approval could prevent us from operating the
Casino.
UNDER COLORADO GAMING LAWS, NOTE HOLDERS MAY BE REQUIRED TO SUBMIT TO A
BACKGROUND INVESTIGATION REGARDING THEIR SUITABILITY AS A NOTE HOLDER OR WARRANT
HOLDER WHICH COULD DELAY ANY APPLICATIONS FOR LICENSES, PERMITS OR OTHER
AUTHORIZATIONS. The current policy of the Colorado Gaming Commission and the
Division of Gaming does not require note holders to submit to a background
investigation for a suitability determination. The Colorado Gaming Commission
and the Division of Gaming could change that policy at any time and require note
holders to undergo a background investigation.
20
In addition, note holders who also own our common stock, whether by the
exercise of a detachable warrant or by any other means, will at least be
required to submit a limited owner application, which will be reviewed by the
Colorado Gaming Commission and the Division of Gaming. The current policy of the
Colorado Gaming Commission and the Division of Gaming does not require
shareholders who are institutional investors to submit to a full background
investigation regarding their suitability. The Colorado Gaming Commission and
the Division of Gaming could change that policy at any time and require
institutional investors to undergo background investigations.
Our shareholders are required to submit owner applications, which are
reviewed by the Colorado Gaming Commission and the Division of Gaming. Despite
current policy, the Colorado Gaming Commission and the Division of Gaming have
the authority to require any person who is one of our shareholders and any of
our executive employees or agents having the power to exercise a significant
influence over decisions concerning any part of the operation of the Casino to
undergo a full background investigation, regardless of whether the shareholder
is an institutional investor and regardless of the number of shares held, which
could further delay the gaming application process.
WE COULD INCUR LOSSES WHICH WOULD NOT BE COVERED BY INSURANCE. Although
we have obtained all insurance customary and appropriate for our business, we
cannot assure you that this insurance will be adequate to cover all perils to
which our business or our assets might be subjected. Any losses we incur that
are in excess of our coverages or are not covered by insurance consequently
increase our operating costs.
WE FACE COMPETITION FROM OTHER GAMING OPERATIONS AND OTHER FORMS OF
GAMING THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR FUTURE OPERATIONS. As
described under "Competition," we operate in a very competitive environment.
Certain of our current and future competitors have or may have more gaming
experience than us or Hyatt Gaming and the other Hyatt Companies and/or greater
financial resources.
Casinos offering hotel accommodations for overnight stay may have a
competitive advantage over the Casino. The number of hotel rooms currently in
Black Hawk is approximately 287, with the Lodge at Black Hawk providing 50 and
the Isle of Capri providing 237. In addition, Harvey's Wagon Wheel Casino Hotel,
located in Central City, has 118 hotel rooms. Isle of Capri recently announced
plans it had completed the acquisition of the Colorado Central Station Casino in
Black Hawk and the Colorado Grand Casino in Cripple Creek. Isle of Capri also
announced plans to expand and add additional hotel rooms to these properties. If
Isle of Capri completes the planned expansion, it could attract gaming patrons
and customers who are currently patrons of the Casino. If this happens, it could
material adverse effect upon the Casino.
We may also face increased competition from casinos in Central City.
Historically, Black Hawk has enjoyed an advantage over Central City because the
majority of customers have to drive by and through Black Hawk to reach Central
City. However, Central City is in the preliminary process of planning and
designing the construction of a nine mile roadway directly connecting Central
City with Interstate 70. This roadway could result in improved access to both
Central City and Black Hawk and enable patrons to reach Central City without
driving through Black Hawk.
Currently, limited stakes gaming in Colorado is constitutionally
authorized in Central City, Black Hawk, Cripple Creek and two Native American
reservations in southwest Colorado. However, gaming could be approved in other
Colorado communities in the future. The legalization of gaming closer to Denver
would likely have a material adverse impact on our future operating results. The
Casino will also indirectly face competition from other forms of
gaming, including the Colorado state-run lottery, multi-state lottery, online
computer gaming, charitable bingo and horse and dog racing, as well as other
forms of entertainment. See "Additional Legalization of Gaming in Colorado or
the Imposition of a Tax on Gaming Revenues Could Adversely Effect our Business."
WE HAVE NO EXPERIENCE IN THE OPERATION OF A CASINO. Upon the entry of a
final order on the Rejection Date approving the Hyatt Settlement and Release
Agreement, and after a transition period, we will be the manager of the Casino.
While we have several employees including Timothy G. Rose, the president of
Windsor Woodmont and our recently hired general manager Sean Sullivan of the
Casino, both who have significant experience in the operations of casinos,
Windsor Woodmont, as an entity has no experience in the operations of a casino.
If we are unable to efficiently manage the operations of the Casino it will have
a material adverse effect upon us.
21
WE MAY FACE DIFFICULTIES IN ATTRACTING AND RETAINING QUALIFIED
EMPLOYEES FOR THE CASINO. The operation of the Casino requires qualified
executives, managers and skilled employees with gaming industry experience and
qualifications to obtain the requisite licenses. Currently, there is a shortage
of skilled labor in the gaming industry. We believe this shortage will make it
increasingly difficult and expensive for the manager of the Casino to attract
and retain qualified employees. Increasing competition in Black Hawk and
competing markets may lead to higher costs in order to retain and attract
qualified employees. We may incur higher labor costs in order for the Casino
management to attract qualified employees from existing gaming facilities. While
we believe that we will be able to attract and retain qualified employees, we
may have difficulty attracting a satisfactory number, and we may incur higher
costs than expected as a result.
THE RISK OF THEFT COULD ADVERSELY AFFECT CASINO OPERATIONS. The nature
of the Casino's operation entrusts management and other persons working in the
Casino in various positions to handle large amounts of cash, casino chips and
tokens. Although our internal controls and security and surveillance policies
and procedures are designed to limit our exposure to theft and the associated
risk of loss, we cannot assure you that such theft does not occur or that we
will discover any such theft promptly, if at all. We cannot assure you we will
have adequate insurance coverage, in the event of any such theft. Any theft by
our employees or otherwise could have an adverse affect on the results of
operations.
22
ADVERSE WEATHER, ROAD CONDITIONS AND INFRASTRUCTURE LIMITATIONS AFFECT
OUR ABILITY TO ATTRACT CUSTOMERS. BECAUSE THE HIGHEST LEVEL OF CUSTOMER VISITS
OCCUR IN THE SUMMER, A POOR SUMMER SEASON COULD ADVERSELY AFFECT OUR BUSINESS.
The location of the Casino in the Rocky Mountains creates a risk that it will be
subject to inclement weather, particularly snow. Severe weather conditions could
cause significant physical damage to the Casino or result in reduced hours of
operation or access to the Casino. Black Hawk is served by winding mountain
roads that require cautious driving, particularly in bad weather, and are
subject to driving restrictions and closure. Congestion on the roads leading to
Black Hawk is common during the peak summer season, holidays and other times and
may discourage potential customers from traveling to the Casino, particularly if
road construction is in process.
The highest level of customer visits occur during the summer months,
because of the more favorable weather conditions. A poor summer season, due to
any reason, including events outside our control, would adversely affect our
business.
LOCAL ECONOMIC AND COMPETITIVE CONDITIONS, AS WELL AS OTHER CONDITIONS
AND CIRCUMSTANCES BEYOND OUR CONTROL COULD ADVERSELY AFFECT OUR BUSINESS. We are
entirely dependent upon the Casino for all of our cash flow. Therefore, we are
subject to greater risks than a geographically diversified gaming company. These
greater risks include those caused by any of the risks described in this
section, including:
- local economic and competitive conditions;
- inaccessibility due to road construction or closure on primary
access routes;
- changes in local and state governmental laws and regulations;
- natural and other disasters;
- a decline in the number of residents near or visitors to Black
Hawk; or
- a decrease in gaming activities in Black Hawk.
Any of the factors outlined above could adversely affect our ability to
reorganize in our Chapter 11 Case and to generate sufficient cash flow to
continue to operate the Casino and meet our obligations under a reorganization
plan. A recession or economic slowdown could cause a reduction in visitation to
the Casino, which would adversely affect our operating results.
WE FACE RISKS THAT A MINING CLAIM MAY ADVERSELY AFFECT OUR PROPERTY
RIGHTS. Black Hawk is located in an area that was actively mined for many years.
Conflicts between mining claims that have certain statutory priorities and
surface rights derived from the town can affect the use or ownership of property
located in Black Hawk. These conflicts are the result of mining claims which
pre-date the township patent granted on April 11, 1873.
Although the government agencies responsible for analyzing such claims
have been reluctant to adversely affect ownership rights that have been treated
as settled, occasional claims based on asserted mining rights have been made
adverse to the interests of casino developments and other property in Black
Hawk. These mining claims may be raised in respect of the land we own in Black
Hawk. If raised, these claims or similar challenges to title could distract our
management could force us to make payments to settle the claims. We have
obtained title insurance which we believe will protect us against such claims.
IN THE EVENT OF FORECLOSURE, NOTE HOLDERS MAY BE UNABLE TO COLLECT THE
FULL VALUE OF THE FIRST MORTGAGE NOTES. The First Mortgage Notes are secured by
a first priority lien on substantially all of our assets other than:
- certain furniture, fixtures and equipment;
- the assets of our future unrestricted subsidiaries; and
23
- assets subject to certain permitted liens, as well as by a
second priority lien on the loan proceeds from the issuance of
the Second Mortgage Notes.
The right of the trustee under the indenture governing the First
Mortgage Notes to foreclosure on and/or dispose of its collateral is
significantly impaired by applicable bankruptcy law in the Chapter 11 Case.
Absent approval of the Bankruptcy Court, the trustee under the indenture
governing the First Mortgage Notes is prohibited from proceeding to foreclose
and/or dispose of its collateral.
In addition, under Colorado gaming laws, the trustee under the
indenture governing the First Mortgage Notes could be precluded from or
otherwise limited or delayed in exercising powers of attorney or selling
collateral, including slot machines, at a foreclosure sale since only persons
licensed by the Colorado gaming authorities may have slot machines in their
possession. In addition, the trustee may encounter difficulty in selling
collateral due to various legal restrictions, including requirements that the
purchaser or the operator of the gaming facility be licensed by state
authorities or that prior approval of a sale or disposition of collateral be
obtained. Since potential purchasers who wish to operate the Casino must satisfy
such requirements, the number of potential purchasers in a sale of the Casino
could be less than in the sale of other types of facilities. Additionally, these
requirements may delay the sale of, and may adversely affect the price paid for,
the collateral.
In addition to gaming law restrictions, the ability of the trustee to
repossess and dispose of collateral will be subject to the procedural and other
restrictions of state real estate law and commercial law and our existing
contractual relationships.
SOME PERSONS WHO PROVIDE SERVICES OR MATERIALS IN CONNECTION WITH THE
CASINO MAY HAVE A LIEN ON THE PROJECT WITH PRIORITY OVER THE LIENS GRANTED TO
SECURE THE FIRST MORTGAGE NOTES. Colorado law provides architects, engineers,
contractors, subcontractors, suppliers and others with a mechanic's lien on the
real property being improved by their services or materials in order to secure
their right to be paid. Following compliance with applicable Colorado law, such
parties may foreclose on their mechanic's liens if they are not paid in full.
Any actions taken to foreclose upon mechanics liens have been stayed pending
resolution of the Chapter 11 Case. The priority of all mechanic's liens arising
out of a construction project relates back to the date on which the construction
of the project commenced. Parties who provide services or materials in
connection with the Casino, including parties providing services or materials
prior to the Petition Date of the Chapter 11 Case may have a lien on the
project, senior in priority to the unsecured creditors.
ADDITIONAL LEGALIZATION OF GAMING IN COLORADO OR THE IMPOSITION OF A
TAX ON GAMING REVENUES COULD ADVERSELY EFFECT OUR BUSINESS. Additional
legalization of gaming in or near any area from which the Casino is expected to
draw customers would adversely affect the Casino's business. Colorado law
requires statewide voter approval for any expansion of limited gaming into
additional locations and depending on the authorization approved by the
statewide vote, may also require voter approval from the locality in question.
Several attempts have been made by various parties in recent years to expand
gaming in Colorado. However, to date none of this legislation has been passed.
Further, additional legislation proposing to legalize the addition of
gaming machines, such as Video Lottery Terminals ("VLT's") in horse and dog
racing establishments has recently been filed with the Colorado Secretary of
State. The current proposal would allow the addition of approximately 500 VLT's
to horse and dog racing establishments at sites considerably closer to the
Denver metro area than our Casino. Such a proposal would have to be approved by
Colorado voters or the Colorado legislature. Similar legislation was voted by
the Governor of Colorado in 1997. There can be no assurance that such
legislation will not be implemented in Colorado. If such legislation is approved
by the Colorado legislature or Colorado voters, it could likely have a material
adverse impact on our future operating results.
Additionally, from time to time, certain federal legislators have
proposed the imposition of a federal tax on gaming revenues. Any such tax could
adversely affect on our financial condition or results of operations.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY. The Casino is
located in a 400 square mile area that has been designated by the United States
Environmental Protection Agency as the Clear Creek/Central City National
Priorities List Superfund Site under the Comprehensive Environmental Response,
Compensation and Liability Act, 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 Casino site as being within a priority area nor has it
identified contamination on or from the Casino site to require remediation.
24
We have been informed that the Superfund Division of the Colorado
Department of Public Health and the Environment ("Superfund Division"), 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. Based on the results of those samples, the EPA and the
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. Even minor contamination could form a basis
for the EPA Superfund Division to require owners and operators of properties
which have been the source of contamination to investigate and remediate
contamination on or from their property or to reimburse costs incurred by the
government in connection with such remediation. The Casino site could be among
the properties suspected of being a source of contamination. If investigation or
remediation of the Casino site were required, the costs associated with
investigation and remediation could have a material adverse effect upon our
business.
Windsor Woodmont, LLC conducted a phase I and modified phase II
environmental assessment of the site of the Casino. The environmental assessment
has identified the remnants of historic mining activities on the site, including
a tunnel, prospect pits, mining waste rock piles, a mine mill, mill tailings and
plugged mine working entrances. The environmental assessment also indicated that
metal analyses of samples of certain soil and rock associated with historic
mining activities were above concentrations allowed by Black Hawk Ordinance No.
93-3 for property proposed for excavation or development and that the soils had
the potential for acid rock drainage.
As a result of the elevated concentrations of metals in the soil and
rock analyses, Windsor Woodmont, LLC prepared plans regarding the handling,
consolidation and permanent disposal of contaminated soils and rock and
submitted those plans to the City of Black Hawk. Those plans call for any
contaminated soil and rock piles in areas of the property other than Silver
Gulch to be excavated and consolidated in Silver Gulch with contaminated soil
and rock piles historically located there.
The mining related soil and rock which we have excavated and
consolidated in Silver Gulch has been covered with a protective soil cap, and
water flows onto the Gulch have been managed to attempt to eliminate or
significantly reduce contact of water with the historic mining material already
located in Silver Gulch and the consolidated material. The soil cap was covered
with the general construction and excavation debris from the construction
operations necessary to create the site for the Casino. Water quality in Silver
Gulch has significantly improved since the installation of the protective soil
cap.
We cannot assure you that we will not be subject to claims or
requirements for contribution or remediation by private parties, the EPA or the
Superfund Division relating to previous mining activities conducted at the
Casino site, to the disposal of excavated soil and rock from the Casino site
which has been consolidated at Silver Gulch, to other contaminated soil and rock
that might be discovered during excavation or construction at the Casino site or
to surface water or groundwater contamination potentially connected with
historic mining materials currently located on, or disposed on, the Casino site.
Moreover, governmental trustees acting under the Comprehensive Environmental
Response, Compensation and Liability Act could make claims for damages to
natural resources as a result of past mining activity at the Casino site as well
as existing conditions or construction activities. Further, conditions that are
imposed in connection with regulatory approvals or permits could cause
construction costs to increase due to costs of handling this excavated material.
THE RATE OF TAXATION ON GAMING PROFITS MAY INCREASE IN THE FUTURE. The
Colorado Constitution permits a gaming tax of up to 40% on adjusted gross gaming
proceeds. Effective July 1, 1999, the Colorado Gaming Commission has set a
gaming tax rate of .25% on adjusted gross gaming proceeds up to and including $2
million, 2% over $2 million up to and including $4 million, 4% over $4 million
up to and including $5 million, 11% over $5 million up to and including $10
million, 16% over $10 million up to and including $15 million, and 20% over $15
million. These fees are set to pay the costs of ongoing regulation by the
Division of Gaming. Black Hawk has imposed an annual device fee of $750 per
gaming device and it revises the same from time to time. The Colorado Gaming
Commission has eliminated its annual device fee for gaming machines. The
Colorado Gaming Commission may revise the gaming tax or re-impose the state
device fee at any time and has been conducting annual reviews to reconsider and
reevaluate the gaming taxes on or about July 1st of each year. We cannot assure
you that the tax rates applicable to the Casino will not be increased in the
future.
25
ITEM 2. DESCRIPTION OF PROPERTY
BLACK HAWK, COLORADO.
We own the Black Hawk Casino by Hyatt, a casino located in Black Hawk,
Colorado. The land we own upon which the Casino is situated is comprised of
approximately 106 acres of land located at the intersection of Richman Street
and Highway 119 in Black Hawk. The tract of land upon which the actual Casino is
located is comprised of an approximately 5.7 acre parcel, on which our new
Casino was constructed in 2001. The Casino includes 425,000 square feet of
space, including 57,000 square feet is currently used for gaming, parking for
approximately 1,450 vehicles, three restaurants including: the Hickory Grill
Restaurant, a steak and seafood restaurant, the Kitchens of the World Action
Buffet, a high quality action-station buffet, a Wolf Gang Puck's Express
restaurant and a food court featuring various quick service food offerings. In
addition, the Casino includes an indoor/outdoor plaza area featuring Starbucks
Coffee and a gift shop.
GOLDEN, COLORADO.
We lease approximately 2,650 square feet of warehouse space in Golden,
Colorado. This facility serves as a receiving warehouse for the Casino. We have
a four year lease at a monthly rate for the year 2002 of $2,098 plus annual
expenses, with the rent escalating annually. The lease terminates on August 1,
2004.
ITEM 3. 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 we have 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. As of the result of the Chapter 11 Case, all
legal proceedings are stayed.
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 us
in securing the $107,500,000 financing for the 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. We paid Paul Hastings a total
of $800,000 in legal fees and costs in conjunction with providing services as
issuer's counsel, including $700,000 disbursed to Paul Hastings from the closing
of the financing in March, 2000. After March, 2000, Paul Hastings submitted
additional billing statements to us, made several threatening communications to
us, and ultimately filed litigation against us in California state courts in Los
Angeles County in June, 2001. Paul Hastings claimed that it was owed
approximately $470,000 in additional fees for legal services, one-half of which
is allegedly based upon services rendered on an hourly fee basis, and the other
half of which constitutes "bonus" which Paul Hastings alleges is due as a result
of the closing of the financing. We believed we overpaid Paul Hastings. The
matter was scheduled for trial in October, 2002 in Los Angeles, but was settled
at a mediation in Denver in May, 2002. We agreed to pay Paul Hastings an
additional $150,000, $50,000 of which was paid in May, 2002 with the balance of
$100,000 due in December, 2002. The $100,000 payment has not been made and Paul
Hastings will be treated as an unsecured creditor in the Chapter 11 Case.
On August 1, 2001, First Place LLC ("First Place") filed a lawsuit in
the Gilpin County District Court against us asserting that it had an ownership
interest in approximately 5,000 square feet of property upon which the Casino is
built and operating. We timely referred the issue to its title insurance
company, First American Title. We have a $33,500,000 owner's title insurance
policy with First American. First American has advised us that the claim will be
covered by our title insurance and the title insurance company has been and is
vigorously defending the claim. After a trial in June, 2002, the trial court
determined that First Place does have an ownership interest in a strip of
property containing approximately 3,000 square feet which we believed we owned.
Certain post trial motions had been granted and were pending final determination
by the court at the time of the Chapter 11 filing. The Company and First
American engaged in efforts with First Place to remove this case from the
bankruptcy proceeding, however, those efforts have proved unsuccessful to date.
We do not anticipate that there will be any financial exposure to us and that
this claim will be resolved by and at the expense of First American Title.
26
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. The Colorado Gaming Commission approved the issuance of the appropriate
and necessary gaming licenses for operation of the Casino to the Company and
Hyatt Gaming on September 20, 2001. The licenses were physically issued to the
Company and Hyatt Gaming immediately prior to opening of our Casino on December
20, 2001. The Company and Hyatt Gaming requested that the appeal be dismissed
for several reasons, including that GF lacked standing and that the Colorado
Gaming Commission lacked jurisdiction over architectural compliance issues
(those issues being within the exclusive province of the municipalities in which
limited gaming is permitted). 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 continuing its challenge with the
Colorado Court of Appeals. All parties have filed all required briefs with the
Court of Appeals, but a decision by the Court of Appeals has been stayed by the
Chapter 11 Case. Recently, all parties to this case have filed a stipulated
motion with the Bankruptcy Court to lift the automatic stay on this proceeding
and to allow its final adjudication by the state court system. The Bankruptcy
Court has not ruled on the stipulated motion.
PCL Construction Services, Inc. ("PCL") acted as the general contractor
for us in the construction of our Casino. 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 and certain components of the project were not completed until
early 2002. PCL and its subcontractors claim to be owed an aggregate of
approximately $7,200,000 on the project, have recorded mechanic's liens and
filed mechanic's lien foreclosure and breach of contract litigation against us.
The Company has filed litigation against PCL for PCL's misrepresentations and
contractual breaches concerning completion of the project. This litigation was
not at issue with all parties as of the date of the Chapter 11 Case and has been
stayed. We anticipate that this claim will likely be resolved by a settlement
agreement with PCL in the Chapter 11 Case. We have been engaged in extensive
settlement discussions with PCL since late January, 2003 and, as of April 4,
2003, PCL and the Company have conceptually agreed on the basic business terms
of a settlement agreement. The agreement must be memorialized and executed by
the parties, following which it must be submitted to the Bankruptcy Court for
review and approval.
Paul Steelman ("Steelman") was the project architect for the Casino
project. Steelman claims that he is owed an additional approximate $200,000 for
architectural work performed at the project. We believe that we do not owe
Steelman the $200,000 and further believe that Steelman owes us approximately
$2,000,000 for Steelman's failure to properly prepare and complete architectural
plans and specifications for the project in a timely fashion. Prior to the
Chapter 11 Case, we had entered into a Dispute Resolution Agreement with
Steelman providing for mediation to be followed by binding arbitration, if
necessary. The dispute resolution process contemplated by this agreement has
been stayed. We have verbally agreed with Steelman to file a stipulated motion
lifting the stay from this dispute and allowing its determination by a Dispute
Resolution Agreement; such a motion has been drafted and is awaiting execution
and filing with the Bankruptcy Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by us to a vote of our security holders
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this Annual Report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. Our common stock has not been registered under the
Securities Act and there is no public trading market for our common stock.
HOLDERS. As of April 9, 2003 there were 51 holders of record of our
common stock.
27
DIVIDENDS. No dividends have been declared or paid on our common stock
and we do not intend to pay a dividend on shares of our common stock in the
future. In addition, the payment of cash dividends on our common stock is
subject to any preferences which may be applicable to our series A and series B
preferred stock and our ability to declare dividends on our common stock is
restricted by the terms of our series B preferred stock. In addition, the Hyatt
Settlement and Release Agreement limits our ability to pay dividends. The
indenture governing our First Mortgage Notes also limits our ability to pay
dividends. Consequently, no cash dividends are expected to be paid on our common
stock in the foreseeable future. Further, there can be no assurance that our
proposed operations will generate the funds needed to declare a cash dividend or
that we will have legally available funds to pay dividends. In addition, we may
fund part of our operations in the future from indebtedness, the terms of which
may prohibit or restrict the payment of cash dividends. If a holder of common
stock is disqualified by the regulatory authorities from owning such shares,
such holder will not be permitted to receive any dividends with respect to such
stock. See Item 1, "Description of Business--Gaming and Liquor Licensing
Matters."
VOLUNTARY STOCK OPTION EXCHANGE. On January 29, 2003, the Company
entered into voluntary stock option exchange agreements (the "Option Exchange
Agreements") to exchange outstanding options to purchase shares of our the
Common Stock granted under the 2000 Stock Incentive Plan held by eligible
employees or eligible directors for new options under the same option plans. The
Option Exchange Agreements required an optionee to cancel and terminate their
old stock options previously granted to the optionee with the result that the
same number of new options with a exercise price to be the fair market value of
the Common Stock on a new grant date exactly six months and one day after the
date of the Option Exchange Agreements. Stock options to acquire a total of
95,000 shares of the Company's Common Stock with exercise prices ranging from
$16.50 to $20.00 were exchanged under the Option Exchange Agreements. The
Exchange Program was designed to comply with FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation," for fixed
plan accounting.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
The table set forth below presents the securities authorized for
issuance with respect to compensation plans under which equity securities are
authorized for issuance as of December 31, 2002:
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------------------------------
Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans (excluding
Plan Category warrants and rights warrants and rights securities reflected in the 1st column)
- ----------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
approved by security holders 150,000 (1) $ 18.31 (2) 45,000
- ----------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans not
approved by security holders 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Total 150,000 $ 18.31 45,000
- ----------------------------------------------------------------------------------------------------------------------------
(1) Includes 95,000 shares exchanged pursuant to the Option Exchange Agreements
entered into on January 29, 2003. The 95,000 new options shall be granted
exactly six months and one day after the date of the Option Exchange
Agreements with a exercise price to be the fair market value of the Common
Stock on the new grant date.
(2) Includes the weighted-average share price of the 95,000 shares exchanged
pursuant to the Option Exchange Agreements. The exercise price of the
95,000 shares will be the fair market value of the Common Stock on a date
six months and one day from the date of the Option Exchange Agreements. The
weighted average share price thus will be adjusted on the new grant date.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information has been
derived from the financial statements of the Company and should be read in
conjunction with the financial statements and notes thereto, and Management's
Discussion and Analysis of Plan of Operation included elsewhere in this Form
10-K.
28
DATE OF
INCEPTION JULY
17, 1997 TO
FOR THE YEAR ENDED DECEMBER DECEMBER 31
-------------------------------------------------------------- --------------
Income Statement Data 2002 2001 2000 1998 1998
---- ---- ---- ---- ----
Net Revenue $ 65,863,813 $ 2,802,134 -- -- --
Operating Loss (849,642) (4,044,577) $ (317,316) $ (435,900) $ (522,275)
------------- ------------ ------------ ----------- ------------
Interest Income 142,405 1,978,602 3,810,304 -- --
Interest Expense (16,774,290) (5,839,058) (8,834,934) (240,500) (609,321)
Write off Previously Capitalized Costs -- -- -- -- (3,027,589)
Change in Valuation of Warrants 2,854,880 -- (12,536) -- --
------------- ------------ ------------ ----------- ------------
Other Expense, net (13,777,005) (3,860,456) (5,035,166) (240,500) (3,636,910)
------------- ------------ ------------ ----------- ------------
Net Loss before Reorganization costs (14,662,647) (7,905,033) (5,354,312) (676,400) (4,159,185)
Reorganization Costs (4,762,559) -- -- -- --
Preferred Stock Dividends (559,599) (551,254) (471,322) -- --
------------- ------------ ------------ ----------- ------------
Net Loss Attributable to Common Stock $ (19,948,805) $ (8,456,287) $ (5,771,804) $ (676,400) $ (4,159,185)
============= ============ ============ =========== ============
OVERVIEW
As a result of our inability to meet the financial projections set
forth by Hyatt resulting from below projection revenues and earnings
performance, on November 7, 2002, we filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code.
Under Chapter 11, we are operating our business as a
debtor-in-possession. Under the Bankruptcy Code, actions to collect pre-petition
indebtedness or enforce pre-petition contractual obligations, as well as most
other pending actions against us or property of our estate, are stayed. On April
10, 2003, we entered into the Hyatt Settlement and Release Agreement with Hyatt
Gaming whereby Hyatt Gaming will hold certain allowed pre-petition unsecured
claims in the Chapter 11 Case and the Hyatt Management Agreement will be deemed
rejected. The Hyatt Settlement and Release Agreement is subject to the approval
of the Bankruptcy Court. Information regarding the Chapter 11 Case appears in
Item 1. Business - Proceedings Under Chapter 11 of the Bankruptcy Code, of this
Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
WARRANTS ISSUED ON COMMON STOCK.
Warrants issued in connection with the Company's various financing
transactions (see Note 3), 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
have been 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 December 31, 2002 and 2001, a liability for the fair market value of the
warrants of $ 0.71 million and $3.57 million was recorded in the accompanying
consolidated balance sheet and a corresponding income of $2.85 million and an
expense of $12,536 was recorded in the accompanying statement of operations for
the years ended December 31, 2002 and 2001.
STOCK-BASED COMPENSATION.
In 2002 the Company adopted Statement of Financial Accounting Standards
No. 148 (SFAS 148), "Accounting for Stock-based Compensation -Transition and
Disclosure" which amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation"
29
to require prominent disclosure 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 148 also provides
alternative methods of transition for a voluntary change to fair value based
methods of accounting which have not been adopted at this time. SFAS 123
encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation for employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock. The Company values
stock-based compensation grants to non-employees at fair value.
CAPITALIZED INTEREST.
The Company capitalized interest costs associated with the debt
incurred in connection with the Project in accordance with Statements of
Financial Accounting Standards No. 34 - "Capitalization of Interest Cost."
Interest capitalization ceased once the Project was substantially complete on
December 20, 2001. No interest was capitalized during 2002. During the years
ended December 31, 2001, and 2000, $10,935,152 and $4,248,787 of interest
expense was capitalized, respectively.
FUNDS HELD IN ESCROW.
Funds held in escrow at December 31, 2002 and 2001 represents cash held
by the Black Hawk Business Improvement District under various bond agreements
associated with the construction of the Project.
INCOME TAXES.
The Company accounts for Income Taxes according to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets, net of an
applicable valuation allowance, related to net operating loss carry-forwards and
certain temporary differences. The standard requires recognition of a future tax
benefit to the extent that the realization of such benefit is more likely than
not. Otherwise, a valuation allowance is applied.
DEBT ISSUANCE COSTS.
Debt discount and issuance costs are capitalized and amortized using
the effective interest rate method over the term of the related debt.
Unamortized debt discount and issuance costs related to the First Mortgage Notes
and Second Mortgage Notes were written off at November 7, 2002 in connection
with the bankruptcy filing, and the related valuation of these items at face
value. The write-off of the unamortized balances was charged to reorganization
costs. Accumulated amortization, including costs written off in 2002, was
$4,141,672 and $2,475,409 at December 31, 2002 and 2001, respectively.
USE OF ESTIMATES.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities, and related revenues and
expenses. Actual results could differ from those estimates.
30
IMPAIRMENT OF LONG-LIVED ASSETS.
The Company reviews long-lived assets for possible impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If there is an indication of impairment, which is estimated as the
difference between anticipated undiscounted future cash flows and carrying
value, the carrying amount of the asset is written down to its estimated fair
value by a charge to operations. Fair value is estimated based on the present
value of estimated future cash flows using a discount rate commensurate with the
risk involved. Estimates of future cash flows are inherently subjective and are
based on management's best assessment of expected future conditions. During 2001
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which is effective for fiscal years beginning after December
15, 2001. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." While SFAS No.
144 retains many of the provisions of SFAS No. 121 it provides guidance on
estimating future cash flows to test recoverability, among other things. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements.
START-UP COSTS.
Effective January 1, 1999, Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities," addressed the manner in which the Company
accounts for start-up costs. Start-up costs incurred after January 1, 1999
through opening in 2001, have been expensed as incurred. Start-up costs consist
of salaries, benefits, training, marketing, licensing and other costs incurred
in connection with the opening of the Project. During the fiscal year December
31, 2001 and 2000, the Company incurred start-up costs of approximately $4.5
million, and $0.3 million, respectively.
REVENUE RECOGNITION.
Casino revenue is the net win from gaming activities, which is the
difference between gaming wins and losses. The incremental amount of unpaid
progressive jackpot is recorded as a liability and a reduction of casino revenue
in the period during which the progressive jackpot increases.
PLAYERS CLUB.
In February 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued a partial consensus on EITF 00-22,
"Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future." The consensus requires that vendors recognize the cash rebate or
refund obligation associated with time or volume-based cash rebates as a
reduction of revenue based on a systematic and rational allocation of the cost
of honoring rebates or refunds earned and claimed to each of the underlying
revenue transactions that result in progress by the customer toward earning the
rebate or refund. The liability for such obligations should be based on the
estimated amount of rebates or refunds to be ultimately earned, including an
estimate of breakage if it can be reasonably estimated.
Our players' club allows customers to earn certain complimentary
products and/or cash based on the volume of the customers' gaming activity. The
Company has recorded a liability for the estimated cost of the products and/or
cash to be earned by customers. In accordance with EITF 00-22, the Company has
recorded the charge for progress towards the complimentary services/cash rebates
as a reduction of revenues, which totaled $3.9 million and $.08 million for the
years ended December 31, 2002 and 2001, respectively.
PROMOTIONAL ALLOWANCES.
In the fourth quarter of 2000, the EITF reached a consensus on Issue
00-14, "Accounting for Certain Sales Incentives." EITF 00-14 requires that sales
incentives be recorded as a reduction of revenue. The Company's policy relating
to food and beverage and other non-casino revenues complies with EITF 00-14 and
are reported as a reduction of revenues, which totaled $4.14 million and $.13
million for the year ended December 31, 2002 and 2001, respectively.
31
FOR THE YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31,
2001
Our operating loss is derived from the operation of the Casino during
the year ended December 31, 2002. Our other expense, net consists of interest
expense on our outstanding indebtedness, interest income on our restricted cash
and income from the change in valuation of warrants.
Operating revenues and operating expenses for the year ended December
31, 2002 are not comparable to the operating revenues and operating expenses for
the year ended December 31, 2001 due to the fact the Casino opened on December
20, 2001, and accordingly included only 11 days of operating results, compared
to a full year of operating results for the year ended December 31, 2002.
Interest income for the year ended December 31, 2002 compared to the
year ended December 31, 2001 decreased as a function of (a) the amount of funds
invested was reduced to fund construction costs and (b) a reduction in the
interest rate on invested funds during 2002 compared to 2001.
Interest charges for the year ended December 31, 2002 totaled
approximately $16.8 million compared to approximately $16.7 million on December
31, 2001. During 2001, $10.9 million of the interest was capitalized and $5.8
million was expensed. In 2002, no interest charges were capitalized. On November
7, 2002, the Petition Date, we stopped accruing interest expense on the First
Mortgage Notes and on the Second Mortgage Notes, as they are considered
under-secured and thus not entitled to interest during the Chapter 11 Case.
Start-up costs are expensed as incurred. The decrease in start-up costs
for the year ended December 31, 2002 compared to the year ended December 31,
2001 is attributable to start-up costs ending in connection with the opening of
the Casino on December 20, 2001.
Depreciation and amortization expenses for the year ended December 31,
2002 was approximately $8.4 million compared to $246,000 in the year ended
December 31, 2001. This increase is a function of the property being in service
and subject to depreciation for the entire year 2002, versus only being in
service and subject to depreciation in 2001 for the 11 day period beginning on
December 20, 2001.
Reorganization related expenses of $4,762,559 were incurred during the
year ended December 31, 2002. These include costs incurred for legal and
financial advisor services received in connection with our debt restructuring
efforts, travel related expenses and other costs directly related to our debt
restructuring efforts. Such costs also include the write-off of unamortized debt
discount and deferred financing costs related to the First Mortgage Notes and
the Second Mortgage Notes in the amount of $897,794 and $3,440,651, respectively
in accordance with accounting policies for entities in reorganization under the
Bankruptcy Code.
FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
Our operating income is from the operations of the Casino during the
period December 20, 2001 through December 31, 2001. Our other expense, net
consists of interest expense on our outstanding indebtedness, net of interest
capitalized during construction, interest income on our restricted cash and
short-term investments and start-up costs.
General and administrative expenses represents salaries and project
development services which have not been capitalized to the Casino project. We
have capitalized salaries which, in management's opinion, are directly
attributable to the development of the Casino. Accordingly, the increase in
general and administrative expenses from the year ended December 31, 2001 to the
year ended December 31, 2000 is a result of the opening of the Casino on
December 20, 2001 and management's determination of the nature of the services
being performed, resulting in substantially all salaries prior to the opening of
the Casino being capitalized in the year ended December 31, 2001.
32
Interest income for the year ended December 31, 2001 compared to the
year ended December 31, 2000 decreased as a function of (a) the amount of funds
invested reduced to fund construction costs and (b) a reduction in the interest
rate on invested funds during 2001 compared to 2000.
Interest charges for the year ended December 31, 2001 totaled
approximately $16.7 million, including $1.4 million in amortization of debt
issuance costs. Of this total, $10.9 million was capitalized and $5.8 million
was expensed. Interest charges for the year ended December 31, 2001 compared to
the year ended December 31, 2000 increased as a result of the issuance of the
FF&E Loan and the Black Hawk Business Improvement District bonds, and the fact
that the $100 million First Mortgage Notes and the $7.5 million Second Mortgage
Notes were outstanding for the entire year ended December 31, 2001.
Start-up costs are expensed as incurred. The increase in start-up costs
for the year ended December 31, 2001 compared to the year ended December 31,
2000 is attributable to start-up costs being incurred for salaries, benefits,
training, marketing, licensing and other costs in connection with the opening of
the Casino.
FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31,
1999
We do not have any historical operating results other than interest
expense on our outstanding indebtedness, interest income on our restricted cash
and short-term investments, start-up costs and the capitalization of certain
costs.
General and administrative expenses represents salaries and project
development services which have not been capitalized to the Casino project. We
have capitalized salaries which, in management's opinion, are directly
attributable to the development of the Casino. Accordingly, the decrease in
general and administrative expenses from the year ended December 31, 1999 to the
year ended December 31, 2000 is a result of management's determination of the
nature of the services being performed, resulting in substantially all salaries
being capitalized in the year ended December 31, 2000.
Interest charges for the year ended December 31, 2000 totaled
approximately $13.1 million, including $1.0 million in amortization of debt
issuance costs. Of this total, $4.3 million was capitalized and $8.8 million was
expensed. Interest charges for the year ended December 31, 2000 compared to the
year ended December 31, 1999 increased as a result of the issuance of the First
Mortgage Notes and the $7.5 million Second Mortgage Notes.
Start-up costs are expensed as incurred. The increase in start-up costs
for the year ended December 31, 2000 compared to the year ended December 31,
1999 is attributable to start-up costs being incurred and funded with the
successful completion of the note offering in March 2000.
LIQUIDITY AND CAPITAL RESOURCES
Following is a schedule of Total Contractual Cash Obligations and Other
Commercial Commitments as of December 31, 2002.
- ---------------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ---------------------------------------------------------------------------------------------------------------------
Long-term Debt (1) $ 130,304,360 $ 130,304,360 -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Operating Leases 436,091 167,244 268,847 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $ 130,740,451 $ 130,372,604 268,847 -- --
- ---------------------------------------------------------------------------------------------------------------------
(1) Our First Mortgage Notes and Second Mortgage Notes have been classified as
current because we are in default of the First Mortgage Notes and Second
Mortgage Notes due to non-payment of interest.
Under the Bankruptcy Code, actions to collect pre-petition indebtedness
or enforce pre-petition contractual obligations, as well as most other pending
actions against the Company or property of its estate are stayed. Therefore the
commitments shown in the above table may not reflect actual cash outlays in the
future periods.
33
After we confirm a plan of reorganization, we estimate that cash flow
from operations will be sufficient to sustain our operations during the next
fiscal year. We cannot assure you that any financing, if necessary to meet
liquidity requirements, will be available to us in the future, or that, if
available, any such financing will be on favorable terms. We cannot assure you
that our reasonably foreseeable liquidity needs are or will be accurate or that
new business developments or other unforeseen events will not occur, resulting
in the need to raise additional funds. We expect that the adequacy of our
operating cash flow will depend, among other things, upon our ability to
reorganize, the general state of the economy, both local and national, our
ability to manage the Casino if the Bankruptcy Court approves the Hyatt
Settlement and Release Agreement or otherwise approves the rejection of the
Hyatt Management Agreement, the continued development of the Black Hawk market
as a gaming destination, the intensity of the competition, the efficiency of
operations, depth of customer demand, and the effectiveness of our marketing and
promotional efforts.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company has reviewed all recently issued accounting pronouncements
and does not believe that any of the pronouncements will have a material impact
on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At April 30, 2003, we did not have any derivative instruments that
increased our exposure to market risks for interest rates, foreign currency
rates, commodity prices or other market price risks. We do not use derivatives
for speculative purposes. Currently, our exposure to market risks results
primarily from changes in interest rates. We do not use swaps or other interest
rate protection agreements to hedge this risk.
ITEM 8. FINANCIAL STATEMENTS
The response to this item is submitted as a separate section of this
Annual Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 20, 2002, we dismissed Arthur Andersen, LLP ("Andersen"), as our
independent public accountants. Our Audit Committee participated in and approved
the decision to dismiss Andersen.
The reports by Andersen on our 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.
During the preceding two fiscal years and through May 20, 2002, there
were no reportable events required to be disclosed pursuant to Item
304(a)(1)(v).
On May 13, 2002, we announced that the Company's Board of Directors
voted to approve the engagement of Deloitte & Touche LLP as the Company's
independent auditor for the year ending December 31, 2002, subject to customary
client acceptance procedures. On August 13, 2002, Deloitte & Touche LLP notified
the Company that Deloitte & Touche LLP declined to accept this engagement.
Deloitte & Touche LLP has not reviewed, audited or rendered any report on any
financial statements of the Company as of any date or for any period.
On January 14, 2003 we filed an application to employ Grant Thornton
LLP as our new independent accountants. The Bankruptcy Court approved the
employment of Grant Thornton LLP on February 6, 2003. During the preceding two
fiscal years and through December 31, 2002, the Company has not consulted with
Grant Thorton
34
LLP regarding the matters described in, and required to be disclosed pursuant to
Item 304(a)(2)(i) or Item 304(a)(2)(ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
This item has been omitted from this Annual Report and is incorporated
by reference to Windsor Woodmont Black Hawk Resort Corporation's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
This item has been omitted from this Annual Report and is incorporated
by reference to Windsor Woodmont Black Hawk Resort Corporation's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item has been omitted from this Annual Report and is incorporated
by reference to Windsor Woodmont Black Hawk Resort Corporation's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item has been omitted from this Annual Report and is incorporated
by reference to Windsor Woodmont Black Hawk Resort Corporation's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year covered by this report.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,
as amended, as of a date within 90 days prior to the filing date of this Annual
Report (the "Evaluation Date"). Based on this evaluation, such officers have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in the Company's periodic SEC filings. Since the
Evaluation Date, there have not been any significant changes in the internal
controls of the Company, or in other factors that could significantly affect
these controls subsequent to the Evaluation Date.
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of the exhibits included as part of this Form 10-K is set forth
in the Exhibit Index that immediately precedes such exhibits, which is
incorporated herein by reference.
(b) Reports on Form 8-K for the Fourth Quarter 2002
Current Report on Form 8-K filed October 17, 2002 (Item 5) (disclosing
Windsor Woodmont's failure to make the interest payments on First
Mortgage Notes that had been deferred until October 15, 2002).
Current Report on Form 8-K filed October 24, 2002 (Item 5) (disclosing
that SunTrust Bank had declared our First Mortgage Notes due and
payable immediately).
35
Current Report on Form 8-K filed October 24, 2002 (Item 5) (disclosing
our voluntary filing under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of
Colorado).
36
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(Registrant)
Date: May 5, 2003 By: /s/ Jerry L. Dauderman
-------------------------------------
Jerry L. Dauderman, Chairman of the
Board and Chief Executive Officer
(principal executive officer)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: May 5, 2003 /s/ Timothy G. Rose
-----------------------------------------
Timothy G. Rose, Chief Operating Officer,
President and Director
Date: May 5, 2003 /s/ Irving C. Deal
-----------------------------------------
Irving C. Deal, Director
Date: May 5, 2003 /s/ Michael L. Armstrong
-----------------------------------------
Michael L. Armstrong, Executive Vice
President, Chief Financial Officer,
Treasurer and Secretary (principal
financial officer)
Date: May 5, 2003 /s/ Garry Saunders
-----------------------------------------
Garry Saunders, Director
37
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jerry Dauderman, certify that:
1. I have reviewed this annual report on Form 10-K of Windsor
Woodmont Black Hawk Resort Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period discovered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure control and procedures as of a date within
90 days prior to the filing date of this annual
report (the "Evaluation Date") and;
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls, and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's certifying officers and I have indicated in
this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ Jerry Dauderman
----------------------------------------
Jerry Dauderman, Chief Executive Officer
and Chairman of the Board of Directors
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Armstrong, certify that:
1. I have reviewed this annual report on Form 10-K of Windsor
Woodmont Black Hawk Resort Corp.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period discovered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure control and procedures as of a date within
90 days prior to the filing date of this annual
report (the "Evaluation Date") and;
c) presented in this annual report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls, and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's certifying officers and I have indicated in
this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ Michael Armstrong
---------------------------------------------
Michael Armstrong, Executive Vice
President, Chief Financial Officer, Treasurer
and Secretary
EXHIBIT INDEX
Exhibit
No. Description
3.1(1) First Amended and Restated Articles of Incorporation of Windsor
Woodmont Black Hawk Resort Corp.
3.2(1) First Amended and Restated Bylaws of Windsor Woodmont Black Hawk
Resort Corp.
4.1(1) Indenture, dated as of March 14, 2000, by and between Windsor
Woodmont Black Hawk Resort Corp. and SunTrust Bank, as trustee
4.2(1) Form of 13% First Mortgage Notes, series B
4.3(1) Form of series A Warrant certificates dated March 14, 2000 issued to
unit purchasers for the purchase of up to 342,744 shares of common
stock, issued to Hyatt Gaming Management, Inc. for the purchase of
up 33,887 shares of common stock and issued to U.S. Bancorp Libra,
as placement agent, for the purchase of up to 80,031 shares of
common stock
4.4(1) Form of series B Warrant certificates dated March 14, 2000 to
purchase up to 257,058 shares of common stock issued to the
purchasers of the series B Preferred Stock
4.5(1) First Warrant Agreement dated as of March 14, 2000, by and Windsor
Woodmont Black Hawk Resort Corp. and SunTrust Bank, as warrant
agent, relating to the issuance to the unit purchasers of warrants
for the purchase of 342,744 shares of common stock, the issuance to
Hyatt Gaming Management, Inc. of warrants to purchase 33,887 shares
of common stock and the issuance to U.S. Bancorp Libra, as placement
agent, of warrants to purchase 80,031 shares of common stock
4.6(1) Second Warrant Agreement, dated as of March 14, 2000, by and between
Windsor Woodmont Black Hawk Resort Corp. and SunTrust Bank, as
warrant agent, relating to the issuance to the purchasers of the
series B Preferred Stock of warrants for the purchase of 257,058
shares of common stock
4.7(1) A/B Exchange Registration Rights Agreement, dated as of March 14,
2000, among Windsor Woodmont Black Hawk Resort Corp. and the unit
purchasers
4.8(1) Warrant Registration Rights Agreement, dated as of March 14, 2000,
by and among Windsor Woodmont Black Hawk Resort Corp., each of the
purchasers of the units, Hyatt Gaming Management, Inc., each of the
purchasers of the series B Preferred Stock and U.S. Bancorp Libra
10.1(1) Management Agreement dated as of February 2, 2000, by and between
Windsor Woodmont Black Hawk Resort Corp. and Hyatt Gaming
Management, Inc. and First Amendment to Management Agreement
10.2(1) Subordination, Non-Disturbance and Attornment Agreement dated as of
March 14, 2000, by and among Windsor Woodmont Black Hawk Resort
Corp., Hyatt Gaming Management, Inc. and SunTrust Bank, a trustee
10.3(1) Architect's Agreement dated as of January 31, 2000 by and between
Windsor Woodmont, LLC and Paul Steelman, Ltd.
10.4(1) Construction Management Agreement dated February 1, 2000 by and
between Windsor Woodmont, LLC and Building Sciences, Inc.
10.5(1) Construction Agreement dated as of January 11, 2000 by and between
Windsor Woodmont, LLC and PCL Construction Services, Inc.
10.6(1) Excavation Agreement dated as of December 31, 1999, by and between
Windsor Woodmont, LLC and D.H. Blattner & Sons, as amended
10.7(1) Subdivision Agreement dated December 29, 1997 by and between Windsor
Woodmont, LLC and the City of Black Hawk, including the First
Addendum, dated March 25, 1998, Second Addendum, dated May 27, 1998,
and Third Addendum, dated March 29, 2000, thereto
10.8(1) Deed of Trust to Public Trustee, Security Agreement, Fixture Filing
and Assignment of Rents, Leases and Leasehold Interest, dated as of
March 14, 2000, by Windsor Woodmont Black Hawk Resort Corp.
10.9(1) Security Agreement, dated as of March 14, 2000, by and between
Windsor Woodmont Black Hawk Resort Corp. and SunTrust Bank, as
trustee
10.10(1) Pledge and Assignment Agreement, dated as of March 14, 2000, by and
among Windsor Woodmont Black Hawk Resort Corp. in favor of SunTrust
Bank, as trustee
10.11(1) Collateral Assignment, dated as of March 14, 2000, by and between
Windsor Woodmont Black Hawk Resort Corp. in favor of SunTrust Bank,
as trustee
10.12(1) Subordinated Loan Agreement, dated as of March 14, 2000, by and
between Windsor Woodmont Black Hawk Resort Corp. and Hyatt Gaming
Management, Inc.
10.13(1) Hyatt Gaming Deed of Trust to Public Trustee, Security Agreement,
Fixture Filing and Assignment of Rents, Leases and Leasehold
Interests,, dated as of March 14, 2000, by Windsor Woodmont Black
Hawk Resort Corp. to the Public trustee of the County of Gilpin,
Colorado, for the benefit of Hyatt Gaming Management, Inc.
10.14(1) Hyatt Gaming Security Agreement, dated as of March 14, 2000, by and
between Windsor Woodmont Black Hawk Resort Corp. and Hyatt Gaming
Management, Inc.
10.15(1) Hyatt Gaming Pledge and Assignment Agreement, dated as of March 14,
2000, by and among Windsor Woodmont Black Hawk Resort Corp. in favor
of Hyatt Gaming Management, Inc.
10.16(1) Hyatt Gaming Collateral Assignment, dated as of March 14, 2000, by
and between Windsor Woodmont Black Hawk Resort Corp. in favor of
Hyatt Gaming Management, Inc.
10.17(1) General Assignment made as of March 14, 2000 by Windsor Woodmont,
LLC in favor of Windsor Woodmont Black Hawk Resort Corp.
10.18(1) Intercreditor Subordination and Collateral Agreement, dated as of
March 14, 2000, by and among SunTrust Bank, as trustee, Hyatt Gaming
Management, Inc. and Windsor Woodmont Black Hawk Resort Corp.
10.19(1) Cash Collateral and Disbursement Agreement dated as of March 14,
2000 by and among SunTrust Bank, as trustee, Windsor Woodmont Black
Hawk Resort Corp., Hyatt Gaming Management, Inc., Norwest Bank
Minnesota, N.A., as disbursement agent, First American Heritage
Title Company, as construction escrow agent, and RE TECH+, Inc., as
independent construction consultant
10.20(1) Account Agreement, dated as of March 14, 2000, by and among Windsor
Woodmont Black Hawk Resort Corp., SunTrust Bank, as trustee, and
Norwest Bank Minnesota, N.A., as securities intermediary
10.21(1) Interim Interest Reserve Account Agreement, dated as of March 14,
2000, by and among Windsor Woodmont Black Hawk Resort Corp.,
SunTrust Bank, as trustee, and Norwest Bank Minnesota, N.A., as
securities intermediary
10.22(1) Interest Reserve Account Agreement, dated as of March 14, 2000, by
and between Windsor Woodmont Black Hawk Resort Corp. and SunTrust
Bank, as trustee and securities intermediary
10.23(1) Hyatt Gaming Account Agreement, dated as of March 14, 2000, by and
among Windsor Woodmont Black Hawk Resort Corp., Hyatt Gaming
Management, Inc. and Norwest Bank Minnesota, N.A., as securities
intermediary
10.24(1) Shareholders Agreement, dated as of March 14, 2000
10.25(1) Office Lease between Dallas Office Portfolio, L.P., as landlord, and
Windsor Woodmont Black Hawk Resort Corp., as tenant
10.26(1) Site Improvement Agreement, dated March 29, 2000, by and between the
City of Black Hawk, Colorado, and Windsor Woodmont Black Hawk Resort
Corp.
10.27(1) Escrow Agreement, dated March 29, 2000, by and between the City of
Black Hawk, Colorado, Windsor Woodmont Black Hawk Resort Corp. and
Norwest Bank Minnesota, N.A.
10.28(1) Settlement Agreement, dated January 31, 2000, by and between Windsor
Woodmont, LLC and D.H. Blattner & Sons, Inc.
10.29(1) Escrow Agreement, dated March 28, 2000, by and among D.H. Blattner &
Sons, Inc. Windsor Woodmont Black Hawk Resort Corp. and Norwest Bank
Minnesota, N.A.
10.30(1) Incentive Stock Option Plan
16.1(1) Letter from PricewaterhouseCoopers re: change in certifying
accountant
99.1 Certification pursuant to 18 U.S.L. 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------------------
(1) Filed as an exhibit to Windsor Woodmont Black Hawk Resort Corp.'s
Registration Statement on Form S-4 filed July 12, 2000, as amended (File No.s
333-41292), and incorporated herein by reference.
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Financial Statements of Windsor Woodmont Black Hawk Resort Corp.:
Report of Independent Certified Public Accountants - Grant Thornton LLP..................... F-2
Report of Independent Certified Public Accountants - Arthur Andersen LLP.................... F-3
Balance Sheets.............................................................................. F-4
Statements of Operations.................................................................... F-5
Statements of Comprehensive Loss............................................................ F-6
Statements of Redeemable Preferred Stock and Stockholders' Equity........................... F-7
Statements of Cash Flows.................................................................... F-8
Notes to Financial Statements............................................................... F-9
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Windsor Woodmont Black Hawk Resort Corp.:
We have audited the accompanying balance sheet of Windsor Woodmont
Black Hawk Resort Corp. (a Colorado corporation) (The "Company") as of December
31, 2002 and the related statements of operations, comprehensive loss,
redeemable preferred stock and stockholders' equity and cash flows for the year
then ended. 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 audit. The financial statements of Windsor Woodmont
Black Hawk Resort Corp. as of December 31, 2001 and for each of the two years in
the period ended December 31, 2001, were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
financial statements in their report dated March 15, 2002.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present
fairly, in all material respects, the financial position of Windsor Woodmont
Black Hawk Resort Corp. as of December 31, 2002 and the results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses since inception and on
November 7, 2002, the Company voluntarily filed for protection under Chapter 11
of the United States Bankruptcy Code, which raises substantial doubt about the
Company's ability to continue as a going concern in its present form.
Management's intentions with respect to this matter are also described in Note
3. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
GRANT THORNTON LLP
Denver, Colorado,
March 14, 2003 (except as discussed in Note 11,
as to which the date is April 25, 2003)
F-2
The report that appears below is a copy of the report issued by the
Company's previous independent auditor, Arthur Andersen, LLP. That firm has
discontinued performing auditing and accounting services.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Windsor Woodmont Black Hawk Resort Corp.:
We have audited the accompanying consolidated balance sheets of Windsor
Woodmont Black Hawk Resort Corp. (a Colorado corporation) as of December 31,
2001 and 2000, and the related consolidated statements of operations,
comprehensive loss, changes in stockholders' deficit and cash flows for the
years ended December 31, 2001, 2000 and 1999. 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. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Windsor
Woodmont Black Hawk Resort Corp. as of December 31, 2001 and 2000, and the
results of its operations and its cash flows for the years ended December 31,
2001, 2000 and 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
- -----------------------
March 15, 2002 (except as discussed in Note 4,
as to which the date is March 22, 2002)
Las Vegas, Nevada
F-3
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
BALANCE SHEETS
December 31, 2002 December 31, 2001
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 8,020,958 $ 9,667,138
Cash and cash equivalents, restricted 2,350,616 5,012,476
Short-term investments, restricted -- 6,480,236
Accounts receivable 164,205 223,511
Inventories 330,804 282,745
Prepaid expenses 2,614,691 859,704
Other current assets 12,298 --
------------- -------------
Total current assets 13,493,572 22,525,810
Property and Equipment, net 119,742,091 124,599,615
OTHER ASSETS:
Base stock inventories/uniforms, net of accumulated amortization 142,191 279,062
Funds held in escrow and security deposits 288,845 235,151
Franchise Fees 40,000 40,000
Deferred financing costs, net 491,097 5,252,182
------------- -------------
TOTAL ASSETS $ 134,197,796 $ 152,931,820
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Post-Petition Liabilities
Trade accounts payable and accrued expenses $ 1,645,144 $ --
Accounts payable - related parties 545,818 --
Accrued interest 332,389 --
Other current liabilities 42,888 --
------------- -------------
Total Post Petition Liabilities 2,566,239 --
------------- -------------
Pre-Petition Liabilities Subject to Compromise
Current portion of long-term debt 130,304,360 4,029,205
Trade accounts payable and accrued expenses 2,773,190 1,684,980
Accounts payable - related parties 1,900,191 4,925,732
Construction accounts payable 5,364,118 7,344,158
Accrued interest 9,584,859 3,976,906
Other current liabilities 1,642,276 256,157
------------- -------------
Total Pre-Petition Liabilities 151,568,944 22,217,138
------------- -------------
Total current liabilities 154,135,233 22,217,138
------------- -------------
NON CURRENT LIABILITIES
Long-term debt, less current portion -- 128,420,658
Warrants issued on common stock 713,720 3,568,600
------------- -------------
Total non current liabilities 713,720 131,989,258
------------- -------------
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 1,827,355 1,754,637
Accrued dividends on preferred stock 1,528,175 968,576
------------- -------------
Total redeemable preferred stock 6,255,530 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 (39,157,937) (19,209,132)
Other comprehensive income -- 60,093
------------- -------------
Total stockholders' equity (26,906,687) (6,897,789)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 134,197,796 $ 152,931,820
============= =============
SEE NOTES TO FINANCIAL STATEMENTS
F-4
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
OPERATING REVENUES:
Casino $ 61,288,720 $ 2,620,931 $ --
Food and beverage 7,639,860 268,154 --
Other 1,074,451 42,054 --
------------ ------------ ------------
70,003,031 2,931,139 --
Less: Promotional allowances (4,139,218) (129,005) --
------------ ------------ ------------
Net operating revenues 65,863,813 2,802,134 --
------------ ------------ ------------
OPERATING EXPENSES:
Casino 36,818,164 1,028,125 --
Food and beverage 7,281,030 265,871 --
Other operating expenses 1,928,632 290,681 --
General and administrative 10,184,926 360,417 170
Start-up costs -- 4,522,740 317,146
Management fees 2,095,291 132,247 --
Depreciation and amortization 8,405,412 246,630 --
------------ ------------ ------------
Total operating expenses 66,713,455 6,846,711 317,316
------------ ------------ ------------
Operating Income (849,642) (4,044,577) (317,316)
OTHER INCOME (EXPENSE):
Interest income 142,405 1,978,602 3,810,304
Interest expense (excluding $2,237,594 of post
petition interest at contracted rates) (16,774,290) (5,839,058) (8,834,934)
Change in valuation of warrants 2,854,880 -- (12,536)
------------ ------------ ------------
Other expense, net (13,777,005) (3,860,456) (5,037,166)
------------ ------------ ------------
Loss from continuing operations before
reorganization costs and preferred stock dividends (14,662,647) (7,905,033) (5,354,482)
Reorganization costs 4,762,559 -- --
------------ ------------ ------------
Net loss before preferred stock dividends (19,389,206) (7,905,033) (5,354,482)
Preferred stock dividends 559,599 551,254 417,322
------------ ------------ ------------
Net loss attributable to
common stock $(19,948,805) $ (8,456,287) $ (5,771,804)
============ ============ ============
Loss per share
Basic $ (19.95) $ (8.46) $ (7.21)
Diluted $ (19.95) $ (8.46) $ (7.21)
Weighted Average Shares
Basic 1,000,000 1,000,000 800,200
Diluted 1,000,000 1,000,000 800,200
SEE NOTES TO FINANCIAL STATEMENTS
F-5
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
STATEMENTS OF COMPREHENSIVE LOSS
For the Year Ended
December 31,
-------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net loss before preferred stock dividends $(19,389,206) $ (7,905,033) $ (5,354,482)
Unrealized gain (loss) on securities held
for sale (60,093) (226,593) 286,686
------------ ------------ ------------
Comprehensive loss $(19,449,299) $ (8,131,626) $ (5,067,796)
============ ============ ============
SEE NOTES TO FINANCIAL STATEMENTS
F-6
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Redeemable
Preferred Stock Common Stock
--------------------------- -------------------------
Shares Amount Shares Amount
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 -- 72,718 -- --
Preferred stock dividends -- 559,599 -- --
------- ---------- --------- --------
Balance at December 31, 2002 59,000 $6,255,530 1,000,000 $ 10,000
======= ========== ========= ========
Additional Other Total
Paid In Accumulated Comprehensive Stockholders'
Capital Deficit Income Equity
------------ ------------- ------------- --------------
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 -- (559,599) -- (559,599)
Net loss -- (19,389,206) -- (19,389,206)
Unrealized gain on investments available for sale -- (60,093) (60,093)
------------ ------------ -------- ------------
Balance at December 31, 2002 $ 12,241,250 $(39,157,937) $ -- $(26,906,687)
============ ============ ======== ============
SEE NOTES TO FINANCIAL STATEMENTS
F-7
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Cash flows used in operating activities
Net Loss $ (19,389,206) $ (7,905,033) $ (5,354,482)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization expense 8,405,412 246,630 --
Amortization of deferred financing costs 1,450,434 1,431,699 1,043,710
Amortization of debt discount 292,576 344,226 --
Amortization of preferred stock discount 72,718 69,967 --
Change in valuation of warrants (2,854,880) -- 12,536
Changes in working capital:
Accounts receivable 59,306 (223,511) --
Inventory (48,059) (282,745) --
Prepaid expenses (746,806) (859,704) --
Other current assets (12,298) -- --
Trade accounts payable 2,733,354 1,684,980 --
Accounts payable related parties (2,479,723) 4,925,732 --
Accrued interest 5,940,342 1,547,427 2,107,225
Other current liabilities 1,429,007 256,157 --
------------- ------------- -------------
Net cash provided (used) in operating activities, before
reorganization items: (5,147,823) 1,235,825 (2,191,011)
Cash flows from reorganization items:
Prepayments made in connection with Chapter 11 proceedings (1,008,181) -- --
Write-off unamortized debt discount 897,794 -- --
Write-off unamortized deferred finance costs 3,440,651 -- --
------------- ------------- -------------
Net cash provided (used) in operating activities (1,817,559) 1,235,825 (2,191,011)
------------- ------------- -------------
Cash flows from investing activities:
Decrease (increase) in funds held in escrow (53,694) (185,151) 1,736,990
Increase in base stock inventory/uniforms (90,478) (284,344) --
Increase in franchise fees -- (40,000) --
Increase in property and equipment (3,320,539) (68,611,052) (27,092,162)
Decrease (increase) in cash - restricted, cost 2,661,860 25,109,744 (30,122,220)
Decrease (increase) in investments, cost 6,420,143 29,708,398 (36,128,541)
(Decrease) increase in construction accounts payable (1,980,040) (492,719) (5,339,871)
------------- ------------- -------------
Net cash provided (used) in investment activities 3,637,252 (14,795,124) (96,945,804)
------------- ------------- -------------
Cash flows from financing activities:
Deferred offering costs incurred (130,000) (802,767) (6,274,954)
Proceeds from notes payable -- 23,800,000 105,965,404
Payment of notes payable (3,335,873) -- (9,339,506)
Proceeds from preferred stock - Series B -- -- 1,684,670
Proceeds from common stock issued for cash -- -- 4,010,250
Proceeds from warrants issued for cash -- -- 3,173,064
------------- ------------- -------------
Net cash (used) provided by financing activities (3,465,873) 22,997,233 99,218,928
------------- ------------- -------------
Net change in cash and cash equivalents (1,646,180) 9,437,934 82,113
Cash and cash equivalents, beginning of period 9,667,138 229,204 147,091
------------- ------------- -------------
Cash and cash equivalents, end of period $ 8,020,958 $ 9,667,138 $ 229,204
============= ============= =============
Non Cash Items:
Construction in progress due to retainage $ -- $ (2,203,329) $ (1,642,060)
Supplemental Cash Flow Information:
Interest Paid $ 8,948,240 $ 13,379,590 $ 9,630,208
SEE NOTES TO FINANCIAL STATEMENTS
F-8
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
Windsor Woodmont Black Hawk Resort Corp., a Colorado corporation (the
"Company" or "Resort Corp.") 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
Private Placement and other financing transactions described in Note 3, 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
completed the development of the Project, and operates the Project under a
management agreement with 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.
BANKRUPTCY PROCEEDINGS:
On November 7, 2002 (the Petition Date), the Company (debtor) filed a
voluntary petition for protection under Chapter 11 of the United States
Bankruptcy Code in the Federal District of Delaware in order to facilitate the
restructuring of the Company's debt, trade liabilities and other obligations.
The Company is currently operating as a debtor-in-possession under the
supervision of the United States District Court for the District of Colorado.
The bankruptcy petition was filed in order to preserve cash and to give the
Company the opportunity to restructure its obligations.
The financial statements contained herein have been prepared in
accordance with accounting principles generally accepted in the United States of
America applicable to a going concern, and do not purport to reflect or to
provide for all of the possible consequences of the ongoing Chapter 11
reorganization case. Specifically, the financial statements do not present the
amount which will ultimately be paid to settle liabilities and contingencies
which may be required in the Chapter 11 reorganization case or the effect of any
changes which may be made in connection with the Company's capitalization or
operations resulting from a plan of reorganization. The Debtor has not filed a
plan of reorganization as of this date, but expects to file one in the near
term. The plan, when filed, is subject to acceptance by the Company's
compromised creditors and stockholders and approval by the Bankruptcy Court.
Because of the ongoing nature of the reorganization case, the outcome
of which is not presently determinable, the financial statements contained
herein are subject to material uncertainties and may not be indicative of the
results of the Company's future operations or financial position. No assurance
can be given that the Company will be successful in reorganizing its affairs
within the Chapter 11 bankruptcy proceedings.
As a result of the items discussed above, there is substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon, but not limited to,
formulation, approval, and confirmation of a plan of reorganization, adequate
sources of capital, customer and employee retention, the ability to provide a
high quality gaming experience and the ability to sustain positive results of
operations and cash flows sufficient to continue to operate. The financial
statements do not include any adjustments to the recorded amounts or
classification of assets or liabilities or reflect any amounts that may
ultimately be paid to settle liabilities and contingencies which may be required
in the Chapter 11 reorganization or the effect of any changes which may be made
in connection with the Company's capitalization or operations resulting from a
plan of reorganization.
F-9
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
ACCOUNTING UNDER BANKRUPTCY:
The December 31, 2002 financial statements have been prepared in
accordance with AICPA Statement of Position 90-7 Financial Reporting by Entities
in Reorganization under the Bankruptcy Code (SOP 90-7). Pursuant to SOP 90-7, an
objective of financial statements issued by an entity in Chapter 11 is to
reflect its financial evolution during the proceeding. For that purpose, the
financial statements for periods including and subsequent to filing the Chapter
11 petition should distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations of the business.
Expenses and other items not directly related to ongoing operations are
reflected separately in the statement of operations as reorganization expenses
(see note 5).
The filing of the Chapter 11 cases by the Debtors (i) automatically
stayed actions by creditors and other parties in interest to recover any claim
that arose prior to the commencement of the cases, and (ii)served to accelerate,
for purposes of allowance, all pre-petition liabilities of the Company, whether
or not those liabilities were liquidated or contingent as of the Petition Date.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents, Restricted
The Company considers all highly liquid investments with a maturity at
the time of purchase of six months or less to be cash equivalents. Amounts are
held in several trust accounts by Wells Fargo Bank (as cash disbursement agent)
and are restricted in use to the development of the Black Hawk Casino by Hyatt
in Black Hawk, Colorado or for the 13% First Mortgage Notes interest payments.
Included in restricted cash equivalents are two certificates of deposit in the
amounts of $919,718 and $526,776 which were pledged as collateral on two
irrevocable letters of credit in like amounts which constitute required
collateral for public improvements under the Subdivision Agreement and site
remediation collateral for a bench excavation permit. The letter of credit in
the amount of $919,718 expired April 30, 2002, and the letter of credit in the
amount of $526,776 expired September 1, 2002.
Short-Term Investments, Restricted
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the
accounting and reporting requirements in equity securities that have readily
determinable fair values and for all investments in debt securities, and
requires such securities to be classified as either held to maturity, trading,
or available for sale.
Management determines the appropriate classification of its investment
securities at the time of purchase and reevaluates such determination at each
balance sheet date. There were no short-term investments at December 31, 2002.
At December 31, 2001, short-term investments consisting of publicly traded
corporate debt securities with a maturity date of 12 months or less were
classified as investments available for sale. As investments available for sale,
they are carried a market value, with unrealized holding gain or loss reported
as a separate component of stockholders' equity.
Amounts were held in several trust accounts by Wells Fargo Bank (as
cash disbursement agent) and are restricted in use to the development of the
Project or for the 13% First Mortgage Notes interest payments.
For the years ending December 31, 2002 and 2001, unrealized losses of
$60,093 and $226,593, respectively, have been recognized in the accompanying
financial statements. For the year ended December 31, 2000, an unrealized gain
in the amount of $286,686 has been recognized in the accompanying financial
statements.
Inventory
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
F-10
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Warrants Issued on Common Stock
Warrants issued in connection with the Company's various financing
transactions (see Note 4), 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
have been 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
balance sheet and recorded at fair value each reporting period. As of December
31, 2002 and 2001, a liability for the fair market value of the warrants of $
0.71 million and $3.57 million was recorded in the accompanying balance sheet
and a corresponding income of $2.85 million and an expense of $12,536 was
recorded in the accompanying statement of operations for the years ended
December 31, 2002 and 2000.
Stock-Based Compensation
In 2002 the Company adopted Statement of Financial Accounting Standards
No. 148 (SFAS 148), "Accounting for Stock-based Compensation -Transition and
Disclosure" which amends the disclosure requirements of Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" to require prominent disclosure 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 148
also provides alternative methods of transition for a voluntary change to fair
value based methods of accounting which have not been adopted at this time. SFAS
123 encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to
account for stock-based compensation for employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire that stock. The Company values
stock-based compensation grants to non-employees at fair value.
At December 31, 2002, the Company had two stock-based employee
compensation plans, but awards had only been made under one of the plans. The
Company accounts for the plans under the recognition and measurement principles
of APB 25, and related Interpretations. No stock-based compensation cost is
reflected in net earnings, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock on the date of
the grant. The following table illustrates the effect on net loss if the Company
had applied the fair value recognition provisions of SFAS 123, to stock-based
employee compensation.
December 31,
Net Loss 2002 2001 2000
---- ---- ----
As reported $19,948,805 $8,456,287 $5,771,804
Employee stock-based compensation (131,070) (284,460) (237,502)
----------- ---------- ----------
Pro forma $20,079,875 $8,740,747 $6,009,306
=========== ========== ==========
As the Company's stock is not publicly traded, the fair value of each option was
estimated on the grant date using the minimum value method (which excludes a
volatility assumption), with the following assumptions:
December 31,
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.88% 5.21% 6.21%
Expected life in years 10 years 10 years 10 years
Dividend yield 0.0% 0.0% 0.0%
F-11
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Capitalized Interest
The Company capitalized interest costs associated with the debt
incurred in connection with the Project in accordance with Statements of
Financial Accounting Standards No. 34 - "Capitalization of Interest Cost."
Interest capitalization ceased once the Project was substantially complete on
December 20, 2001. No interest was capitalized during 2002. During the years
ended December 31, 2001, and 2000, $10,935,152 and $4,248,787 of interest
expense was capitalized, respectively.
Funds Held in Escrow
Funds held in escrow at December 31, 2002 and 2001 represents cash held
by the Black Hawk Business Improvement District under various bond agreements
associated with the construction of the Project.
Income Taxes
The Company accounts for Income Taxes according to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires the recognition of deferred tax assets, net of an
applicable valuation allowance, related to net operating loss carry-forwards and
certain temporary differences. The standard requires recognition of a future tax
benefit to the extent that the realization of such benefit is more likely than
not. Otherwise, a valuation allowance is applied.
Debt Issuance Costs
Debt discount and issuance costs are capitalized and amortized using
the effective interest rate method over the term of the related debt.
Unamortized debt discount and issuance costs related to the First Mortgage Notes
and Second Mortgage Notes were written off at November 7, 2002 in connection
with the bankruptcy filing, and the related valuation of these items at face
value. The write-off of the unamortized balances was charged to reorganization
costs. Accumulated amortization, including costs written off in 2002, was
$4,141,672 and $2,475,409 at December 31, 2002 and 2001, respectively.
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 relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities, and
related revenues and expenses. Actual results could differ from those estimates.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for possible impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If there is an indication of impairment, which is estimated as the
difference between anticipated undiscounted future cash flows and carrying
value, the carrying amount of the asset is written down to its estimated fair
value by a charge to operations. Fair value is estimated based on the present
value of estimated future cash flows using a discount rate commensurate with the
risk involved. Estimates of future cash flows are inherently subjective and are
based on management's best assessment of expected future conditions. During 2001
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" which is effective for fiscal years beginning after December
15, 2001. SFAS No. 144 supersedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". While SFAS No.
144 retains many of the provisions of SFAS No. 121 it provides guidance on
estimating future cash flows to test recoverability, among other things. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements.
F-12
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Loss Per Share
Basic loss per share is computed by dividing net loss applicable to
common stock by the weighted average common shares outstanding during the
period. Diluted loss per share is based on the weighted average number of common
shares outstanding during the respective periods, plus the common equivalent
shares, if dilutive, that would result from the exercise of stock options. Total
common stock equivalents of 863,720 for the years ended December 31, 2002, 2001
and 2000 were excluded from the diluted loss per share calculation because their
effects would have been anti-dilutive.
Start-up Costs
Effective January 1, 1999, Statement of Position 98-5, "Reporting on
the Costs of Start-up Activities", addressed the manner in which the Company
accounts for start-up costs. Start-up costs incurred after January 1, 1999
through opening in 2001, have been expensed as incurred. Start-up costs consist
of salaries, benefits, training, marketing, licensing and other costs incurred
in connection with the opening of the Project. During the fiscal year December
31, 2001 and 2000, the Company incurred start-up costs of approximately $4.5
million, and $0.3 million, respectively.
Revenue Recognition
Casino revenue is the net win from gaming activities, which is the
difference between gaming wins and losses. The incremental amount of unpaid
progressive jackpot is recorded as a liability and a reduction of casino revenue
in the period during which the progressive jackpot increases.
Players Club
In February 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued a partial consensus on EITF 00-22,
"Accounting for "Points" and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to be Delivered in
the Future." The consensus requires that vendors recognize the cash rebate or
refund obligation associated with time or volume-based cash rebates as a
reduction of revenue based on a systematic and rational allocation of the cost
of honoring rebates or refunds earned and claimed to each of the underlying
revenue transactions that result in progress by the customer toward earning the
rebate or refund. The liability for such obligations should be based on the
estimated amount of rebates or refunds to be ultimately earned, including an
estimate of breakage if it can be reasonably estimated.
Our players' club allows customers to earn certain complimentary
products and/or cash based on the volume of the customers' gaming activity. The
Company has recorded a liability for the estimated cost of the products and/or
cash to be earned by customers. In accordance with EITF 00-22, the Company has
recorded the charge for progress towards the complimentary services/cash rebates
as a reduction of revenues, which totaled $3.9 million and $.08 million for the
years ended December 31, 2002 and 2001, respectively.
Promotional Allowances
In the fourth quarter of 2000, the EITF reached a consensus on Issue
00-14, "Accounting for Certain Sales Incentives." EITF 00-14 requires that sales
incentives be recorded as a reduction of revenue. The Company's policy relating
to food and beverage and other non-casino revenues complies with EITF 00-14 and
are reported as a reduction of revenues, which totaled $4.14 million and $.13
million for the year ended December 31, 2002 and 2001, respectively.
Recently Issued Accounting Standards
The Company has reviewed all recently issued accounting pronouncements
and does not believe that any of the pronouncements will have a material impact
on its financial statements.
F-13
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Reclassifications
Certain amounts in the December 31, 2001 and 2000 financial statements
have been reclassified to conform with the current year presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2002 2001
---- ----
Property and equipment
Land and land improvements 17,915,989 17,915,989
Buildings and improvements 89,224,255 86,619,705
Furniture, fixtures and equipment 20,997,179 20,305,269
Construction in progress 24,079 --
------------- -------------
128,161,502 124,840,963
Less: accumulated depreciation and amortization (8,419,411) (241,348)
------------- -------------
Net property and equipment $ 119,742,091 $ 124,599,615
============= =============
Property and equipment is recorded at cost. Depreciation and
amortization of property and equipment began accumulating upon the commencement
of gaming operations (December 20, 2001) and is computed using the straight-line
method over the following estimated useful lives:
Years
-----
Slot machines 3
Furniture, fixtures and equipment 5-10
Buildings and improvements 15-39
3. GOING CONCERN CONSIDERATIONS
The Company is currently operating under the jurisdiction of Chapter 11
of the Code and the Court, and the continuation of the Company as a going
concern is contingent upon, among other things, its ability to restructure
successfully, including refinancing its debts, and the ability of the Company to
general sufficient cash to fund future operations. There can be no assurance in
this regard.
The Company intends to utilize the Chapter 11 process to reorganize its
financial and operational affairs with the goal of preserving and enhancing the
assets of the Company for the benefit of creditors and shareholders. The Company
expects the business to operate as usual, our valued employees to be retained,
and for our post-bankruptcy obligations to be satisfied.
The Company's objective is to achieve the highest possible recoveries
for all creditors and shareholders, consistent with the Company's ability to pay
and to continue the operation of the Company's business. However, there can be
no assurance that the Company will be able to attain these objectives or to
achieve a successful reorganization. Further, there can be no assurance that the
liabilities of the Company will not be found to exceed the fair value of their
assets. This could result in claims being paid at less than 100% of their face
value and the equity of the Company's shareholders being diluted or cancelled.
Under the Code, the rights of, and ultimate payments to pre-Filing Date
creditors and shareholders may be substantially altered from their contractual
terms. At this time, it is not possible to predict the outcome of the Case, in
general, or the effect of the Case on the business of the Company or on the
interests of creditors and shareholders.
F-14
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
The Company anticipates that substantially all liabilities of the
Company as of the Filing Date will be resolved under one or more plans of
reorganizations to be proposed and voted on in the Case in accordance with the
provisions of the Code. Although the Company intends to file and seek
confirmation of such a plan or plans, there can be no assurance as to when the
Company will file such a plan or plans, or that such plan or plans will be
confirmed by the Court and consummated.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. However, as a result of the filing of the Case, such realization of
assets and liquidation of liabilities are subject to a significant number of
uncertainties.
4. NOTES PAYABLE
Notes payable consisted of the following at December 31, 2002 and 2001:
Principal Balance
at December 31,
2002 2001
---- ----
13% First Mortgage Notes , due March 15, 2005 $100,000,000 $ 99,189,164
15.5% Second Mortgage Notes, due March 15, 2010 9,840,233 9,706,699
FF&E Note, interest at prime + 6.75% (11% at Dec. 31, 2002) 17,680,006 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 2,784,121 3,000,000
------------ ------------
$130,304,360 $132,449,863
Less current maturities 130,304,360 4,029,205
------------ ------------
Long-term debt $ -- $128,420,658
============ ============
As described in Note 3 above, all of the Company's long-term debt
became immediately due and payable as a result of the commencement of the Case,
accordingly, long-term debt balances have been reclassified to current
maturities.
Substantially all of the Company's assets are pledged as collateral for
long-term debt. On October 15, 2002, the Company failed to make the interest
payments initially due on September 15, 2002, that it had elected to defer until
October 15, 2002 on the First Mortgage Notes and Second Mortgage Notes. The
Company's failure to pay the interest constituted an "Event of Default" under
the applicable agreements. On November 7, 2002, the Company filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code. As a result of the
failure to make required interest payments, and the filing of the bankruptcy
petition, the Company was not in compliance with all of its debt covenants.
5. REORGANIZATION EXPENSES
Reorganization related expenses of $4,762,559 were incurred during the
year ended December 31, 2002. These include costs incurred for legal, financial
advisor services received in connection with our debt restructuring efforts,
travel related expenses and other costs directly related to our debt
restructuring efforts. Such costs also include the write-off of unamortized debt
discount and deferred financing costs related to the First Mortgage Notes and
the Second Mortgage Notes, in the amount of $897,794 and $3,440,651,
respectively.
6. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK
The Company issued 29,000 shares of its preferred stock as "Series A"
preferred stock and 30,000 shares of its preferred stock as "Series B" preferred
stock. The holders of both the Series A and Series B preferred stock have no
voting rights. The Series A preferred stock is non-convertible, accrues
cumulative, non-compounding dividends at the rate of 11% per annum and has a
liquidation preference of $100 per share.
F-15
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Holders of the Series A preferred stock may redeem their shares at a price per
share equal to their liquidation preference plus accrued and unpaid dividends
thereon at any time after the later of (1) one year after the First Mortgage
notes are paid in full, whether at maturity or upon redemption or repurchase and
(2) one year after the second mortgage notes issued to Hyatt Gaming are paid in
full, whether at maturity or upon redemption or repurchase. The Series B
preferred stock is non-convertible, accrues dividends on a cumulative basis,
compounding quarterly at a rate of 7% per annum and has a liquidation preference
of $100 per share. Holders of the Series B preferred stock may redeem their
shares at a price equal to their liquidation preference plus accrued and unpaid
dividends thereon at March 15, 2015.
7. 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 will be reviewed periodically by the gaming
authorities in Colorado and there are no guarantees such licenses will be
renewed.
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 events transpire. See
Note 12 for subsequent events related to the Hyatt Management Agreement.
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 is 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. Upon completion of the improvements, the Company 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.
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.
Paul, Hastings, Janofsky & Walker claim for legal fees. Paul, Hastings,
Janofsky & Walker (Paul Hastings) is the Los Angeles and New York based law firm
which acted as issuer's counsel for the Company in securing financing for the
Company's casino project in Black Hawk, Colorado. The approximately $110 million
in financing closed in March, 2000. The Company paid Paul Hastings a total of
$800,000 in legal fees and costs in conjunction with providing services as
issuer's counsel, including $700,000 disbursed to Paul Hastings from the closing
of the financing in March, 2000. After March, 2000, Paul Hastings submitted
additional billing statements to the Company, made several threatening
communications to the Company, and ultimately filed litigation against the
Company in California state courts in Los Angeles County in June, 2001.
F-16
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Paul Hastings claimed that it was owed an additional approximately $470,000 in
fees for legal services, approximately one-half of which is allegedly based upon
services rendered on an hourly fee basis, and the other half of which
constitutes "bonus" which Paul Hastings alleges is due as a result of the
closing of the financing. The Company believed that it overpaid Paul Hastings
for the services rendered. The matter was scheduled for trial in October, 2002
in Los Angeles, but was settled at a mediation in Denver in May, 2002. The
Company agreed to pay Paul Hastings an additional $150,000, $50,000 of which was
paid in May, 2002 with the balance of $100,000 due in December, 2002. The
$100,000 payment has not been made and Paul Hastings will be treated as an
unsecured creditor in the Chapter 11 proceeding.
First Place LLC filed a lawsuit against the Company generally asserting
that it has an ownership interest in a small sliver of property upon which the
Company has built and is operating the Black Hawk Casino by Hyatt. The property
which First Place contends it has an ownership in consists of approximately
6,000 square feet. The Company timely referred the issue to its title insurance
company, First American Title. The Company has a $33.5 million owner's title
insurance policy with First American. First American has advised the Company
that the claim will be covered by the Company's title insurance and the title
insurance company has been and is vigorously defending the claim. After a trial
in June, 2002, the trial court determined that First Place does have an
ownership interest in a strip of property containing approximately 3,000 square
feet which the Company believed it owed. Certain post trial motions had been
granted and were pending final determination by the Court at the time of the
Chapter 11 filing. The Company and First American engaged in efforts with First
Place to remove this case from the bankruptcy proceeding, however, those efforts
have proved unsuccessful to date. We do not anticipate that there will be any
financial exposure to the Company with respect to this claim, however, similarly
situate claimants have raised issues in the past with other property owners in
the Black Hawk area which have had the effect of temporarily clouding title and
have resulted in property owner's and/or title insurance company's entering into
financial settlements with the claimant in order to eliminate the alleged
"clouds" on title. The Company fully expects that this claim will be resolved by
and at the expense of First American Title.
The Colorado Limited Gaming Control Commission (the Commission)
approved the issuance of the appropriate and necessary gaming licenses for
operation of the Black Hawk Casino by Hyatt to the Company and Hyatt Gaming
Management, Inc. on September 20, 2001. The licenses were physically issued to
the Company and Hyatt immediately prior to opening of the casino on December 20,
2001. In the meantime, in October 2001, GF Gaming, a gaming company operating a
casino in Central City, Colorado, filed an appeal with the Commission
challenging the issuance of the licenses to the Company and Hyatt, ostensibly on
the grounds that the Commission had failed to consider whether the casino
facility met the historic architectural intent of the Colorado gaming laws. The
Company and Hyatt requested that the appeal be dismissed for several reasons,
including that GF Gaming lacked standing and that the Commission lacked
jurisdiction over architectural compliance issues (those issues being within the
exclusive province of the municipalities in which limited gaming is permitted).
In December, 2001, the Commission dismissed the appeal based upon lack of
standing and lack of jurisdiction. In February, 2002, GF Gaming filed a notice
of appeal continuing its challenge with the Colorado Court of Appeals. All
parties have filed all required briefs with the Court of Appeals, but a decision
by the Court of Appeals has been stayed by the Chapter 11 filing. Recently, all
parties to this case have filed a stipulated motion with the bankruptcy court to
lift the automatic stay on this proceeding and to allow its final adjudication
by the state court system. The bankruptcy court has not ruled on the stipulated
motion.
PCL Construction Services, Inc. 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 and certain components of the project were
not completed until early 2002. PCL and its subcontractors claim to be owed an
aggregate of approximately $7,200,000 on the project, have recorded mechanic's
liens and filed mechanic's lien foreclosure and breach of contract litigation
against the Company. The Company has filed litigation against PCL for PCL's
misrepresentations and contractual breaches concerning completion of the
project. This litigation was not at issue with all parties as of the date of the
Chapter 11 filing and has been stayed. The Company anticipates that this claim
will likely be resolved by a settlement agreement with PCL in the Chapter 11
proceeding. The Company and PCL have been engaged in extensive settlement
discussions since late January, 2003 and, as of April 4, 2003, PCL and the
Company have conceptually agreed on the basic business terms of a settlement
agreement. The agreement must be memorialized and executed by the parties,
following which it must be submitted to the bankruptcy court for review and,
hopefully, approval.
F-17
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
Paul Steelman was the project architect for the Black Hawk Casino by
Hyatt project. Paul Steelman claims that it is owed an additional approximately
$200,000 for architectural work performed at the project. The Company believes
that it does not owe Paul Steelman the $200,000 and further believes that Paul
Steelman owes the Company approximately $2,000,000 for Paul Steelman's failure
to properly prepare and complete architectural plans and specifications for the
project in a timely fashion. Prior to the Chapter 11 filing, the Company and
Steelman had entered into a Dispute Resolution Agreement providing for
mediation, to be followed by binding arbitration, if necessary. The dispute
resolution process contemplated by this Agreement has been stayed. The Company
and Steelman have verbally agreed to file a stipulated motion lifting the stay
from this dispute and allowing its determination by Dispute Resolution
Agreement; such a motion has been drafted and is awaiting execution and filing
with the bankruptcy court.
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.
Lease Commitments
Minimum rental obligations under all non-cancelable operating leases
with terms of one year or more as of December 31, 2002 are as follows:
For the year ending December 31,
- -----------------------------------------------------
2003 $ 167,244
2004 149,287
2005 74,616
2006 44,944
---------
$ 436,091
=========
F-18
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The benefit for income taxes attributable to net loss for the year
ended December 31, 2001 and 2000 is as follows:
2002 2001 2000
---- ---- ----
Current -- -- --
Deferred -- -- --
---- ---- ----
Total Provision $ -- $ -- $ --
==== ==== ====
The income tax benefit associated with the Company's net loss for the
year ended December 31, 2002, 2001 and 2000 differs from the amount computed at
the federal income tax statutory rate as a result of the following:
2002 2001 2000
---- ---- ----
Amount at statutory rate $ (6,592,330) $ (2,687,711) $ (1,820,524)
Other timing differences 857,903 (52,790) --
Valuation allowance 7,450,233 2,740,501 1,820,524
------------ ------------ ------------
Total Provision $ -- $ -- $ --
============ ============ ============
The components of the deferred taxes at December 31, 2002 and 2001
consisted of the following:
Deferred tax assets: 2002 2001
- ----------------------- ---- ----
Net operating loss $ 10,877,633 $ 4,772,847
Start-up costs 1,317,234 1,742,776
Bond issue costs 1,169,822 --
Bond discount 305,250 --
Depreciation 50,523 (355,489)
Accruals and other (65,105) 44,990
------------ -----------
Net deferred tax asset $ 13,655,357 $ 6,205,124
Valuation Allowance (13,655,357) (6,205,124)
------------ -----------
Net deferred tax asset $ -- $ --
============ ===========
As discussed in Note 1, prior to the Private Placement, the operations
of the Company were associated with the LLC, which was a nontaxable entity.
Consistent with SFAS 109, deferred tax assets and a corresponding valuation
allowance of $ 1.6 million were recorded at the date the LLC contributed all of
its assets and liabilities to the Company.
At December 31, 2002, the Company had a net operating loss of $31.9
million, that expires at various dates through 2022. The use of these losses may
be limited in the event of a change in control of the Company.
At December 31, 2002, the Company believes that it is not more likely
than not that any of its deferred tax assets are realizable because of the
absence of accurate future projected taxable income. Accordingly, all deferred
tax assets are fully reserved as of December 31, 2002.
9. RELATED PARTY TRANSACTIONS
One of our former directors was the Chairman and Chief Executive
Officer of U.S. Bancorp Libra, the placement agent for our unit offering. During
the year ended December 31, 2000, in conjunction with the initial unit offering,
we paid U.S. Bancorp Libra a placement fee in the amount of $3,500,000 and
warrants to purchase 80,031 shares of our common stock at $0.01 per share,
exercisable until March 15, 2010.
F-19
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
We have a financial consulting arrangement with one of our former
directors. During the year ended December 31, 2001 this director earned $208,000
for services related to the FF&E loan from Wells Fargo Bank and provided $40,000
in additional services. During the year ended December 31, 2000 this director
was paid $200,000 for services related to the initial unit offering and has
provided $83,785 in additional services. Trade accounts payable and accrued
expenses include $208,000 payable to this director at December 31, 2002 and
2001.
Our former Secretary and director provided legal and professional
services to the Company. During the year ended December 31, 2002, he provided
$26,794 in legal services. During the year ended December 31, 2001, he provided
$63,496 in legal services. During the year ended December 31, 2000, he provided
$47,250 in services related to the initial unit offering and $20,091 in
additional services. Trade accounts payable and accrued expenses include $3,912
and $977 payable to this director at December 31, 2002 and 2001, respectively.
Hyatt Gaming, the manager of the Project, incurred start-up costs on
behalf of the Project, representing the cost of salaries, benefits, training,
marketing and other costs incurred in connection with the opening of the
Project. During the years ending December 31, 2001 and 2000, Hyatt Gaming
incurred start-up costs totaling $4,333,178 and $166,822, respectively. Accounts
payable related parties includes $1,532,921 and $3,537,403 at December 31, 2002
and 2001, respectively, due to Hyatt for start-up costs. Accounts payable
related parties includes an additional $913,088 and $1,179,352 due to Hyatt
Gaming for payroll, benefits and other operating costs incurred on behalf of the
Project after opening as of December 31, 2002 and 2001, respectively.
10. STOCK INCENTIVE PLAN
On April 14, 2000, our board of directors approved the 2000 Stock
Incentive Plan, which provides for the grant of options to purchase an aggregate
of not more than 150,000 shares of our common stock. The purpose of the plan is
to promote our long-term growth and profitability by providing key people with
incentives to improve stockholder value and contribute to our growth and
financial success and by enabling us to attract, retain and reward the
best-available persons. The plan was approved by the shareholders in August,
2000.
On March 25, 2002, our board of directors approved the 2002 Stock
Incentive Plan, which provides for the grant of options to purchase an aggregate
of not more than 45,000 shares of our common stock. The purpose of the plan is
to promote our long-term growth and profitability by providing key people with
incentives to improve stockholder value and contribute to our growth and
financial success and by enabling us to attract, retain and reward the
best-available persons. The plan was approved by the shareholders in April,
2002.
The plans provide for the granting of both incentive stock options
qualifying under Section 422 of the Internal Revenue Code of 1986 and
nonqualified stock options, stock appreciation rights, restricted or
unrestricted stock awards, phantom stock and performance awards. Awards of
incentive stock options under the plan are limited to employees and must have an
exercise price at least equal to the fair market value of our common stock at
the date of grant, but nonqualified stock options may have an exercise price
less than fair market value.
The plans will be administered by the board of directors or by a
committee appointed by the board of directors which determines the persons to be
granted options under the plan, the number of shares subject to each option, the
exercise price of each option and the option period.
The Company has not yet granted any option or award under the 2002
Stock Incentive Plan.
F-20
WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
A summary of stock option activity and weighted average exercise prices
under the 2000 Stock Incentive Plan is as follows:
Weighted
Average
Number Exercise
Of Shares Price
--------- ----------
Balance December 31, 1999
Granted at market price 108,000 $ 16.50
Exercised --
Forfeited -- --
------- ----------
Balance December 31, 2000 108,000 $ 16.50
Granted at market price 25,000 $ 25.00
Exercised --
Forfeited --
------- ----------
Balance December 31, 2001 133,000 $ 18.10
Granted at market price 17,000 $ 20.00
Exercised --
Forfeited --
------- ----------
Balance December 31, 2002 150,000 $ 18.31
======= ==========
The weighted average fair value and remaining contract life of options
granted was $18.31, $18.10 and $16.50 and 7.8 years, 8.6 years and 9.3 years,
respectively, for the fiscal year ending December 31, 2002, 2001 and 2000.
On January 29, 2003, the Company entered into voluntary stock option
exchange agreements (the "Option Exchange Agreements") to exchange outstanding
options to purchase shares of our the Common Stock granted under the 2000 Stock
Incentive Plan held by eligible employees or eligible directors for new options
under the same option plans. The Option Exchange Agreements required an optionee
to cancel and terminate their old stock options previously granted to the
optionee with the result that the same number of new options with a exercise
price to be the fair market value of the Common Stock on a new grant date
exactly six months and one day after the date of the Option Exchange Agreements.
Stock options to acquire a total of 95,000 shares of the Company's Common Stock
with exercise prices ranging from $16.50 to $20.00 were exchanged under the
Option Exchange Agreements. The Exchange Program was designed to comply with
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," for fixed plan accounting.
11. SUBSEQUENT EVENTS
On December 13, 2002, we filed a motion for court approval of the
rejection of the Hyatt Management Agreement. The rejection of the Hyatt
Management Agreement will eliminate the payment of the Hyatt Management fee,
thereby reducing operating costs and increasing net revenue. On April 10, 2003,
we entered into a settlement agreement with Hyatt where they will not contest
the rejection of the Hyatt Management Agreement (the "Hyatt Settlement and
Release Agreement"). On April 25, 2003, the Bankruptcy Court entered an order
approving the Hyatt Settlement and Release Agreement. The order approving the
Hyatt Settlement and Release Agreement will be entered as a final order on the
Rejection Date. The Rejection Date is currently set for May 6, 2003; however, we
entered into a stipulation with Hyatt to extend the Rejection Date to be on the
fourth business date after we provide written notice to Hyatt, but in any event
will not be later than May 19, 2003. We entered into this stipulation with Hyatt
to provide additional time for the orderly transition for the management of
operations.
Under the terms of the Hyatt Settlement and Release Agreement, the
Hyatt Management Agreement will be deemed rejected and Hyatt shall hold an
allowed pre-petition unsecured claim in the Bankruptcy Case in the amount of
$18,318,368. This claim includes the following: (i) rejection damage claim in
the amount of $ 5,000,000, (ii) Second Mortgage Note claim in the amount of $
10,877,791, including accrued interest, (iii) pre-casino opening expenses claim
in the amount of $ 1,532,921, and (iv) post opening expenses claim in the amount
of $ 907,657. Windsor Woodmont agrees to commence making interest only payments
at a rate of 6% one month after the effective date of the reorganization plan.
The interest only payments will continue until Windsor Woodmont generates excess
cash flow (as defined in the Hyatt Settlement and Release Agreement) to pay the
pre-petition
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WINDSOR WOODMONT BLACK HAWK RESORT CORP.
(DEBTOR-IN-POSSESSION AS OF NOVEMBER 7, 2002)
NOTES TO FINANCIAL STATEMENTS
unsecured claim until paid in full. We agree to restrict dividends to our
equity holders until Hyatt's pre-petition unsecured claim is paid in full.
Hyatt agrees to support a plan of reorganization in the Chapter 11 Case and
agrees to waive any claim or interest in and to any funds it possesses from the
operation of the Casino. Under the Hyatt Settlement and Release Agreement,
Hyatt agrees to fully cooperate in the transition of the Casino to us.
12. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarter
------------------------------------------------------------------------------
First Second Third Fourth Total
-------------- ------------- ------------- ------------- -------------
Net operating revenues $ 16,940,655 $ 16,401,127 $ 18,347,586 $ 14,174,445 $ 65,863,813
Operating Income (73,946) (630,575) 438,290 (583,411) (849,642)
Loss from continuing operations before
reorganization costs and preferred stock
dividends (4,789,675) (2,538,170) (4,315,159) (2,983,643) (14,626,647)
Reorganization costs - - 209,111 4,553,448 4,762,559
Net loss before preferred stock dividends (4,789,675) (2,538,170) (4,524,270) (7,537,091) (19,389,206)
Preferred stock dividends 138,399 140,065 141,801 139,334 559,599
Net loss attributable to
common stock (4,928,074) (2,678,235) (4,666,071) (7,676,425) (19,948,805)
Loss per share
Basic $ (4.93) $ (2.68) $ (4.67) $ (7.68) $ (19.95)
Diluted $ (4.93) $ (2.68) $ (4.67) $ (7.68) $ (19.95)
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