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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2003
[ ] TRANSITION REPORT PURSANT TO 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.
(Exact name of registrant as specified 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)
Registrant's Telephone Number: (303) 582-3600
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock, $0.01 par
value (Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark 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]
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 April
12, 2004 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 26, 2004
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business............................................................................... 1
Item 2. Property............................................................................... 21
Item 3. Legal Proceedings...................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders.................................... 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 23
Item 6. Selected Financial Data................................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 29
Item 8. Financial Statements................................................................... 29
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............................................... 29
Item 9A. Controls and Procedures................................................................ 30
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................................... 30
Item 11. Executive Compensation................................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 30
Item 13. Certain Relationships and Related Transactions......................................... 30
Item 14. Principal Accountant Fees and Services................................................. 30
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 30
SIGNATURES............................................................................................... 32
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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. "Second
Mortgage Notes" refers to the $9,840,233 principal amount subordinated
indebtedness comprised of the second mortgage notes held by Hyatt Gaming,
defined below. "Hyatt Management Agreement" refers to the casino management
agreement between the Company and Hyatt Gaming dated February 2, 2000, as
amended on 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 "Mountain High Casino."
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 Mountain High Casino, 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 intersection of Highway 119 and Richman Street in the center of the Black
Hawk gaming district. From opening until May 14, 2003, the Casino was managed by
Hyatt Gaming Management, Inc. ("Hyatt Gaming") pursuant to a professional
management agreement. On May 14, 2003, the Company assumed management of the
Casino.
As described below, 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"). We filed the Chapter 11 Case because we were experiencing
difficulties generating sufficient cash flow from operations to meet our
financial obligations under the First Mortgage Notes and the Second Mortgage
Note, pursuant to the applicable agreements. We are currently acting as a
debtor-in-possession on behalf of the bankruptcy estate.
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
Our failure to pay the interest on the First Mortgage Notes and the
Second Mortgage Note when due on October 15, 2002 constituted an "Event of
Default" under such 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.
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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.
On November 7, 2002, we filed 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.
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.
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 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 has passed. The claims register prepared and maintained by the
Bankruptcy Court reflects that, as of November 18, 2003, 126 proofs of claim
have been filed in the Chapter 11 Case in an aggregate amount in excess of $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
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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 13, 2002, we filed a motion for court approval of the
rejection of the management agreement with Hyatt Gaming (the "Hyatt Management
Agreement"). On April 10, 2003, the Company executed a settlement agreement with
Hyatt Gaming (the "Hyatt Settlement and Release Agreement"), which provided for
the rejection of the Hyatt Management Agreement, the transition of management of
the Casino to the Company, the fixing of the amount and priority of Hyatt
Gaming's claims in the Chapter 11 Case (including the claims based on the Second
Mortage Note and the rejection of the Hyatt Management Agreement), and the
treatment of Hyatt Gaming's claims under a plan of reorganization.
Pursuant to the Hyatt Settlement and Release Agreement, Hyatt Gaming
holds an allowed unsecured claim in the Chapter 11 Case in the aggregate amount
of $18,413,243.68 (the amount of $18,318,368.49 set forth in the Hyatt
Settlement and Release Agreement plus an additional $94,875.19 in incentive
management fees from the Petition Date through May 13, 2003); provided, however,
that in the event that the value of the Company's assets exceed the value of the
liens senior to the Second Mortgage Note (including the liens of the Black Hawk
BID, PCL, the FF&E Lender and the First Mortgage Noteholders), Hyatt Gaming's
claim based on the Second Mortgage Note will be secured to such extent. On April
25, 2003, the Bankruptcy Court entered an order approving the Hyatt Settlement
and Release Agreement. On May 14, 2003, we assumed management of the Casino and
the Casino name was changed to the Mountain High Casino. The treatment of Hyatt
Gaming's allowed claim (including certain changes to such treatment that Hyatt
Gaming asserts are in violation of the Hyatt Settlement Agreement and to which
Hyatt Gaming has not consented) is reflected in the Plan of Reorganization (as
defined below). Hyatt Gaming has indicated that, in addition to its pre-petition
claims against the Company, it may assert an administrative claim in the Chapter
11 Case for damages arising from alleged breaches of the terms of the Hyatt
Settlement and Release Agreement.
On or about February 19, 2003, we entered into a stipulation with David
R. Belding, our furniture, fixture and equipment lender (the "FF&E Lender")
pursuant to which all issues between the Company and the FF&E Lender concerning
the amount and priority of the FF&E Lender's claim and the treatment of such
claim under a plan of reorganization were resolved. On February 19, 2003, the
Company filed its Motion to Approve Stipulation Regarding (1) Allowance and
Payment of Secured Claim of David R. Belding; and (2) Mutual Release of Claims
Relating to Disputes Over Funds in Wells Fargo Bank Account (the "FF&E
Stipulation"). Thereafter, objections to the FF&E Stipulation were filed by the
First Mortgage Noteholders and PCL (as defined below), and SunTrust and the
Unsecured Creditors Committee filed joinders to the objection filed by the First
Mortgage Noteholders (PCL later withdrew its objection to the FF&E Stipulation).
The objections asserted, among other things, that the initiation of an adversary
proceeding may be required to obtain the relief sought in the FF&E Stipulation.
The Company, the FF&E Lender, and the objecting parties agreed to
proceed with the issues raised in connection with the FF&E Stipulation and the
objections thereto by way of an adversary proceeding and such matter was
converted to an adversary proceeding. Thereafter, the parties reached an
agreement whereby the adversary proceeding on the FF&E Stipulation was held in
abeyance and the issues relating to the FF&E Stipulation were resolved or
reserved for a later date. On June 24, 2003, the Company filed an Amended
Stipulation Regarding (1) Allowance and Payment of Secured Claim of David R.
Belding; and (2) Mutual Release of Claims Relating to Disputes Over Funds in
Wells Fargo Bank Account (the "FF&E Settlement Agreement"), which was approved
by the Bankruptcy Court by order entered June 30, 2003. The FF&E Settlement
Agreement provides, among other things, that the FF&E Lender will receive
payments of up to $500,000 per month during the Chapter 11 Case and will be paid
certain amounts on the effective date of a plan of reorgnaization. After the
approval of the FF&E Settlement Agreement, the Company and the FF&E Lender
agreed to more favorable treatment to the Company, including a reduction in the
required effective date payment to the FF&E Lender and a one-year extension on
the repayment of the amounts due to the FF&E Lender, which treatment is
reflected in the Plan of Reorganization (as defined below).
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PCL Construction Services, Inc. ("PCL") was the general contractor in
the construction of the Casino. Pursuant to its contract with the Company, PCL
was obligated to prepare construction schedules for completion of the Casino
within the time limits of the contract, to revise the schedules to the extent
required, to provide for timely completion of the contract, and to otherwise
perform and act in the capacity of general contractor.
On May 29, 2002, we filed a complaint in Gilpin County District Court,
Colorado, seeking damages from PCL for (1) fraudulent misrepresentation, (2)
fraudulent concealment, (3) negligent misrepresentation, (4) constructive fraud,
and (5) breach of contract (the "Casino Action"). On June 19, 2002, PCL filed an
answer and filed its own complaint against the Debtor and 20 other defendants
(including numerous subcontractors) also in Gilpin County District Court,
Colorado (the "PCL Action"). On August 22, 2002, the Debtor filed an answer to
the complaint in the PCL Action. Prior to the Petition Date, the Casino Action
and the PCL Action were consolidated into one case.
The claims of PCL and its subcontractors against the Debtor aggregated
approximately $10,000,000 and the Debtor's claims against PCL were in the
approximate amount of $5,000,000. The claims on the part of both PCL and the
Debtor were contingent and unliquidated, however, PCL's claims included claims
for the foreclosure of mechanic's liens on the Casino property and PCL asserted
that the mechanic's liens were first priority liens on the Casino property,
superior in priority to the deed of trust of SunTrust, as trustee for the First
Mortgage Noteholders.
Following extensive settlement discussions, on May 15, 2003, we entered
into a Settlement and Release Agreement with PCL, on behalf of itself and the
PCL Subcontractors (the "PCL Settlement Agreement"). Pursuant to the PCL
Settlement Agreement, we agreed to pay PCL a total of $4,500,000, with a
$2,300,000 down payment, a $1,400,000 payment on the earlier of January 15, 2004
or ten (10) days after the effective date of the Plan of Reorganization (defined
below), $400,000 on October 15, 2004 and $400,000 on April 15, 2005. The
Bankruptcy Court approved the PCL Settlement Agreement on July 7, 2003. The
required $2,300,000 down payment was paid to PCL on July 28, 2003 and the
$1,400,000 payment was made on or about January 15, 2004.
As provided by the Bankruptcy Code, we had 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
such plan. During 2003, we petitioned the Bankruptcy Court and were granted
extensions of time with respect to our exclusive right to file a plan and
solicit and obtain acceptances thereto.
On August 6, 2003, we filed a plan of reorganization and accompanying
disclosure statement with the Bankruptcy Court. On November 20, 2003, we filed
an amended plan of reorganization (the "Plan of Reorganization") and
accompanying amended disclosure statement (the "Disclosure Statement") with the
Bankruptcy Court. An objection to the Disclosure Statement was filed by First
Place LLC. By stipulations between the First Mortgage Noteholders, Sun Trust and
the Unsecured Creditors Committee and orders thereon, the hearing on approval of
the Disclosure Statement has been continued on several occasions and is
currently scheduled for May 4, 2004. By those same stipulations and orders, the
current objection deadline relative to the Disclosure Statement has been
extended to April 26, 2004 for the First Mortgage Noteholders, Sun Trust, Hyatt
Gaming and the Unsecured Creditors Committee. At the hearing on the Disclosure
Statement, the Bankruptcy Court will also consider granting an extension of
exclusivity period for us to solicit and obtain acceptances to the Plan of
Reorganization.
If the Plan of Reorganization is 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 or reorganization 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. There can be no assurance that the
Plan of Reorganization will be confirmed by the Bankruptcy Court, or that any
such plan will be consummated.
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 December 31, 2003, we
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had approximately $8,283,104 million in cash available. 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
Case 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.
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 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 principal
amount First Mortgage Notes. The proceeds were used to finance the development
and construction of the Casino.
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 996
state of the art slot machines and 24 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 Steakhouse at Mountain High Casino, a steak
and seafood restaurant, the Mountain High Buffet, a high quality action-station
buffet and a food court featuring: Wolfgang Puck's Express restaurant and the
Mountain High Grill. Krispy Kreme donuts that are delivered fresh daily and a
Starbucks Coffee Bar is located on the Sun Fire Deck, an indoor/outdoor plaza
area.
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 Winner's Circle 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 includes a Margarita Bar on the gaming 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
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cash flow from operations. Key elements to our restructuring will be to reduce
our expenses, continue to improve in our slot product, focus our marketing
efforts to high worth casino 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.
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
Winner's Advantage Club, preferred player recognition program. The Winner's
Advantage Club allows members to receive valuable rewards and exciting
promotional offers in conjunction with their casino play. Rewards include:
complementary meals, cash back, special mail offers, 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 Winners 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 the Casino's web site located at www.mtnhighcasino.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.
EMPLOYEES
As of March 31, 2004, Windsor Woodmont employed 473 full-time, paid
employees including cashiers, dealers, food and beverage service personnel,
facilities maintenance staff, security, accounting and marketing personnel. No
labor unions represent any employee group.
COMPETITION
The information contained in this discussion of competition has been
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.
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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.
Of the 22 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 985 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 traditionally been one of the
most successful casinos in Colorado, is located near the Casino and has
approximately 750 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 1,070 gaming machines and 1,100 parking spaces. Smaller
competitors in the Black Hawk market include the Gilpin Hotel Casino, Canyon
Casino, Fitzgerald's and Bullwhackers.
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, Fortune Valley Hotel & Casino located in Central City, has 118 hotel
rooms.
On April 22, 2003, Isle of Capri Black Hawk, L.L.C. acquired
CCSC/Blackhawk, Inc., which owns and operates the Colorado Central Station
casino in Black Hawk, Colorado, and Colorado Grande Enterprises, Inc., which
owns and operates the Colorado Grande casino in Cripple Creek, Colorado. On
November 5, 2003, Nevada Gold & Casino's, Inc., in a joint venture with Isle of
Capri, announced an expansion project, which has begun, at the Colorado Central
Station Casino adding casino space and hotel rooms with completion of the
project by the end of 2005. This expansion 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. These
bonds were sold on June 18, 2003 and on October 3, 2003 construction began on a
new four-lane road from I-70 at the Hidden Valley exit directly into downtown
Central City. This roadway allows drivers to reach Central City without driving
through Clear Creek Canyon and Black Hawk. While Black Hawk is only one mile
away from Central City, the new roadway may attract patrons and customers of the
Casino to casinos located in Central City. This may have a material adverse
effect upon the Casino.
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. On November 4, 2003, Colorado voters
rejected an amendment to the Colorado constitution that would have allowed video
lottery terminals in five racetracks located along the front range in Colorado.
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
7
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."
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 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.
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
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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 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 First Mortgage 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
9
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.
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 First Mortgage 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
10
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
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
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for the first fifty (50) gaming devices. As of April 2, 2004, we had a total of
1,020 gaming devices and pay the annual device fee for 970 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 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
HYATT SETTLEMENT AND RELEASE AGREEMENT.
On December 13, 2002, we filed a motion for court approval of the
rejection of the Hyatt Management Agreement. On April 10, 2003, the Company
executed the Hyatt Settlement and Release Agreement with Hyatt Gaming, which
provided for the rejection of the Hyatt Management Agreement, the transition of
management of the Casino to the Company, the fixing of the amount and priority
of Hyatt Gaming's claims in the Chapter 11 Case (including the claims based on
the Second Mortage Note and the rejection of the Hyatt Management Agreement),
and the treatment of Hyatt Gaming's claims under a plan of reorganization.
Pursuant to the Hyatt Settlement and Release Agreement, Hyatt Gaming
holds an allowed unsecured claim in the Chapter 11 Case in the aggregate amount
of $18,413,243.68 (the amount of $18,318,368.49 set forth in the Hyatt
Settlement and Release Agreement plus an additional $94,875.19 in incentive
management fees from the Petition Date through May 13, 2003); provided, however,
that in the event that the value of the Company's assets exceed the value of the
liens senior to the Second Mortgage Note (including the liens of the Black Hawk
BID, PCL, the FF&E Lender and the First Mortgage Noteholders), Hyatt Gaming's
claim based on the Second Mortgage Note will be secured to such extent. On April
25, 2003, the Bankruptcy Court entered an order approving the Hyatt Settlement
and Release Agreement. On May 14, 2003, we assumed management of the Casino and
the Casino name was changed to the Mountain High Casino. The treatment of Hyatt
Gaming's allowed claim (including certain
12
changes to such treatment that Hyatt Gaming asserts are in violation of the
Hyatt Settlement Agreement and to which Hyatt Gaming has not consented) is
reflected in the Plan of Reorganization (as defined below). Hyatt Gaming has
indicated that, in addition to its pre-petition claims against the Company, it
may assert an administrative claim in the Chapter 11 Case for damages arising
from alleged breaches of the terms of the Hyatt Settlement and Release
Agreement. A copy of the Hyatt Settlement and Release Agreement is attached
hereto as Exhibit 10.31.
FF&E SETTLEMENT AGREEMENT
On or about February 19, 2003, we entered into the FF&E Stipulation
with the FF&E Lender pursuant to which all issues between the Company and the
FF&E Lender concerning the amount and priority of the FF&E Lender's claim and
the treatment of such claim under a plan of reorganization were resolved. On
June 24, 2003, the Company filed an Amended Stipulation Regarding (1) Allowance
and Payment of Secured Claim of David R. Belding; and (2) Mutual Release of
Claims Relating to Disputes Over Funds in Wells Fargo Bank Account (the "FF&E
Settlement Agreement"), which was approved by the Bankruptcy Court by order
entered June 30, 2003. The FF&E Settlement Agreement provides, among other
things, that the FF&E Lender will receive payments of up to $500,000 per month
during the Chapter 11 Case and will be paid certain amounts on the effective
date of a plan of reorganization. After the approval of the FF&E Settlement
Agreement by the Bankruptcy Court, the Company and the FF&E Lender agreed to
more favorable treatment to the Company, including a reduction in the required
effective date payment to the FF&E Lender and a one-year extension on the
repayment of the amounts due to the FF&E Lender, which treatment is reflected in
the Plan of Reorganization.
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: the Plan of
Reorganization or a plan substantially similar thereto submitted by us will be
approved by the Bankruptcy Court, market conditions affecting the 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 Litigation Reform Act of 1995 contains a safe
harbor for forward-looking statements on which we rely in making such
disclosures. In connection with this safe harbor we are hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statements made by or on our behalf. Any
such statement is qualified by reference to the cautionary statements included
in this Annual Report.
CERTAIN BANKRUPTCY CONSIDERATIONS
13
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.
WE HAVE FILED A PLAN OF REORGANIZATION WITH THE BANKRUPTCY COURT WHICH
REQUIRES APPROVAL TO EMERGE FROM CHAPTER 11. On November 20, 2003 we filed the
Plan of Reorganization with the Bankruptcy Court. The Plan of Reorganization is
subject to Bankruptcy Court approval, as well as the acceptance by our creditors
and equity holders. 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 the Plan of Reorganization receives
the requisite acceptance by creditors and equity holders and is ultimately
approved by the Bankruptcy Court, the Plan of Reorganization 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 the Plan of Reorganization.
Accordingly, there can be no assurance as to whether or when the Plan of
Reorganization may be approved by the creditors or equity holders or confirmed
by the Bankruptcy Court in the Chapter 11 Case.
WE MAY NOT RECEIVE THE APPROVALS NECESSARY TO CONFIRM THE PLAN. Section
1129 of the Bankruptcy Code, which sets forth the requirements for confirmation
of the Plan of Reorganization, requires, among other things, a finding by a
Bankruptcy Court that:
- the confirmation of a plan is not likely to be followed by the
need for further reorganization;
- all claims and interests have been classified in compliance
with the provisions of section 1122 of the Bankruptcy Code;
and
- each holder of a claim or equity interest within each impaired
class has voted to accept the plan or has received or retained
under the plan, cash or property of a value, as of the date
the plan becomes effective, that is not less than the value
such holders would receive or retain if the debtor were
liquidated under Chapter 7 of the Bankruptcy Code.
We can give no assurance that the Bankruptcy Court will conclude that
these tests and the other requirements of section 1129 of the Bankruptcy Code
have been met with respect to the Plan of Reorganization. We can also give no
assurance that further modifications to the Plan of Reorganization would not be
required for confirmation, or that such modifications would not require us to
recirculate the Plan of Reorganization to solicit approval of the modified Plan
of Reorganization. Any requirement to resolicit approvals would delay
implementation of the Plan of Reorganization, which we believe would adversely
affect our investors.
We believe that the Plan of Reorganization meets all of the
requirements for confirmation thereof, including, in particular, that if the
Plan of Reorganization is confirmed it will not be followed by the need for
further financial reorganization of the Company and that our creditors and
investors whose interests are considered impaired will receive value under the
Plan of Reorganization that is greater than the value they would receive if we
were liquidated under chapter 7 of the Bankruptcy Code. However, we can give no
assurance that the Bankruptcy Court will reach the same conclusions.
In addition, the confirmation and effectiveness of the Plan of
Reorganization is also subject to certain conditions. We can give no assurances
that these conditions will be satisfied or waived or that any necessary consent
will be obtained.
Failure of confirmation of the Plan of Reorganization by the Bankruptcy
Court would likely result in a sale of some or all of our business operations, a
conversion of the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy
Code or the proposal of a different plan of reorganization.
14
OUR FINANCIAL STATEMENTS ASSUME WE WILL CONTINUE AS A "GOING CONCERN."
Based on current and anticipated levels of operations and assuming confirmation
of the 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) the
approval of the Plan of Reorganization by parties required by the Bankruptcy
Code and be confirmed by the Bankruptcy Court, and (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
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 continue to 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 a plan of reorganization is 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 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 will 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.
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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 126 proofs of claim filed, representing in
excess of $160 million in claims against us. Our inability to generate adequate
cash prior to and after the approval of the Plan of Reorganization 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.
In addition, note holders who are also holders of 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
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Division of Gaming could change that policy at any time and require
institutional investors to undergo background investigations.
Holders of our common stock 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 we do.
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, Fortune Valley Hotel and Casino,
located in Central City, has 118 hotel rooms. Isle of Capri recently announced
plans to expand the Colorado Central Station Casino, adding casino space and
hotel rooms with the completion of the project scheduled for the end of 2005.
This expansion could attract gaming patrons and customers who are currently
patrons of the Casino. If this happens, it could material adverse effect upon
the Casino.
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."
CONSTRUCTION OF NEW ROADWAY FROM CENTRAL CITY OF INTERSTATE 70,
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, on October 3, 2003, Central City began construction of a new
four-lane road from Interstate 70 at hidden valley directly into downtown
Central City. Upon completion, this roadway will allow drivers to reach Central
City without driving through Clear Creek Canyon and Black Hawk. The new roadway
may attract patrons and customers of the Casino to casinos located in Central
City, which may have a material adverse effect upon us.
WE HAVE NO EXPERIENCE IN THE OPERATION OF A CASINO. From December 21,
2001 until May 14, 2003, Hyatt Gaming managed the Casino. On May 14, 2003, we
assumed management of the Casino. Prior to this date, we had no experience in
the operation of a 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 continue to efficiently manage the
operations of the Casino it will have a material adverse effect upon us.
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DEPENDENCE UPON REPEAT CORE CUSTOMERS. Management of the Company
believes that approximately 90% of our business is from repeat core customers.
There can be no assurance that these customers will continue to come to the
Casino or game at current levels in the future. The loss of a significant number
of these repeat core customers, or a significant reduction in their gaming
activities at the Casino, would have a material adverse effect upon the Company.
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.
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.
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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 and 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
- 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
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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, including an amendment in November 2003 to include Video
Lottery Terminals in dog tracks located along the front range of Colroado.
However, to date none of this legislation has been passed. However, 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.
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 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.
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.
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
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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.
ITEM 2. PROPERTY
BLACK HAWK, COLORADO.
We own the Mountain High Casino, 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 Steakhouse at the
Mountain High Casino, 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.
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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,
except where noted, legal proceedings are stayed. For a complete description of
our Chapter 11 Case, see "Proceedings under Chapter 11 of the Bankruptcy Code."
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 Mountain High casino. 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 owned. Certain post trial motions had been
granted and were pending final determination by the Court at the time of the
Chapter 11 filing. On August 7, 2003, the Bankruptcy Court entered an order
lifting the automatic stay, thus allowing this case to proceed to conclusion in
the state courts. On September 12, 2003, the state trial court liquidated the
First Place claim, based upon application of the "relative hardship" doctrine,
in the amount of $73,500 and decreed that upon payment of that amount the
Company would own the 3,000 square feet. First Place has appealed this case to
the Colorado Court of Appeals and it is anticipated the appeal will be concluded
in late 2004 or early 2005. We do not anticipate that there will be any
financial exposure to the Company with respect to this claim, and fully expects
that this claim will be resolved by and at the expense of First American Title.
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. In early 2002, PCL and its subcontractors
claimed to be owed an aggregate of approximately $7,200,000 on the project,
recorded mechanic's liens and filed mechanic's lien foreclosure and breach of
contract litigation against the Company. The Company 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 and PCL engaged in
extensive settlement discussions starting in January, 2003 and entered into a
settlement agreement in May 2003. The Bankruptcy Court approved the agreement on
July 7, 2003. Under the agreement, the Company agreed to pay PCL and its
subcontractors a total of $4.5 million, $2.3 million of which was paid July 28,
2003, $1.4 million of which was paid in January 2004, $400,000 to be paid in
October 2004, and $400,000 to be paid in April 2005.
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 Company and
Steelman filed a stipulated motion lifting the stay from this dispute and
allowing its determination by Dispute Resolution Agreement, and an order
approving the motion was entered in May 2003. Mediation between the Company and
Steelman did not result in a resolution of these claims and a binding
arbitration of the claims is scheduled for September 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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 REGISTRANT'S 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 2, 2004 there were 51 holders of record of our
common stock.
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 -- Regulatory Structure - Gaming
Licenses."
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. As of the date of this Annual Report, the new stock options had
not been granted under the Option Exchange Agreements.
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.
23
FOR THE YEAR ENDED DECEMBER
---------------------------
Statement of Operations Data 2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Net Operating Revenues $ 55,567,444 $ 65,863,813 $ 2,802,134 - -
Operating Loss (4,237) (849,642) (4,044,577) $ (317,316) $ (435,900)
------------ ------------ ------------ ------------ ------------
Interest Income 21,335 142,405 1,978,602 3,810,304 -
Interest Expense (2,419,914) (16,774,290) (5,839,058) (8,834,934) (240,500)
Change in Valuation of Warrants - 2,854,880 - (12,536) -
------------ ------------ ------------ ------------ ------------
Other Expense, net (2,398,579) (13,777,005) (3,860,456) (5,035,166) (240,500)
------------ ------------ ------------ ------------ ------------
Net Loss before Reorganization items (2,402,816) (14,626,647) (7,905,033) (5,354,312) (676,400)
and Preferred Stock Dividends
Reorganization Items (8,716,907) (4,762,559) - - -
Preferred Stock Dividends (581,603) (559,599) (551,254) (471,322) -
------------ ------------ ------------ ------------ ------------
Loss Attributable to Common Stock $(11,701,326) $(19,948,805) $ (8,456,287) $ (5,771,804) $ (676,400)
============ ============ ============ ============ ============
Loss Per Common Share $ (11.70) $ (19.95) $ (8.46) $ (7.21) $ (676.40)
Balance Sheet Data 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Total Assets $123,389,308 $134,197,796 $152,931,820 $126,724,347 $ 31,380,573
Total Current Liabilities 154,370,768 154,135,233 22,217,138 10,403,260 36,360,573
Long Term Obligations 713,720 713,720 131,989,258 109,534,004 -
Redeemable Preferred Stock 6,912,833 6,255,530 5,623,213 5,001,992 -
Stockholders' Equity (Deficit) $(38,608,013) $(26,906,687) $ (6,897,789) $ 1,785,091 $ (4,980,041)
The following table sets forth certain summarized operating data for the periods
indicated.
Year Ended December 31,
----------------------------
2003 2002 Increase (Decrease)
------------ ------------ ----------------------
Net Operating Revenues $ 55,567,444 $ 65,863,813 $(10,296,369) -15.6%
Total Operating Expenses 55,571,681 66,713,455 (11,141,774) -16.7%
------------ ------------ ------------
Operating Loss (4,237) (849,642) 845,405 99.50%
Add: Depreciation and Amortization 8,356,921 8,405,412 (48,491) -0.6%
------------ ------------ ------------
EBITDA* $ 8,352,684 $ 7,555,770 $ 796,914 10.5%
============ ============ ============ ======
EBITDA* Margin 15.0% 11.5% 3.5%
============ ============ ============
1. EBITDA consists of earnings (loss) before interest, income taxes,
depreciation and amortizat