As filed
with the Securities and Exchange Commission on March 31, 2008
Registration No. 333-140934
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM SB-2/A
ON FORM S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
SOUTHWEST CASINO CORPORATION
(Name of small business
issuer in its charter)
Nevada
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7999
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87-0686721
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(State
or jurisdiction of
incorporation or organization)
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(Primary
Standard Industrial
Classification Code Number)
|
(I.R.S.
Employer
Identification number)
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2001 Killebrew Drive, Suite 350
Minneapolis, MN 55425
Tel: 952-853-9990
Fax: 952-853-9991
(Address
and telephone number of principal executive office)
Thomas E. Fox
President and Chief Operation Officer
2001 Killebrew Drive, Suite 350
Minneapolis, MN 55425
Tel: 952-853-9990
Fax: 952-853-9991
|
(Name,
address and telephone number of agent for service of process)
Incorp
Services, Inc.
3155 East Patrick Lane, Suite 1
Las Vegas, NV 89120-3481
Tel: 702-866-2500
|
Copies
of all communications to:
D.
William Kaufman, Esq.
Patrick
J. Pazderka, Esq.
Oppenheimer, Wolff & Donnelly
45 South 7
th
Street, Suite 3300
Minneapolis, MN 55402
Tel: 612-607-7000
Fax: 612-607-7100
Approximate date of
commencement of proposed sale to the public: From time to time after this
registration statement becomes effective, as determined by market
considerations and other factors.
If any securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following
box.
x
If this Form is
filed to register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
If this Form is a
post effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
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Non-accelerated filer
o
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Smaller reporting
company
x
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Calculation of Registration Fee
Title of Each Class of Securities
to be Registered
|
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Amount to be
Registered (1)
|
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Proposed
Maximum Offering
Price Per Share
(1)(2)
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Proposed Maximum
Aggregate Offering Price (2)
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Amount of
Registration Fee (3)
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Common Stock, $0.001 par value
|
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7,954,787
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$
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0.965
|
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$
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7,676,370.00
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$
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236.00
|
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Common Stock, $0.001 par value, underlying warrants
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4,708,602
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$
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0.965
|
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$
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4,543,801.00
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$
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140.00
|
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TOTAL
|
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12,663,
389
|
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$
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0.965
|
|
$
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12,220,171.00
|
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$
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376.00
|
|
(1) The shares of our Common Stock registered under this statement
are being registered for resale by the selling security holders named in the
prospectus. Of the shares of common
stock, 7,954,787 shares are currently outstanding and 4,708,602 shares are
issuable upon the exercise of warrants.
In addition, pursuant to Rule 416 under the Securities Act of 1933,
this registration statement includes an indeterminate number of additional
shares that may be offered and sold to prevent dilution resulting from stock
splits, stock dividends, or similar transactions.
(2)
Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, based
upon the last sale price reported of the Registrants common stock as quoted on
the Over-the-Counter Bulletin Board of $0.965 on February 23, 2007.
(3)
Previously paid.
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until the registration statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. The selling stockholders may not
sell these securities until our registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 31, 2008.
PROSPECTUS
SOUTHWEST CASINO CORPORATION
12,663,389 SHARES OF COMMON STOCK
This prospectus relates
to 12,663,389 shares of common stock of Southwest Casino Corporation, a Nevada
corporation, which may be resold by selling stockholders named in this
prospectus. These shares consist of
7,954,787 shares currently outstanding and 4,708,602 shares issuable upon
exercise outstanding warrants. We have
been advised by the selling stockholders that they may offer to sell all or a
portion of their shares of common stock being offered in this prospectus from
time to time. Our common stock is quoted
on the Over-the-Counter Bulletin Board (OTCBB) market under the symbol SWCC.OB. On March 28, 2008, the last sales price
of our common stock as reported on the OTCBB was $0.50 per share. No underwriter or any other person has been
engaged to facilitate the sale of the securities in this offering. The shares of common stock will be offered
and sold as described under the heading Plan of Distribution beginning on page 13.
Investing in our common stock
involves a high degree of risk that is described under the heading Risk
Factors beginning on page 2 of this prospectus. We urge you to carefully read the Risk
Factors section before you make your investment decision.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of the
prospectus. Any representation to the
contrary is a criminal offense.
The date of this
prospectus is , 2008.
TABLE OF CONTENTS
You should rely only on
the information contained in this prospectus.
We have not authorized anyone to provide you with information that is
different. This prospectus may only be
used where it is legal to sell these securities. The information in this
prospectus is accurate as of the date on the front cover. You should not assume that the information
contained in this prospectus is accurate as of any other date.
In this prospectus,
references to Southwest, Southwest Casino, the company, we, our or us,
unless the context otherwise requires, refer to Southwest Casino Corporation
and its consolidated subsidiaries. The
terms we, us, or our in each case do not include the selling
stockholders.
Dealer Prospectus
Delivery Obligation
Until ninety days from the effective date of this
registration statement,
all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
i
PROSPECTUS
SUMMARY
The following is a summary that highlights what we believe to be the most important information regarding Southwest and the securities being offered herein. Because it is a summary, however, it may not contain all of the information that is important to you. To understand our business and this offering fully, you should read this entire prospectus and our financial statements and related notes carefully.
Our
Business
Our principal business is
the management, operation and development of gaming facilities in emerging and
established gaming jurisdictions. Our subsidiaries, Southwest Casino and
Hotel Corp. and Gold Rush I, LLC, a Colorado limited liability company, hold
gaming licenses to operate the Gold Rush and Gold Diggers casinos in Cripple
Creek, Colorado. Cripple Creek is a
small, historic mining town near Colorado Springs that is permitted to engage
in limited stakes ($5.00 per bet limit) gaming. Fifteen casinos operate
currently in Cripple Creek. The combined Gold Rush and Gold Diggers facilities
offer approximately 406 slot machines and a 4-table card game area. We also own and operate the Palladium, an
outdoor amphitheater adjacent to the Gold Rush and Gold Diggers facilities
that offers live entertainment and other special events.
Through North Metro
Harness Initiative, LLC, Southwest and its 50 percent partner MTR-Harness, Inc.,
an affiliate of MTR Gaming Group, Inc., were granted Class A and Class B
licenses from the Minnesota Racing Commission on January 19, 2005 to
develop and operate a harness racing track and card room facility on
approximately 180 acres of land in Columbus Township, Anoka County,
Minnesota. Lawsuits against the Minnesota Racing Commission challenging
the validity of those licenses concluded in favor of the Racing Commission and
North Metro during July 2006. This project, named Running Aces
Harness Park, is nearing completion and scheduled to open with its first day of
live harness racing on April 11, 2008.
Once constructed and
operating, this racing facility will offer pari-mutuel wagering on a 5/8-mile
track with combined seating for over 2,000 track, restaurant and card room
patrons. In addition, the facility will
accommodate simulcast wagering on live harness racing events broadcast into the
facility. On January 17, 2008, the
Minnesota Racing Commission approved the plan of operation under which North
Metro will operate a 50-table card room in this facility. Minnesota law requires us to complete 50 days
of live harness racing before we can open the card room and the approval of the
plan of operation is contingent on satisfying that requirement. Under current
law, we are only permitted to simulcast harness races at this facility. We are seeking legislative authorization to
simulcast races by all horse breeds, but cannot provide any assurance that this
effort will succeed.
In September 2007,
we entered into a consulting agreement to work with Palace Resorts in
developing and opening a casino at the Moon Palace Casino, Golf and Spa Resort
now under construction in Punta Cana on the easternmost tip of the Dominican
Republic. Under the consulting agreement, we assist Palace Resorts in all
phases of design, game selection, training and equipping the casino that will
be part of the 1,700-room resort that is scheduled to open in 2008. Southwest
receives consulting fees of $50,000 per month for 10 months beginning in October 2007. Palace Resorts provides world-class resort
vacations at all-inclusive properties throughout Cancun, the Riviera Maya,
Nuevo Vallarta, and Cozumel with the Punta Cana, Dominican Republic resort now
under construction.
Recent
Developments
Until August 17,
2007, Southwest Casino and Hotel Corp. managed the Lucky Star Concho and
Lucky Star Clinton casinos in Concho and Clinton, Oklahoma, under the terms of
a management agreement with the Cheyenne and Arapaho Tribes of Oklahoma. From May 19, 2007 to August 17,
2007, Southwest managed the Lucky Star Concho and Lucky Star Clinton casinos
under Amendment No. 11 to the Third Amended and Restated Gaming Management
agreement between Southwest and the Cheyenne and Arapaho Tribes of Oklahoma,
which extended that agreement for up to two years. On August 17, 2007, the Supreme Court of
the Cheyenne and Arapaho Tribes declared Amendment No. 11 invalid. Also on August 17, 2007, the National
Indian Gaming Commission (NIGC) reversed its prior approval of Amendment No. 11. On August 24, 2007, the NIGC rejected
our challenge to its decision to reverse that approval. We have not received management fees from the
Cheyenne and Arapaho Tribes since August 17, 2007.
1
Our Company
Southwest Casino and
Hotel Corp. is the primary, wholly-owned operating subsidiary of Southwest
Casino Corporation and was our parent company until the July 2004
reorganization that resulted in our current structure. Southwest Casino and Hotel Corp. was
organized under the laws of the State of Minnesota in 1992 under the name Southwest
Casino and Hotel Ventures, Inc. and has operated in the gaming industry
since formation.
On July 22, 2004,
Southwest Casino and Hotel Corp. completed a reverse merger in which it became
a wholly-owned subsidiary of Lone Moose Adventures, Inc., a Nevada
corporation, and the former Southwest Casino and Hotel Corp. equity security
holders acquired approximately 92% of the outstanding securities of Lone Moose
Adventures, Inc. Lone Moose then
changed its name to Southwest Casino Corporation, which is the surviving
reporting entity today.
Lone Moose Adventures, Inc.
was formed on January 2, 2002 to take clients on adventure tours in the
Wasatch mountain range of Utah. Before
closing the reorganization described above, Lone Moose conducted only minimal
operations and received only minimal revenue.
Upon closing the reorganization, we sold substantially all of the assets
and liabilities of Lone Mooses adventure tour business to Lone Mooses
founding shareholders. Since the
reorganization and sale of the adventure tour business, Southwest has not
engaged in any aspect of the business conducted by Lone Moose before the
reorganization.
Principal
Executive Offices
Southwest Casino
Corporation
2001 Killebrew
Drive, Suite 350
Minneapolis, MN
55425
Phone:
952-853-9990
The
Offering
Securities
Offered
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12,663,389
shares of our common stock, consisting of 7,954,787 shares currently
outstanding, and 4,708,602 shares issuable to selling stockholders upon
exercise of outstanding warrants.
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Use of Proceeds
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We will not
receive any of the proceeds from the sale of the common stock offered by the
selling stockholders.
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Risk Factors
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The securities
offered hereby involve a high degree of risk. See Risk Factors.
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Offering Price
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All or part of
the shares of common stock offered hereby may be sold from time to time in
amounts and on terms to be determined by the selling stockholders at the time
of sale.
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OTCBB Trading
Symbol
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SWCC.OB
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RISK
FACTORS
Investing in our stock is
highly speculative and risky. You should
be able to bear a complete loss of your investment. Before making an investment decision, you
should carefully consider the following risk factors in conjunction with any
other information included or incorporated by reference in, including in
conjunction with
2
forward-looking
statements made herein. If any event or
circumstance described in the following risk factors actually occurs, it could
materially adversely affect our business, operating results and financial
condition. The risks and uncertainties described below are not the only ones,
which we face. There may be additional
risks and uncertainties not presently known to us or those we currently believe
are immaterial which could also have a negative impact on our business,
operating results and financial condition.
In addition to the
influences identified elsewhere in this prospectus, there are several important
factors that could cause our actual results to differ materially from those
anticipated by us or that are reflected in any of our forward-looking
statements. These factors, which may
impact the success of our operations and our ability to achieve our goals,
include the following:
1. Risks related to Southwests financial
condition:
We
no longer receive revenue from our prior Oklahoma management agreement
.
Our Gaming Management Agreement with the Cheyenne and Arapaho Tribes of
Oklahoma terminated on August 17, 2007.
We have not received any revenue from management of the Lucky Star
Concho and Lucky Star Clinton casinos since that date. Before August 17, 2007, revenue from
this management agreement was a significant source of our operating revenue.
Because
of the terms of its construction financing, it is unlikely that North Metro
will provide significant cash distributions other than cash distributions for
partner income taxes to us for several years.
We currently estimate that North Metro will begin
horseracing operations in April 2008 and the card room will open in July 2008.
Under the terms of the construction financing for North Metro, operating cash
flow must first be used to repay that financing. We do not believe North Metro will be a
significant source of cash distributions to us for several years.
We
have an accumulated deficit and uncertainty with respect to achieving future
profitability
. We have incurred substantial operating losses
since inception and had an accumulated deficit of $11.2 million as of December 31,
2007. These losses are primarily the result of expenses related to our ongoing
pursuit of new gaming opportunities, including the development of the Running
Aces Harness Park owned by North Metro Harness Initiative, LLC. We cannot provide you any assurance that we
will be able to achieve profitability on a quarterly or annual basis in future
periods. Our future operating results
will depend upon a number of factors, including (a) the continuation and
future profitability of our Colorado casinos; (b) our ability to establish
new gaming opportunities; (c) our ability to maintain our current gaming
licenses and to obtain additional gaming licenses for new or expanded gaming
facilities; and (d) our ability to successfully identify, secure licensing
and maintain all necessary approvals and funding related to any additional
future gaming opportunities.
We
have a continuing need for additional capital
. We anticipate that we will need substantial
additional funding to provide working capital to meet current and future
obligations, including operating expenses and any obligations we may have to
contribute additional capital to North Metro Harness Initiative, LLC. We will also need additional funding for any
additional gaming projects we may choose to pursue. Failure to meet our
capital commitments related to the harness racetrack and card room could lead
to a dilution of our ownership interest in that project. Moreover, our
operating plans and financing needs are subject to change depending on, among
other things, market conditions and opportunities; land, equipment or other
asset-based financing that may be available in connection with our development
of gaming facilities; cash flow from operations, if any; and the number of new
gaming projects that we pursue. While additional funds may be provided through
borrowings from institutional investors or project partners, equipment leasing
or other forms of debt or equity financing, we do not have any unconditional
commitments relating to additional financing and we cannot assure you that
additional financing will be available when needed. Even if financing is
available when required, we cannot assure you that it will be on terms
favorable to us and our security holders in terms of cost or dilution.
2.
Risks related to our
development of the North Metro Harness Initiative racetrack and card room:
It
is unlikely that North Metro will provide significant cash distributions to us
for several years due to restrictions under the construction financing
agreements for the North Metro Harness Initiative racetrack and card room.
Under the terms of the construction loan for North Metro, operating cash
flow from North Metro must first be used to repay the construction loan. North
Metro will not be permitted to make distributions to its owners (other than
annual distributions for payment of income taxes), including Southwest, unless
it exceeds
3
performance thresholds
stated in the loan agreements. We do not project that North Metro will exceed
these thresholds for several years.
Southwest
and North Metro are dependent on MTR-Harness, Inc., the other 50 percent
member of North Metro for a portion of the funds needed to continue development
of the North Metro racetrack and card room.
Under the
North Metro Harness Initiative, LLC Member Control Agreement, after the
Minnesota Racing Commission granted Class A and B racing licenses to North
Metro in January 2005, MTR-Harness, Inc. was initially obligated to
provide the majority of capital for North Metros operation and development
and, having done so, Southwest and MTR must now each provide 50 percent of any
additional funds needed for development or operation. If Southwest is unable to
meet any portion of its capital contribution obligation, MTR is also the most
likely alternative source of those funds. If MTR were to fail to make any of
its required or agreed upon capital contributions to North Metro, North Metro
may not have the financial resources required to develop its racetrack and card
room. If North Metro is unable to
develop its racetrack and card room and alternative financing was not available
and agreed to, Southwest will not receive any cash or profit from the operation
of the facility and the value of Southwests investment in North Metro will be
materially adversely affected.
Delays
in developing North Metros racetrack and card room caused by legal challenges
to North Metros racing licenses increased the cost of the project.
Legal challenges caused significant delays in developing the North Metro
project. These delays caused the costs
of developing the facility to increase significantly due to, among other
things, higher purchase prices for real property, fluctuating interest rates
and borrowing costs, rising construction and labor costs, rising energy prices,
and general inflation. These increased
costs have significantly increased the ultimate development costs for the North
Metro facility which will, in turn, delay and reduce the amount of revenue and
profit generated by North Metro and available for distribution to Southwest.
Actions
by the Minnesota state legislature may reduce the value of our investment in
North Metro.
Legislation has been introduced in the
Minnesota Legislature to expand the scope of gaming to permit slot machines
(commonly referred to as a racino) at Canterbury Park, the other Class A
licensed pari-mutuel wagering racetrack in the state, without affording North
Metro the same opportunity for 5 years. If any legislation should pass that
excludes North Metro from any gaming expansions afforded to Canterbury Park or
Native American tribes, it would have a material adverse effect on North Metros
proposed operations. Similarly, any
expansion of gaming in Minnesota, whether Native American gaming or otherwise,
that excludes North Metro could also have a material adverse effect on North
Metro and its business. In addition, the legislature has considered, but had
not adopted a significant tax on card room revenue that, if passed, would
reduce significantly net revenue generated by North Metro.
To date, North Metro has
been unsuccessful in its on-going efforts to secure legislative authorization
to offer simulcast wagering on all breeds of horse racing (under current law,
North Metro may only simulcast harness races).
North Metro was also unsuccessful in its efforts to eliminate the
requirement that we hold 50 days of live harness racing before we begin card
room operations. We continue to seek a
change in the law to allow all-breed simulcasting , which would have a
significant positive impact on North Metros operating results.
3. Regulatory risks related to our
participation in the gaming industry:
Changes
in the Cripple Creek, Colorado gaming market may negatively impact the
performance of our Gold Rush Hotel and Casino and the Gold Diggers casino.
A new casino, expected to offer 700 gaming
devices, is under construction in Cripple Creek and expected to open in late
spring or early summer 2008. Our ability
to maintain and grow our Colorado operations is largely dependent on our ability
to increase our market share in a highly competitive environment. The opening of this new casino will increase
the level of competition in this market.
At this time, we cannot predict the short or long term effects of the
opening of this facility on our Colorado operations.
In addition,
Colorado banned smoking on casino floors effective January 1, 2008. We expect this ban will have some negative
impact on business volume in the Cripple Creek market. We cannot predict the impact of this smoking ban
on the Gold Rush and Gold Diggers casinos at this time.
We,
and the gaming industry as a whole, are heavily regulated and any change in the
regulatory environment could have a material adverse effect on our business and
operations
.
The gaming industry is highly regulated at
4
the federal and state
levels. The process of complying with all applicable government regulations is
complex and requires us to expend substantial time and resources. We cannot assure
you that we will be able to comply on a continuous or timely basis with all
applicable regulations, and delays in compliance, or failure to comply, could
have a material adverse effect on our business, financial condition, results of
operations and our ability to maintain and obtain needed licenses. Changes in
existing regulations or the adoption of new regulations at the federal level or
in the states in which we operate or pursue new opportunities could delay or
prevent our compliance with those regulations. Our failure to comply with
applicable laws or regulations, whether federal, state or local, could result
in, among other things, the termination or suspension of some of our
operations, both of which would have a material adverse effect on our business.
We
face risks in connection with obtaining, maintaining and renewing gaming
licenses required for the conduct of our business
. The development and management of
gaming facilities are subject to extensive licensing requirements and we cannot
assure you that we will be able to obtain or maintain all necessary licenses,
approvals and other clearances from regulatory authorities having jurisdiction
over our gaming facilities. Although we, and our affiliates, have
obtained the governmental licenses, permits and approvals we believe are
necessary for the continued operation of our Colorado casinos and development
of a harness racing track and poker room in Minnesota, we cannot assure you
that we will be able to maintain or renew the necessary licenses, approvals and
other clearances required for our operations.
All
licenses that have been or may be obtained by us or our affiliates are subject
to various conditions and in many cases will be subject to renewal
. Notwithstanding the fact that we
have earned a good reputation at federal, state and local levels relative to
compliance and licensing ability, there is always the possibility that a
failure to comply with gaming regulations or the conditions of any license we
hold could have an adverse effect upon our ability to secure, maintain or renew
our gaming licenses. We were fined $50,000 by the Colorado Division of
Gaming in June 2004 for failure to properly maintain and review
statistical data on slot machine performance after receiving a warning letter
regarding this deficiency and failing to comply with its recommended action for
correction of the deficiency. We entered into a Stipulation and Agreement with
the Colorado Limited Gaming Control Commission in which we admitted that we
failed to comply with the applicable gaming regulations and agreed to take
corrective action immediately. As part of these proceedings, James Druck, in
his capacity as Manager of the facility in question, without any admission of
guilt, agreed to take the steps required to insure our compliance in this
matter and, further, agreed to pay the sum of $5,000 to Colorados Limited
Gaming Fund as reimbursement for expenses incurred by Colorado in this
investigation. It is difficult to predict with any certainty whether, and
to what extent, this occurrence may have a material adverse effect on our
business or adversely affect our ability and the ability of our key personnel
to obtain or retain required licenses in Colorado. In addition, we must
disclose this violation to other jurisdictions in which we hold or apply for
gaming licenses. It is difficult to predict what impact, if any, that
disclosure may have on our ability to obtain or maintain licenses in those
jurisdictions.
4. Risks related to the gaming
industry generally:
We
face intense competition in the gaming industry
. The gaming
industry, including the development, operation and management of racetracks and
other types of facilities, is highly competitive, especially given the rapid
rate at which the industry is expanding. For example, a number of management
companies may make proposals to a particular tribe for the development and
management of a single Indian gaming facility, and any gaming facilities
developed or managed by us will compete with a rapidly expanding number of
other gaming facilities of varying quality and size, including gaming
facilities that are part of national or regional chains, and other forms of
gaming and entertainment. Many of our competitors have substantially greater
financial and personnel resources than we do. Competition in the future may
also be affected by overbuilding which can adversely affect patronage levels.
Given the current regulatory climate and limited number of lucrative gaming
opportunities available, competition is likely to become more intense in the
future.
We
face risks associated with our pursuit of new gaming projects
.
We have pursued, are pursuing, and will continue to pursue new gaming
projects that involve substantial pre-development commitments of time and money
with no assurance we will receive the approvals needed to develop and operate
the proposed gaming facility. A number of these projects require legislation or
voter approval, which not only increases the cost of such projects but also
increases the risk the project will not be approved and extends the time
required to obtain licenses, complete development and begin operations. Gaming projects may be controversial in some
areas and face significant opposition from competitors or individuals and
groups opposed to gaming on moral grounds.
In addition to
5
increasing the costs and
difficulties in obtaining required approvals for gaming projects, these
opponents may also use litigation to try to delay or block new projects. For example, after we received all required
approvals to develop a harness racetrack in Anoka County, Minnesota, a group
opposed to gaming on moral grounds delayed the start of construction for almost
two years by filing two separate lawsuits in attempts to block the project.
We
will continue to face legislative and judicial hurdles and adverse legislative
and judicial changes
.
The legislative and judicial environments related to gaming are dynamic and
change rapidly. Any federal, state or local action, adverse legislation, or
judicial or regulatory ruling that limits gaming or constricts the scope of our
gaming operations could have a material adverse effect on the gaming industry
or our operations and financial condition.
We
face risks related to the nature of the gaming industry, including adverse
economic and political conditions and changes in the legislative and land use
regulatory climate
.
Similar to investment in other entertainment enterprises, adverse changes in
general and local economic conditions may adversely impact investments in the
gaming industry. Examples of economic conditions subject to change
include, among others, (a) competition in the form of other gaming
facilities and entertainment opportunities; (b) changes in regional and
local population and disposable income; (c) unanticipated increases in
operating costs; (d) restrictive changes in zoning and similar land use
laws and regulations, or in health, safety and environmental laws, rules and
regulations; (e) risks inherent in owning, financing and developing real
estate as part of our casino operations; (f) the inability to secure
property and liability insurance to fully protect against all losses, or to
obtain such insurance at reasonable costs; (g) seasonality; (h) changes
or cancellations in local tourist, recreational or cultural events; and (i) changes
in travel patterns or preferences (which may be affected by increases in
gasoline prices, changes in airline schedules and fares, strikes, weather
patterns or relocation or construction of highways, among other factors).
5. Additional Risks:
The
success of our current operations and our future growth potential are dependent
upon key personnel
.
Our success depends to a significant extent upon the efforts and abilities of our
executive officers, James B. Druck and Thomas E. Fox. Each of these individuals has developed
relationships and experience in the gaming industry that are integral to our
success. We have entered into employment agreements with Messrs. Druck and
Fox. We do not maintain key man life insurance on any of these
individuals. The loss of the services of
one or more of these individuals could have a material adverse effect on our
business and current and proposed operations.
The
success of our current operations and our future growth potential are dependent
upon our relationship with and the performance of certain third parties
. The successful operation of our
various proposed gaming facilities will be dependent to a significant extent on
the efforts of third parties. For example, (a) with respect to the
harness racing track and card room we are developing in Minnesota, the success
of that project will depend to a great extent on the expertise of our 50/50
partner in that venture, MTR-Harness, Inc., an affiliate of MTR Gaming
Group, Inc., in managing racing facilities as well as the ability of our
financing sources to meet their commitments to us; (b) with respect to any
other project pursued by us, we may need to form partnerships or secure third
party funding in order to meet the financial requirements that will likely
transcend our own financial resources; and (c) with respect to any
facility located on Indian land, we will not own the facility and will depend
on the performance by a tribe of its obligations under the applicable
management agreement. The failure of any third party to perform its contractual
obligations to us could have a material adverse effect on our business and
operations. In addition, depending upon the structure of any particular
joint venture, we may be held responsible for the acts or omissions of our
co-venturers.
We
face risks related to the diminishing control of our existing management
. Our directors and executive
officers currently beneficially own (together with their spouses, on a
fully-diluted basis and including shares that may be received in connection
with the exercise of outstanding options and warrants) approximately 29% of the
outstanding shares of our common stock. By virtue of the forgoing, our
directors and executive officers will have limited voting influence in
connection with the election of our future directors and the control of our
business and affairs.
We
have the ability to issue shares of preferred stock that may reduce the value
of our common shares and your rights as a common shareholder
.
Our shareholders have authorized the issuance of up to 30 million shares
of preferred stock with rights and preferences to be determined by our Board of
Directors. No shares of preferred stock
are outstanding and we do not have a current intent to issue any shares of
preferred stock, although we reserve
6
the right to do so in the
future. It is not possible to determine
the actual effect of the authorization and issuance of the preferred stock on
the rights of Southwest shareholders until our Board determines the rights of
the holders of a series of preferred stock.
However, such effects might include, among other effects:
·
restrictions on the payment of dividends to holders of
common stock;
·
dilution of voting power to the extent that holders of
preferred stock are given voting rights;
·
dilution of equity interest and voting power if the
preferred stock is convertible into common stock;
·
restrictions upon any distribution of assets to the
holders of common stock upon liquidation or dissolution, and restrictions upon
the amounts of merger consideration payable to the holders of common stock upon
a merger or acquisition of Southwest, until the satisfaction of any liquidation
preference granted to the holders of preferred stock;
·
redemption rights for holders of preferred stock that
may restrict the availability of revenue for other corporate uses, including
the payment of dividends; and
·
special voting rights for holders of preferred stock
in connection with major corporate actions such as mergers, acquisitions or
other transactions.
In addition, any
particular issuance or series of preferred stock could, depending on the terms,
make it more difficult or discourage any attempt to obtain control of Southwest
by means of a merger, tender offer, proxy contest or other means. Issuance of preferred stock could have the
effect of diluting the stock ownership of persons seeking control of our
company, and the possibility of such dilution could have a deterrent effect on
persons seeking to acquire control. The Board also could, although it has no
present intention of so doing, authorize the issuance of preferred stock to a holder
who might thereby obtain sufficient voting power to assure that any proposal to
effect certain business combinations or amend our Articles of Incorporation or
Bylaws would not receive the required shareholder approval. Accordingly, the
power to issue shares of preferred stock could enable the Board to make it more
difficult to replace incumbent directors and to accomplish business
combinations opposed by the incumbent Board.
Because
our common stock is traded on the OTC Bulletin Board, your ability to sell
shares in the secondary trading market may be limited
. Our common stock trades on the
over-the-counter market on the OTC Bulletin Board. Consequently, the
liquidity of our common stock is impaired, not only in the number of shares
that are bought and sold, but also through delays in the timing of
transactions, and limited coverage by security analysts and the news media, if
any, of our company. As a result, prices for shares of our common stock
may be lower and more volatile than might otherwise prevail if our common stock
was quoted on the Nasdaq Stock Market or traded on a national securities
exchange like The New York Stock Exchange or American Stock Exchange.
Because
our shares are penny stocks, you may have difficulty selling them in the secondary
trading market
.
Federal regulations under the Securities Exchange Act of 1934 regulate the
trading of so-called penny stocks, which are generally defined as any
security not listed on a national securities exchange or Nasdaq, priced at less
than $5.00 per share and offered by an issuer with limited net tangible assets
and revenues. Since our common stock currently trades on the OTC Bulletin
Board at less than $5.00 per share, our common stock is a penny stock and may
not be traded unless a disclosure schedule explaining the penny stock market
and associated risks is delivered to a potential purchaser before any trade.
In addition, because our
common stock is not listed on Nasdaq or any national securities exchange and
currently trades at less than $5.00 per share, trading in our common stock is
subject to Rule 15g-9 under the Exchange Act. Under this rule,
broker-dealers must take certain steps prior to selling a penny stock, which
steps include:
·
obtaining financial and investment
information from the investor;
·
obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and
·
providing the investor a written
identification of the shares being offered and the quantity of the shares.
7
If the broker-dealer does
not follow these penny stock rules, the investor has no obligation to purchase
the shares. The application of these comprehensive rules will make
it more difficult for broker-dealers to sell our common stock and our
shareholders, therefore, may have difficulty selling their shares in the
secondary trading market.
Our stock
price may be volatile and your investment in our common stock could suffer a
decline in value.
The market price of our common stock may
fluctuate significantly in response to a number of factors, some of which are
beyond our control. These factors
include:
·
government regulatory action affecting
our operations;
·
actual or anticipated fluctuations in our
operating results;
·
general market conditions for the gaming
industry;
·
broad market fluctuations; and
·
economic conditions in the United States
or abroad..
We do
not intend to pay any cash dividends in the foreseeable future.
We do not intend to pay any cash dividends in the
foreseeable future and, therefore, any return on your investment in our common
stock must come from increases in the fair market value and trading price of
our common stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus,
including any supplement to this prospectus, contains forward-looking
statements. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. These statements often
contain words such as may, will, project, might, expect, believe, anticipate,
intend, could, would, estimate, continue or pursue, or the negative
or other variations of those words or comparable terminology. In particular, they include statements
relating to, among other things, future actions, new projects, strategies,
future performance, the outcome of contingencies such as legal proceedings and
future financial results. We have based
these forward-looking statements on our current expectations and projections
about future events.
We
caution the reader that forward-looking statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied in the
forward-looking statements. These risks
and uncertainties include, but are not limited to, the following factors as
well as other factors described from time to time in our reports filed with the
Securities and Exchange Commission:
·
the effects of
the smoking ban in Colorado, effective January 1, 2008 on our casinos in
Cripple Creek, CO;
·
the effects of
competition, including location of competitors and operating and market
competition;
·
access to and
the cost of available and feasible debt or equity financing;
·
our ability to
recoup costs of capital investments through higher revenues;
·
success of our
customer tracking and customer loyalty programs;
·
abnormal gaming
holds;
·
litigation
outcomes and judicial actions, including gaming legislation, referenda and
taxation;
·
the effect of
economic, credit and capital market conditions on the economy in general, and
on gaming companies in particular;
·
construction
factors, including delays, zoning issues, environmental restrictions, soil and
water conditions, weather and other hazards, site access matters and building
permit issues;
·
the effects of
environmental and structural building conditions relating to the Companys
properties; and
·
changes in laws
(including increased tax rates), regulations or accounting standards,
third-party relationships and approvals, and decisions of courts, regulators
and governmental bodies.
8
Any
forward-looking statements speak only as of the date made. We undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock offered by this prospectus by the selling stockholders. This offering is intended to satisfy our
obligation to register, under the Securities Act of 1933, the resale of share
of our common stock, including shares of common stock that will be issued upon
the exercise of warrants. All proceeds
from the sale of the shares will be for the account of the selling
stockholders, as described below in the sections of this prospectus entitled Selling
Stockholders and Plan of Distribution.
However, we will receive the proceeds from the exercise of the warrants,
if any. If all of the warrants covering
shares under this offering are exercised, we would receive $2,854,652.03, all
of which we intend to use for working capital.
In addition, we will incur all costs associated with this registration
statement and prospectus.
SELLING SECURITY HOLDERS
The shares being offered for resale by the selling stockholders consist
of the 12,663,389 shares of our common stock held by 57 shareholders. This
prospectus covers:
·
2,659,342
shares of our common stock held by 15 shareholders that were sold to investors
in the second closing of our private placement occurring in February 2007;
·
1,063,740
shares of our common stock issuable upon exercise of warrants issued to investors
in the second closing of our private placement occurring in February 2007;
·
186,970
shares of common stock and warrants to purchase 177,621 shares of our common
stock issued to six affiliates of our placement agent in connection with the
second closing of our private placement occurring in February 2007;
·
4,792,391
shares of our common stock held by 28 shareholders that were sold to investors
in a private placement occurring in January 2007;
·
1,916,961
shares of our common stock issuable upon exercise of warrants issued to
investors in the private placement occurring in January 2007;
·
316,084
shares of common stock and warrants to purchase 300,280 shares of our common
stock issued to seven affiliates of our placement agent in connection with the January 2007
private placement; and
·
1,250,000
shares of common stock issuable upon exercise of outstanding warrants to
purchase 1,250,000 shares of our common stock which were issued to 12
investors
in a private placement of warrants ended October 20, 2005.
In the October 2005 private placement, investors purchased a
warrant to purchase one share of our common stock, with an exercise price of
$0.50 per share ($0.58 per share for our affiliates) for each $2.00 of a bank
loan to the company guaranteed by the investor.
Such shares were issued pursuant to Regulation D Rule 506 of the
Securities Act of 1933. Five
shareholders, including James B. Druck, Director and CEO,
Gus A. Chafoulias, Director (although Mr. Chafoulias was not a Director at
the time of the 2005 warrant offering), Thomas E. Fox, President, and Jeffrey
S. Halpern, Vice President of Government Affairs, participated in both
offerings either as an individual or through an affiliated entity. Only Mr. Chafoulias and Mr. Halpern
purchased in their capacity as individuals in both offerings.
The following table sets forth the name of the selling stockholders,
the number of shares of common stock beneficially owned by each of the selling
stockholders as of May 8, 2007 and the number of shares of common stock
being offered by the selling stockholders.
The shares being offered hereby are being registered to permit public
secondary trading, and the selling stockholders may offer all or part of the
shares for resale from time to time.
9
However, the selling stockholders are under no obligation to sell all
or any portion of such shares nor are the selling stockholders obligated to
sell any shares immediately upon effectiveness of this prospectus. All information with respect to share
ownership has been furnished by the selling stockholders. Shares are deemed beneficially owned by a
person if that person, directly or indirectly, has sole or shared power to vote
or to direct the voting of those shares or sole or shared power to dispose or
direct the disposition of those shares. Except as otherwise indicated, we
believe that each of the beneficial owners of our capital stock listed below,
based on information provided by these owners, has sole dispositive and voting
power with respect to its shares, subject to community property laws where
applicable. Shares not outstanding but
deemed beneficially owned by virtue of the right of a person or member of a
group to acquire them within 60 days are treated as outstanding only when
determining the amount and percent owned by that person or group.
|
|
Shares Beneficially
Owned Prior to the Offering
|
|
|
|
Shares Beneficially
Owned After
Completion of
the Offering
|
|
Selling Stockholder
|
|
Shares
Subject to
Options and
Warrants
|
|
Total Shares
Beneficially
Owned
|
|
Percentage
|
|
Number of
Shares
Being
Offered (1)
|
|
Number
|
|
Percentage
|
|
RBC Dain Rauscher FBO James B. Druck IRA
|
|
27,200
|
|
95,200
|
|
*
|
|
95,200
|
|
0
|
|
|
|
Jeffrey S. Halpern (2)
|
|
377,280
|
|
2,027,980
|
|
7.3
|
%
|
145,480
|
|
1,882,500
|
|
6.8
|
%
|
Gus M. Chafoulias
|
|
310,228
|
|
583,186
|
|
2.1
|
%
|
404,547
|
|
178,639
|
|
*
|
|
David H. Abramson
|
|
143,250
|
|
198,250
|
|
*
|
|
42,000
|
|
156,250
|
|
*
|
|
Roger D. Rubinger
|
|
70,000
|
|
185,570
|
|
*
|
|
120,000
|
|
65,570
|
|
*
|
|
The Howard N. Short Living Trust (3)
|
|
68,000
|
|
338,430
|
|
1.2
|
%
|
238,000
|
|
100,430
|
|
*
|
|
F&B Properties (4)
|
|
54,546
|
|
213,698
|
|
*
|
|
190,910
|
|
22,788
|
|
*
|
|
Pierce Diversified Strategy Master Fund LLC, Ena (5)
|
|
54,546
|
|
190,910
|
|
*
|
|
190,910
|
|
0
|
|
|
|
David J. Moore
|
|
18,182
|
|
63,637
|
|
*
|
|
63,637
|
|
0
|
|
|
|
Praetorian Offshore Ltd. (6)
|
|
218,182
|
|
900,537
|
|
3.3
|
%
|
763,637
|
|
136,900
|
|
*
|
|
Fairfield Investment Group LLC (7)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Paragon Capital LP (8)
|
|
291,200
|
|
1,019,200
|
|
3.7
|
%
|
1,019,200
|
|
0
|
|
|
|
Enable Opportunity Partners LP (9)
|
|
54,546
|
|
190,910
|
|
*
|
|
190,910
|
|
0
|
|
|
|
Fort Mason Master LP (10)
|
|
145,455
|
|
145,455
|
|
*
|
|
145,455
|
|
0
|
|
|
|
Peter V. Mancuso
|
|
80,000
|
|
280,000
|
|
1.0
|
%
|
280,000
|
|
0
|
|
|
|
Diamond Opportunity Fund, LLC (11)
|
|
154,546
|
|
540,910
|
|
2.0
|
%
|
540,910
|
|
0
|
|
|
|
AS Capital Partners, LLC (12)
|
|
44,146
|
|
154,511
|
|
*
|
|
154,511
|
|
0
|
|
|
|
Walter W. Pollack Jr.
|
|
160,000
|
|
560,000
|
|
2.0
|
%
|
560,000
|
|
0
|
|
|
|
Cranshire Capital, L.P. (13)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Stuart Rosen 401-K
|
|
80,000
|
|
280,000
|
|
1.0
|
%
|
280,000
|
|
0
|
|
|
|
Sidney Kaplan and Joy Kaplan, Trustees of the Sidney
Kaplan Revocable Trust U/A/D 10-11-93 (14)
|
|
20,000
|
|
95,000
|
|
*
|
|
70,000
|
|
25,000
|
|
*
|
|
David B. Rosenblatt
|
|
18,182
|
|
90,972
|
|
*
|
|
63,637
|
|
27,335
|
|
*
|
|
BFL General Partnership (15)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Marissa F. Lasky
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Michael G. Hofkin (16)
|
|
20,000
|
|
238,918
|
|
*
|
|
70,000
|
|
168,918
|
|
*
|
|
Richfield Hotel Associates Limited Partnership (17)
|
|
152,728
|
|
534,547
|
|
2.0
|
%
|
534,547
|
|
0
|
|
|
|
Lawrence A. Laukka
|
|
40,000
|
|
291,000
|
|
1.1
|
%
|
140,000
|
|
151,000
|
|
*
|
|
Howard Liszt
|
|
10,910
|
|
106,540
|
|
*
|
|
38,183
|
|
68,357
|
|
*
|
|
Whalehaven Capital Fund Limited (18)
|
|
218,182
|
|
763,637
|
|
2.8
|
%
|
763,637
|
|
0
|
|
|
|
S. Jay and Kathryn Ferrari
|
|
18,182
|
|
63,637
|
|
*
|
|
63,637
|
|
0
|
|
|
|
Daniel Ryweck
|
|
11,622
|
|
70,678
|
|
*
|
|
40,678
|
|
30,000
|
|
*
|
|
James M. Lewis
|
|
40,000
|
|
165,167
|
|
*
|
|
140,000
|
|
25,167
|
|
*
|
|
10
|
|
Shares Beneficially
Owned Prior to the Offering
|
|
|
|
Shares Beneficially
Owned After
Completion of
the Offering
|
|
Selling Stockholder
|
|
Shares
Subject to
Options and
Warrants
|
|
Total Shares
Beneficially
Owned
|
|
Percentage
|
|
Number of
Shares
Being
Offered (1)
|
|
Number
|
|
Percentage
|
|
John S. Crouch
|
|
50,000
|
|
304,000
|
|
1.1
|
%
|
175,000
|
|
129,000
|
|
*
|
|
Norman H. Winer (19)
|
|
181,819
|
|
636,365
|
|
2.3
|
%
|
636,365
|
|
0
|
|
|
|
Marvin C. Ingber
|
|
23,637
|
|
124,395
|
|
*
|
|
82,728
|
|
41,667
|
|
*
|
|
Maricopa Equity Management Corp.
|
|
40,000
|
|
140,000
|
|
*
|
|
140,000
|
|
0
|
|
|
|
John H. Schwieters
|
|
40,000
|
|
140,000
|
|
*
|
|
140,000
|
|
0
|
|
|
|
Gemini Master Fund, Ltd. (20)
|
|
109,092
|
|
381,820
|
|
1.4
|
%
|
381,820
|
|
0
|
|
|
|
RHP Master Fund, Ltd. (21)
|
|
109,092
|
|
381,820
|
|
1.4
|
%
|
381,820
|
|
0
|
|
|
|
David McLukie (22)
|
|
6,400
|
|
22,400
|
|
*
|
|
22,400
|
|
0
|
|
|
|
Midtown Partners & Co., LLC (22)
|
|
70,725
|
|
143,782
|
|
*
|
|
143,782
|
|
0
|
|
|
|
Bruce Jordan (22)
|
|
23,575
|
|
47,928
|
|
*
|
|
47,928
|
|
0
|
|
|
|
Richard Henri Kreger (22)
|
|
235,748
|
|
479,273
|
|
1.7
|
%
|
479,273
|
|
0
|
|
|
|
Ariel Imas (22)
|
|
37,722
|
|
76,688
|
|
*
|
|
76,688
|
|
0
|
|
|
|
Braden Anthony Ferrari (22)
|
|
28,292
|
|
57,517
|
|
*
|
|
57,517
|
|
0
|
|
|
|
RHK Midtown Partners LLC (22)
|
|
75,439
|
|
153,367
|
|
*
|
|
153,367
|
|
0
|
|
|
|
Corporate Capital Management LLC (23)
|
|
3,786
|
|
13,250
|
|
*
|
|
13,250
|
|
0
|
|
|
|
Richard M. Berc (24)
|
|
100,000
|
|
132,560
|
|
*
|
|
100,000
|
|
32,560
|
|
*
|
|
Norman H. Winer Irrevocable Generation Skipping
Trust U/A dated August 28, 2006
|
|
200,000
|
|
311,226
|
|
1.1
|
%
|
200,000
|
|
111,226
|
|
*
|
|
James M. Gordon
|
|
150,000
|
|
701,364
|
|
2.6
|
%
|
150,000
|
|
551,364
|
|
2.0
|
%
|
Thomas LaSalle (24)
|
|
125,000
|
|
283,625
|
|
1.0
|
%
|
125,000
|
|
158,625
|
|
*
|
|
Bruce G. Nimmer (25)
|
|
125,000
|
|
175,566
|
|
*
|
|
125,000
|
|
50,566
|
|
*
|
|
Gene Rerat
|
|
50,000
|
|
50,000
|
|
*
|
|
50,000
|
|
0
|
|
|
|
Howard N. Short (26)
|
|
150,000
|
|
150,000
|
|
*
|
|
150,000
|
|
0
|
|
|
|
James B. Druck (27)
|
|
350,000
|
|
1,961,500
|
|
7.1
|
%
|
50,000
|
|
1,911,500
|
|
6.9
|
%
|
Thomas E. Fox (28)
|
|
350,000
|
|
1,912,500
|
|
6.9
|
%
|
50,000
|
|
1,862,500
|
|
6.8
|
%
|
*
Less than one percent (1%)
(1)
Includes shares
of outstanding common stock and shares of common stock issuable upon the
exercise of warrants.
(2)
Includes 40,000 shares held
by Mr. Halperns wife.
(3)
Howard N. Short
as trustee of the Howard N. Short Living Trust has voting and investment power
over the securities beneficially owned by the Howard N. Short Living Trust. Does not include a warrant to purchase
150,000 shares held by Mr. Short directly.
(4)
Thomas E. Fox is
the 50% general partner of F&B Properties.
Does not include shares, warrants and options held directly by Mr. Fox.
(5)
Mitch Levine, as
managing partner of Pierce Diversified Strategy Master Fund LLC, Ena, has
voting and investment control over the shares beneficially owned by Pierce
Diversified Strategy Master Fund LLC, Ena.
Although Pierce Diversified Strategy Master Fund LLC, Ena is an
affiliate of a registered broker-dealer, Pierce Diversified Strategy Master
Fund LLC, Ena has represented to us that it has purchased its shares being
offered in this offering in the ordinary course of business and at the time of
such purchase, had no agreements or understandings to distribute such
securities.
(6)
Praetorian
Capital Management, LLC is the investment manager or advisor of Praetorian
Offshore Ltd. and consequently has voting control and investment discretion
over securities owned by Praetorian Offshore Ltd. Harris B. Kupperman is the sole member and
manager of Praetorian Capital Management LLC.
(7)
Jeffrey Benton,
a managing director of Fairfield Investment Group LLC, has voting and
investment power over the securities beneficially owned by Fairfield Investment
Group LLC.
11
(8)
Alan P.
Donenfeld, the managing member of the general partner of Paragon Capital LP,
has voting and investment power over the securities beneficially owned by
Paragon Capital LP. Although Paragon
Capital LP is an affiliate of a registered broker-dealer, Paragon Capital LP
has represented to us that it has purchased its shares being offered in this
offering in the ordinary course of business and at the time of such purchase,
had no agreements or understandings to distribute such securities.
(9)
Mitch Levine,
the managing partner of Enable Opportunity Partners LP, has voting and
investment power over the securities beneficially owned by Enable Opportunity
Partners LP. Although Enable Opportunity
Partners LP is an affiliate of a registered broker-dealer, Enable Opportunity
Partners LP has represented to us that it has purchased its shares being
offered in this offering in the ordinary course of business and at the time of
such purchase, had no agreements or understandings to distribute such
securities.
(10)
Intentionally Omitted
(11)
David Hokin, Rob
Rubin and Richard Marks, in their respective capacity as manager and managing
Directors of Diamond Opportunity Fund, LLC, have shared voting and investment
control over the shares held by Diamond Opportunity Fund, LLC. Messrs. Hokin, Rubin and Marks disclaim
beneficial ownership of such securities.
(12)
Andrew Smukler,
a managing member of AS Capital Partners, LLC, has voting and investment power
over the securities beneficially owned by AS Capital Partners, LLC.
(13)
Mitchell P.
Kopin, President of Downsview Capital, Inc., the General Partner of
Cranshire Capital, L.P., has sole voting and investment power over the
securities beneficially owned by Cranshire Capital, L.P.
(14)
Sidney Kaplan,
as trustee of the Sidney Kaplan Revocable Trust U/A/D October 11, 1993,
has voting and investment power over the securities beneficially owned by the
Sidney Kaplan Revocable Trust U/A/D October 11, 1993. Does not include 16,667 shares held by Sidney
Kaplan directly or 95,570 shares held by SPS Investments, a family partnership.
(15)
Thomas E. Fox,
Richard M. Berc and Thomas W. LaSalle are general partners of BFL General
Partnership. Does not include shares,
warrants or options directly held by each of Messrs. Fox, Berc and
LaSalle.
(16)
Includes 35,285
shares held by the Michael G. Hofkin Trust FBO of Michael G. Hofkin of which Mr. Hofkin
is the trustee and 35,285 shares held by the Susan Salomon Trust FBO of Susan
Salomon of which Mr. Hofkin is the trustee.
(17)
Thomas W.
LaSalle, Arthur J. Petrie and Bruce G. Nimmer are partners of Richfield Hotel
Associates Limited Partnership and have shared voting and investment power over
the securities beneficially owned by Richfield Hotel Associates Limited
Partnership. Does not include shares,
warrants or options directly held by each of Messrs. LaSalle, Petrie and
Nimmer.
(18)
Michael
Finkelstein, an investment manager and majority shareholder of Whalehaven
Capital Fund Limited, has voting and investment power over the securities
beneficially owned by Whalehaven Capital Fund Limited.
(19)
Although Mr. Winer
is an affiliate of a registered broker-dealer, Mr. Winer has represented
to us that he has purchased his shares being offered in this offering in the
ordinary course of business and at the time of such purchase, had no agreements
or understandings to distribute such securities.
(20)
Gemini
Strategies, LLC is the investment manager of Gemini Master Fund, Ltd., and
Steven Winters is the sole managing member of Gemini Strategies, LLC. Each of Gemini Strategies, LLC and Steven
Winters expressly disclais any equitable or beneficial ownership of such
securities.
(21)
RHP Master Fund,
Ltd. is a party to an investment management agreement with Rock Hill Investment
Management, L.P., a limited partnership of which the general partner is RHP
General Partner, LLC. Pursuant to such
agreement, Rock Hill Investment Management directs the voting and disposition
of shares owned by RHP Master Fund. Messrs. Wayne
Bloch and Peter Lockhart own all of the interest in RHP General Partner. The aforementioned entities and individuals
disclaim beneficial ownership of the securities held by RHP Master Fund, Ltd.
(22)
Midtown Partners &
Co., LLC is a registered broker-dealer who received its shares being offered
under this prospectus as compensation for services rendered to Southwest. Midtown acted as agent in connection with
Southwests January and February 2007 private placements. In connection with the January and February 2007
private placements, Midtown received an aggregate of 503,054 shares and
warrants to purchase an aggregate of 477,901 shares of common stock. Midtown assigned some of its shares and
warrant shares to RHK Midtown Partners LLC and the following employees of
Midtown Partners & Co., LLC:
David McLukie, Bruce Jordan, Richard Henri Kreger, Ariel Imas and Braden
Anthony Ferrari. Bruce Jordan has voting
and investment power over the shares beneficially owned by Midtown Partners &
Co., LLC.
12
(23)
Mark Savage, a
managing member of Corporate Capital Management LLC, has voting and investment
power over the securities beneficially owned by Corporate Capital Management
LLC. Corporate Capital Management acted
as an advisor in connection with Southwests February 2007 private
placement. In connection with the February 2007
private placement, Corporate Capital Management received 13,520 shares and a
warrant to purchase an aggregate of 5,408 shares of common stock. Corporate Capital Management assigned some of
its shares and warrant shares to Daniel Ryweck, an employee of Corporate
Capital Management LLC.
(24)
Does not include
181,819 shares and a warrant to purchase 72,728 shares of common stock held by
BFL General Partnership. Mr. Berc, Mr. Fox
and Mr. LaSalle are general partners of BFL General Partnership. See Footnote (15).
(25)
Does not include
381,819 shares and a warrant to purchase 152,728 shares of common stock held by
Richfield Hotel Associates Limited Partnership.
See Footnote (17).
(26)
Does not include
270,430 shares and a warrant to purchase 68,000 shares of common stock held by
The Howard N. Short Living Trust. See
Footnote (3).
(27)
Does not include
68,000 shares and a warrant to purchase 27,200 shares of common stock held by
RBC Dain Rauscher FBO James B. Druck IRA as set forth in the table above.
(28)
Does note
include: (i) 159,152 shares held by
F&B Properties, a partnership in which Mr. Fox is a 50% general
partner; (ii) 181,819 shares held by BFL General Partnership, a
partnership in which Mr. Fox is a general partner, (iii) 381,819
shares held by Richfield Hotel Associates Limited Partnership, in which Mr. Fox
is general partner of a partnership that is a limited partner; (iv) 54,546
shares issuable upon exercise of a warrant held by F&B Properties; (v) 72,728
shares issuable upon exercise of a warrant held by BFL General Partnership; and
(vi) 152,728 shares issuable upon exercise of a warrant held by Richfield
Hotel Associates Limited Partnership.
See Footnotes (4), (15) and (17).
PLAN OF DISTRIBUTION
Each
selling stockholder of the common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on the OTC Bulletin Board, or any other stock exchange,
market or trading facility on which the shares are traded, or in private
transactions. These sales may be at
fixed or negotiated prices. A selling stockholder
may use any one or more of the following methods when selling shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
·
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share;
·
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
·
a
combination of any such methods of sale; or
·
any
other method permitted under applicable law.
13
The selling stockholders may also sell shares under Rule 144 under
the Securities Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers engaged by the selling stockholders may arrange for
other brokers-dealers to participate in sales.
Broker-dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the purchaser of
shares, from the purchaser) in amounts to be negotiated, but, except as stated
in a supplement to this Prospectus, in the case of an agency transaction not in
excess of a customary brokerage commission in compliance with NASDR Rule 2440;
and in the case of a principal transaction a markup or markdown in compliance
with NASDR IM-2440.
In connection with the sale of the common stock or interests in the
common stock, the selling stockholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the common stock in the course of hedging the positions they
assume. The selling stockholders may
also sell shares of the common stock short and deliver these securities to
close out their short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities. The selling stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell under this prospectus (as supplemented or amended to
reflect such transaction).
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be underwriters within the
meaning of the Securities Act of 1933, as amended, in connection with such
sales. In that event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each
selling stockholder has informed us that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the common stock. In no event
will any broker-dealer receive fees, commissions and markups that, in the
aggregate, would exceed eight percent (8%).
We are required to pay certain fees and expenses that we incur incident
to the registration of the shares. We
have agreed to indemnify the selling stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
Because Selling Stockholders may be deemed to be underwriters within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act, including Rule 172
promulgated under the Securities Act. In
addition, any securities covered by this prospectus that qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under Rule 144
rather than under this prospectus. There
is no underwriter or coordinating broker acting in connection with the proposed
sale of the resale shares by the selling stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the
date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule 144(k) under
the Securities Act or any other rule of similar effect or (ii) all of
the shares have been sold under this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain
states, the resale shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Securities and
Exchange Act of 1934, any person engaged in the distribution of the resale
shares may not simultaneously engage in market making activities with respect
to the common stock for the applicable restricted period, as defined in
Regulation M, before the commencement of the distribution. In addition, the selling stockholders will be
subject to applicable provisions of the Securities and Exchange Act of 1934 and
the rules and regulations promulgated under the Securities and Exchange
Act of 1934, including Regulation M, which may limit the timing of purchases
and sales of shares of the common stock by the selling stockholders or any
other person. We will make copies of
this prospectus available to the selling
14
stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or before the time of
the sale (including by compliance with Rule 172 promulgated under the
Securities Act).
LEGAL PROCEEDINGS
Alleged
Breach of Gaming Management Agreement
On July 24, 2007,
the Governor of the Cheyenne and Arapaho Tribes of Oklahoma delivered notice to
Southwest that on July 13, 2007 he had initiated an arbitration proceeding
against us for alleged breach of the Third Amended and Restated Gaming Management
Agreement under which we then managed two casinos for the Tribes. On November 2, 2007, we filed a
counterclaim in this proceeding alleging a breach of the Gaming Management
Agreement by the tribal Governor. The three-member arbitration panel for this proceeding
was appointed in February 2008. A
scheduling conference with the arbitration panel occurred on March 11,
2008. Preliminary pleading documents are
to be submitted to the arbiters during April 2008.
In the arbitration
demand, the Governor alleged that Southwest breached the management agreement
by interfering with or attempting to influence internal affairs or governmental
decisions of the Tribes in connection with our efforts to extend our gaming
management relationship with the Tribes, which terminated on August 17,
2007. The Governor sought termination of the agreement and $10 million in
damages. We do not believe we improperly
interfered with or attempted to influence internal governmental decisions of
the Tribes and we intend to vigorously defend ourself in this arbitration
proceeding. Under its Gaming Management Agreement with the Tribes, we were
permitted to oppose, publicly or privately, any action by the Tribes that we
believe were not in the best interest of the Tribal gaming operations. We
believe that all of the actions we have taken on behalf of the gaming
operations we managed or as part of our efforts to extend our gaming management
relationship with the Tribes are consistent with that provision.
In our counterclaim, we
allege that the Governor of the Tribes breached the Management Agreement by
refusing to negotiate in good faith for an extension and expansion of the
gaming management relationship between Southwest and the Tribes. We assert that the Management Agreement
required the Tribes to negotiate this extension and expansion after Southwest
led the Tribes successful efforts to negotiate and enter into a compact for
expanded gaming with the State of Oklahoma in April 2005.
Theft and Distribution of
Surveillance Video from Lucky Star Clinton casino
On August 24, 2007, Southwest Casino and Hotel Corp.,
as exclusive manager of the Lucky Star casinos of the Cheyenne and Arapaho
Tribes of Oklahoma filed a lawsuit against Doris Thunderbull, Darrell
Flyingman, in his individual capacity, and John Does No. 1 and 2 alleging
theft (conversion) of confidential surveillance video from the Lucky Star
Clinton casino and subsequent copyright infringement and defamation in
connection with the posting of the stolen video on the website www.YouTube.com
and widespread distribution of DVDs containing the video by mail. We
initially sought an emergency temporary restraining order barring further
distribution of the video. That request was denied on August 27, 2007 and
we withdrew our request for restraining order on September 24, 2007.
We continue to pursue claims for conversion, copyright infringement, tortious
interference with contract, defamation, and conspiracy against the defendants.
On January 14, 2008,
Mr. Flyingman, as Governor of the Tribes, filed a declaratory judgment
action in Cheyenne and Arapaho Trial Court asserting that the Tribes, not
Southwest, owned the surveillance footage and the copyright in it. Southwest filed an answer to the complaint
asserting the tribal court did not have jurisdiction and a motion to compel
arbitration of the matter on February 15, 2008. On February 13, 2008, the Federal
District Court issued a stay of the proceedings before the federal cout pending
resolution of the Tribal court proceeding.
Other Litigation
Matters
In addition to the
matters described above, we are involved in other various claims, legal actions
and other complaints arising in the ordinary course of business. In the
opinion of management, any losses that may occur from these matters are
adequately covered by insurance or are provided for in our financial statements
and the
15
ultimate outcome of these
other matters will not have a material effect on our financial position or
results of operations.
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
Our directors and
executive officers, their ages and the offices they held with Southwest Casino
Corporation, as of March 12, 2008, are as follows:
Name
|
|
Age
|
|
Position
|
James B. Druck
|
|
66
|
|
Chief Executive Officer
and Director
|
|
|
|
|
|
David H. Abramson
|
|
66
|
|
Director
|
|
|
|
|
|
Gus A. Chafoulias
|
|
72
|
|
Director
|
|
|
|
|
|
Jim Holmes
|
|
65
|
|
Director
|
|
|
|
|
|
Gregg P. Schatzman
|
|
54
|
|
Director
|
|
|
|
|
|
Thomas E. Fox
|
|
60
|
|
President and Chief
Operating Officer
|
|
|
|
|
|
Jeffrey S. Halpern
|
|
65
|
|
Vice President of
Government Affairs and Secretary
|
|
|
|
|
|
Brian L. Foster
|
|
39
|
|
Vice President of
Native American Operations
|
|
|
|
|
|
Tracie L. Wilson
|
|
41
|
|
Chief Financial Officer
|
James B. Druck
. Mr. Druck joined the Southwest Casino
Corporation Board of Directors and was appointed as our Chief Executive Officer
and Secretary on July 22, 2004 in connection with the closing of the
reorganization in which Southwest Casino and Hotel Corp. became a wholly-owned
subsidiary of Southwest Casino Corporation (formerly Lone Moose
Adventures). Mr. Druck has been a director of Southwest Casino and
Hotel Corp. since its inception. He served as President of Southwest
Casino and Hotel Corp. from October 1992 until June 2004, at which
time he became the Chief Executive Officer of Southwest Casino and Hotel
Corp. From 1967 until April 1993, Mr. Druck was an attorney in
private practice in Minneapolis, Minnesota. His practice focused
primarily in the areas of real estate development and finance.
Thomas E. Fox
. Mr. Fox was elected to the Southwest
Casino Corporation Board of Directors and appointed as our President, Chief
Operating Officer, and Chief Financial Officer on July 22, 2004 in
connection with the closing of the reorganization in which Southwest Casino and
Hotel Corp. became a wholly-owned subsidiary of Southwest Casino
Corporation. Mr. Fox resigned from our Board of Directors on December 7,
2005 in connection with the election of four new independent directors. Mr. Fox
resigned his position as Chief Financial Officer in June 2006 in
connection with the hiring of our new CFO. Mr. Fox has been a
Certified Public Accountant since November 1969. He began his career
with Arthur Andersen & Co. in June 1969, and was promoted to tax
manager in June 1973. In September 1976, Mr. Fox
co-founded the accounting firm of Berc & Fox, Limited. He joined
Southwest Casino and Hotel Corp. as Chief Financial Officer in November 1993
and was appointed to the Board of Directors of Southwest Casino and Hotel Corp.
in January 2000.
Jeffrey S. Halpern
. Mr. Halpern has served as our Vice
President of Government Affairs and Secretary since November 21,
2005. Mr. Halpern was appointed Chairman of the Southwest Casino
Corporation Board of Directors on July 22, 2004 in connection with the
closing of the reorganization in which Southwest Casino and Hotel Corp. became
a wholly-owned subsidiary of Southwest Casino Corporation. He resigned
from his position as Chairman of the Board of Directors on December 7,
2005 in connection with the election of four new independent board
members. Mr. Halpern had been a director of Southwest Casino and
Hotel Corp. since its inception in 1992. He served as Chairman of the
Board and Chief Executive Officer of Southwest Casino and Hotel Corp. from October 1992
until June 2004. Mr. Halpern also serves currently as a
director and Vice President of Government Affairs and
16
Secretary
of Southwest Casino and Hotel Corp. From 1967 until July 1993, Mr. Halpern
was an attorney in private practice in Minneapolis, Minnesota. His practice
focused primarily in the areas of corporate finance and securities.
Brian L. Foster
. Brian Foster is our Vice President of Native
American Operations and managed our Native American gaming operations in
Oklahoma. In addition to these titles, Mr. Foster was the General
Manager of the Lucky Star Casino, an enterprise of the Cheyenne and Arapaho
Tribes of Oklahoma from 1995 to August 17, 2007. Mr. Foster was
also the Chairman of the Oklahoma Indian Gaming Association from 2003 to 2007
and served as that organizations Vice Chairman in 2000 and 2001.
Tracie L. Wilson
. Tracie Wilson joined Southwest on June 7,
2006 as our Chief Financial Officer. Ms. Wilson has also served as
Chief Financial Officer of Southwest Casino and Hotel Corp. since June 7,
2006. Before joining Southwest, Ms. Wilson served as a
consultant to and, most recently, as the Director of Financial Reporting for
Lakes Entertainment, Inc. where she had worked since January 2005.
From December 1999 through December 2004, Ms. Wilson held
positions as Director of Finance and as Vice President of Finance and Treasurer
of Netco Communications Corporation, a global network information technology
company. Before joining Netco Communications, Ms. Wilson served as a
CPA in the public accounting firms of Grant Thornton LLP and Deloitte &
Touche LLP from 1989 to 1999. Ms. Wilson is a Certified Public Accountant
(inactive license holder) and received a Bachelor of Science in Business from
the University of Colorado.
David H. Abramson
. David Abramson joined the Southwest Board of
Directors on December 7, 2005 and was elected to chair its Audit Committee
on January 10, 2006. He is also a member of the Boards Nominating
Committee. Mr. Abramson is the Chairman and CEO of David Abramson &
Associates, LLC, a retained executive search and leadership development firm he
founded in January 2002. Immediately before founding David Abramson &
Associates, he was a Senior Vice President of AXA Financial/Equitable Life
Insurance and the Chairman and CEO of Grant Thornton Advisors, a joint venture
of AXA Financial/Equitable Life Insurance and Grant Thornton, LLP, from January to
December 2001. Before this, Mr. Abramson had an extensive
career at Grant Thornton, certified public accountants, beginning in 1967
during which he was a member of the National Leadership and Senior Management
Team and the Managing Partner of and an audit partner in the Minneapolis
office. Among many board memberships, Mr. Abramson has been the
Chairman of Board of Directors of the Minneapolis Chamber of Commerce,
President and Board member of the Minnesota Society of Certified Public
Accountants, Chairman and board member of the Minnesota Cooperation Office for
Job Creation, and a member of the Governing Council of the American Institute
of CPAs. Mr. Abramson holds a B.S. in Accounting from the Carlson
School of Management and an MBA from the University of Michigan.
Gus A. Chafoulias
. Gus Chafoulias joined to Southwests Board of
Directors on December 7, 2005 and was elected chair of its Nominating
Committee on February 1, 2006. He is also a member of the Boards
Compensation Committee. Mr. Chafoulias is Chairman of the Board of
Chafoulias Management Company, where he has worked since 1987. Mr. Chafoulias
has developed more than 3 million square feet of apartments and commercial
space during more than 40 years in the development business. One of Mr. Chafoulias
liquor stores, which Mr. Chafoulias has owned and operated since 1957, has
been voted as a top ten liquor retailer in the United States. Mr. Chafoulias
is also a United Way Alexis de Tocqueville Society member, Leadership 100 board
member, and Blue Cross Blue Shield Champions of Health award winner. He
has served on numerous boards of directors including the Rochester (MN) Chamber
of Commerce, Diversity Council, U.S. Bank, Medvision, and Comfortex, Inc.
In addition to Southwest, Mr. Chafoulias currently serves on the boards of
Jaguar Communications and Festival Airlines.
Jim Holmes.
Jim Holmes was elected a Director of Southwest on December 7,
2005 and serves on the Boards Audit Committee and Compensation
Committee. Mr. Holmes is a 1965 graduate of West Points U.S.
Military Academy and has a masters degree in law enforcement administration
from Central Missouri State University. Mr. Holmes has significant
experience on both the regulatory and business sides of the gaming
industry. Since 1991, Mr. Holmes has been President of Jim Holmes
and Company and, beginning in 1987, has acted as a national and international
gaming consultant for lottery operations, bingo projects, casinos and Indian
gaming, specializing in start-up operations and risk analysis. In addition,
from March 2005 to October 2005 Mr. Holmes was an Executive Vice
President for Cadillac Jack, Inc., a slot machine manufacturer, and from February 2001
to January 2004, Mr. Holmes was president of API Technologies,
LLC. From January 2000 to January 2001, Mr. Holmes was
Executive Vice President of Sierra Design Group. In 1985, Mr. Holmes
was appointed by then Governor Ashcroft
17
as the
first Executive Director of the Missouri Lottery. Before working to establish
the Missouri Lottery, he spent 15 years with the FBI in Missouri as both a
Special Agent and Supervisor.
Gregg P. Schatzman
. Gregg Schatzman joined Southwests Board of
Directors on December 7, 2005. He also serves on the Boards Audit
Committee and Compensation Committee, which he chairs. Mr. Schatzman
has in-depth experience as both a regulator and an operator in the gaming
industry. Mr. Schatzman has been the Managing Director of Schatzman &
Associates, LLC, which provides consulting services to gaming companies and law
firms regarding casino operations and regulatory issues, since June 2003.
From March 2003 to June 2003, he was a partner and owner of Castaways
Hotel and Casino in Las Vegas, Nevada and owned and worked as Executive Vice
President of VSS Enterprises, LLC, from March 1999 to May 2003.
Mr. Schatzmans 13 years in casino operations included work as an
Executive Vice President of Primadonna Resorts, Inc.; a Vice President and
General Manager for Ameristar Casinos and Vice President and General Manager
for Gem Gaming and worked with Trump casinos. Before joining the business
side of the gaming industry, Mr. Schatzman spent 10 years as a gaming
regulator with the Nevada Gaming Control Board, rising from Financial
Investigator to Chief of Investigations. As Chief of Investigations, Mr. Schatzman
supervised the work of the 80 agents in the Investigations and Corporate
Securities Divisions of the Gaming Control Board.
Each
of Mr. Abramson, Mr. Chafoulias, Mr. Holmes and Mr. Schatzman
has been determined to be independent under the rules of the Nasdaq
stock market.
Family Relationships
No
family relationships exist among our directors and executive officers.
Legal Proceedings
To the
knowledge of our management, during the past five years, no present or former
director, person nominated to become a director, executive officer, promoter or
control person of our company, except as disclosed below:
·
was
a general partner or executive officer of any business by or against which any bankruptcy
petition was filed, whether at the time of such filing or two years prior the
filing;
·
was
convicted in a criminal proceeding or named the subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses);
·
was
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities.
·
was
found by a court of competent jurisdiction in a civil action, or by the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated federal or state securities or commodities law, and the
judgment has not been subsequently reversed, suspended, or vacated.
Prior Bankruptcy Proceeding of Subsidiary
James
B. Druck, Jeffrey S. Halpern and Thomas E. Fox are Managers of Gold Rush I,
LLC, a Colorado limited liability company and a wholly-owned subsidiary of
Southwest Casino and Hotel Corp. In August 2001,
Cripple Creek Development Corp., a Colorado corporation, Blue Building
Development, Inc., a Wyoming corporation, Mark Brockley, an individual,
and Annesse Brockley, an individual, initiated a lawsuit against Gold Rush I,
LLC, and Southwest Casino and Hotel Corp. in District Court, Teller County,
Colorado (01-CV-156). The plaintiff
alleged that the defendants failed to pay certain obligations to the plaintiffs
under the terms of their lease agreement and breach of contract. The lease included a provision that capped
the maximum monthly amount required to be paid to Mr. Brockleys
creditors. In the early years of the
operation, Mr. Brockleys obligations to creditors far exceeded this cap
and Southwest paid these obligations as they came due. Under the lease, Southwest set off against
current rent the amount of the excess payments.
In the lawsuit, Mr. Brockley sought to evict Gold Rush I from the
18
premises
for failing to pay amounts claimed to be owed under the Lease. Gold Rush I responded by denying any failure
to pay.
Before
an evidentiary hearing in this lawsuit was completed, Gold Rush I filed a
voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code in the Bankruptcy Court for the District of Minnesota (Case No. 01-33755)
to ensure that we did not lose possession of the premises while the underlying
claims were litigated. On October 15,
2001, the Colorado District Court entered an Order in which it found (a) that
Gold Rush I was not in default under the lease, (b) that Gold Rush I had
made payments in excess of the monthly caps provided in the lease (which
overpayments the court subsequently quantified at $554,362.09), and (c) that
Gold Rush I was entitled to offset the overpayments against rent and other
payments due under the terms of the lease.
Mr. Brockley appealed the Colorado District Courts Order to the
Colorado Court of Appeals, which dismissed the appeal on May 21, 2002. After successfully defending the lawsuit
brought by its landlord, Gold Rush I emerged from bankruptcy on January 10,
2003,when the Bankruptcy Court confirmed its reorganization plan, which
provided for full payment to all creditors, with interest.
Colorado
Regulatory Proceeding
In June 2004,
Southwest Casino and Hotel Corp. paid a $50,000 fine to the Colorado Division
of Gaming for failure to properly maintain and review statistical data on slot
machine performance after receiving a warning letter regarding this deficiency
and failing to comply with its agreement to correct the deficiency. Southwest Casino and Hotel Corp. paid the
full amount of the fine. As part of
these proceedings, James Druck, in his capacity as manager of the facility in
question, without any admission of guilt, agreed to take the necessary steps to
ensure Southwest Casino and Hotel Corp.s compliance in this matter and,
further, agreed to pay $5,000 to the Limited Gaming Fund to reimburse expenses
incurred by Colorado in this investigation.
19
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table states the information known to us
with respect to the beneficial ownership of our common stock as of March 20,
2008 for (1) each person known by us to beneficially own more than 5% of
our common stock, (2) each of our executive officers, (3) each of our
directors, and (4) all of our executive officers and directors as a group.
Shares are deemed beneficially owned by a person if
that person, directly or indirectly, has sole or shared power to vote or to
direct the voting of those shares or sole or shared power to dispose or direct
the disposition of those shares. Except
as otherwise indicated, we believe that each of the beneficial owners of our
capital stock listed below, based on information provided by these owners, has
sole dispositive and voting power with respect to its shares, subject to
community property laws where applicable, except as descried in the notes
below. Shares not outstanding but deemed
beneficially owned by virtue of the right of a person or member of a group to
acquire them within 60 days are treated as outstanding only when determining
the amount and percent owned by that person or group.
|
|
Common Stock
|
|
Name and Address
|
|
Number
|
|
Percent
|
|
James B. Druck
(1)
|
|
2,259,825
|
(2)
|
8.0
|
%
|
David H.
Abramson (3)
|
|
273,250
|
(4)
|
1.0
|
%
|
Gus A.
Chafoulias (5)
|
|
962,186
|
(6)
|
3.4
|
%
|
Jim Holmes (1)
|
|
137,500
|
(7)
|
*
|
|
Gregg P.
Schatzman (1)
|
|
137,500
|
(7)
|
*
|
|
Thomas E. Fox
(1)
|
|
2,683,870
|
(8)
|
9.5
|
%
|
Jeffrey S.
Halpern (1)
|
|
2,331,105
|
(9)
|
8.3
|
%
|
Brian L. Foster
(1)
|
|
250,000
|
(10)
|
*
|
|
Tracie L. Wilson
(1)
|
|
91,929
|
(11)
|
*
|
|
All executive
officers and directors as a group (9 persons)
|
|
9,127,165
|
(12)
|
29.4
|
%
|
* Less than 1 percent
(1)
|
Address:
2001 Killebrew Drive, Suite 350, Minneapolis, MN 55425
|
(2)
|
|
Includes
(i) 100,000 shares held by Mr. Drucks wife, (ii) 353,125
shares of common stock issuable upon exercise of options, and
(iii) 327,200 shares issuable upon exercise of warrants.
|
(3)
|
|
Address:
Parkdale Plaza, 1660 S. Highway 100, Suite 500, Minneapolis, MN 55416
|
(4)
|
|
Includes 206,250 shares issuable upon exercise of
stock options and 12,000 shares issuable upon exercise of a warrant.
|
(5)
|
|
Address:
121 23rd Avenue SW, Rochester, MN 55902.
|
(6)
|
|
Includes
137,500 shares issuable upon exercise of a stock option and 522,728 shares
issuable upon exercise of warrants.
|
(7)
|
|
Consists
of 137,500 shares issuable upon exercise of a stock option.
|
(8)
|
|
Includes:
(i) 159,152 shares held by F&B Properties, a partnership in which
Mr. Fox is a 50% general partner; (ii) 181,819 shares held by BFL
General Partnership, a partnership in which Mr. Fox is a general
partner; (iii) 353,125 shares issuable upon exercise of a stock option;
(iv) 300,000 shares issuable upon exercise of warrants; (v) 54,546
shares issuable upon exercise of a warrant held by F&B Properties;
(vii) 72,728 shares issuable upon exercise of a warrant held by BFL
General Partnership. Does not include 381,819 shares and warrants to purchase
152,728 held by Richfield Hotel Associates Limited Partnership (RHALP).
Mr. Fox is a general partner of a partnership that is a limited partner
of RHALP and does not have or share investment control over RHALP and
disclaims any beneficial ownership interest in these shares.
|
(9)
|
|
Includes:
(i) 40,000 shares held by Mr. Halperns wife; (ii) 353,125
shares issuable upon exercise of a stock option; and (iii) 327,280
shares issuable upon exercise of warrants.
|
(10)
|
|
Consists
of 250,000 shares issuable upon exercise of a stock option.
|
(11)
|
|
Consists
of 91,929 shares issuable upon exercise of a stock option.
|
(12)
|
|
Includes:
(i) an aggregate of 2,020,054 shares issuable upon exercise of options;
(ii) 1,616,482 shares issuable upon exercise of warrants;
(iii) 340,971 shares held by partnerships in which an executive officer
is a general partner; and (iv) 140,000 shares held by the spouse of an
executive officer.
|
20
DESCRIPTION OF SECURITIES
General
Our authorized capital
stock consists of 75,000,000 shares of common stock, par value of $0.001 per
share and 30,000,000 shares of preferred stock at a par value of $0.001 per
share. There are no provisions in our charter or by-laws that would delay,
defer or prevent a change in our control.
Common
Stock
As of March 20,
2008, 27,460,953 shares of common stock are issued and outstanding and held by
approximately 344 shareholders of record. Holders of our common stock are
entitled to one vote for each share on all matters submitted to a stockholder
vote.
Holders of our common
stock do not have cumulative voting rights.
Therefore, holders of a majority of the shares of common stock voting
for the election of directors can elect all of the directors. Holders of our common
stock representing a majority of the voting power of our capital stock issued
and outstanding and entitled to vote, represented in person or by proxy, are
necessary to constitute a quorum at any meeting of our stockholders. A vote by
the holders of a majority of our outstanding shares is required to effectuate
certain fundamental corporate changes such as liquidation, merger or an
amendment to our Articles of Incorporation.
Although there are no
provisions in our charter or by-laws that may delay, defer or prevent a change
in control, we are authorized, without shareholder approval, to issue shares of
preferred stock that may contain rights or restrictions that could have this
effect.
Holders of common stock
are entitled to share in all dividends that the board of directors, in its
discretion, declares from legally available funds. In the event of liquidation,
dissolution or winding up, each outstanding share entitles its holder to
participate pro rata in all assets that remain after payment of liabilities and
after providing for each class of stock, if any, having preference over the
common stock. Holders of our common stock have no pre-emptive rights, no
conversion rights. We have the right to
redeem any outstanding share of our common or preferred stock if our Board of
Directors determines that the continued ownership of those shares may cause any
regulatory authority to deny or refuse to approve any gaming license or gaming
contract.
Preferred
Stock
Our articles of
incorporation also provide that we are authorized to issue up to 30,000,000
shares of preferred stock with a par value of $0.001 per share. As of the date
of this prospectus, there are no shares of preferred stock issued and
outstanding. Our Board of Directors has the authority, without further action
by the shareholders, to issue from time to time the preferred stock in one or
more series for such consideration and with such relative rights, privileges,
preferences and restrictions that the Board may determine. The preferences,
powers, rights and restrictions of different series of preferred stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions and
purchase funds and other matters. The issuance of preferred stock could adversely
affect the voting power or other rights of the holders of common stock.
Dividends
Since inception we have
not paid any dividends on our common stock. We currently do not anticipate
paying any cash dividends in the foreseeable future on our common stock.
Although we intend to retain our earnings, if any, to finance our business and
fund growth opportunities, our Board of Directors will have the discretion to
declare and pay dividends in the future. Payment of dividends in the future
will depend upon our earnings, capital requirements, and other factors, which
our Board of Directors may deem relevant.
21
Options and Warrants
As of December 31,
2007, we had outstanding options to purchase an aggregate of 2,500,000 shares
of common stock at exercise prices ranging between $0.12 and $1.00 per share. Subsequent to December 31, 2007, additional
options were granted, see note 26 to our 2007 consolidated financial statements
included with this prospectus. All
outstanding options provide for antidilution adjustments in the event of
certain mergers, consolidations, reorganizations, recapitalizations, stock
dividends, stock splits or other similar changes in our corporate structure and
shares of our capital stock. As of December 31,
2007, we had outstanding warrants to purchase an aggregate of 5,946,102 shares
of common stock at exercise prices ranging between $0.12 and $1.00. The warrants provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in our
corporate structure of our company.
Registration Rights
On October 20, 2005,
Southwest Casino and Hotel Corp., the wholly-owned operating subsidiary of
Southwest Casino Corporation, entered into a Revolving Credit and Term Loan
Agreement with Crown Bank of Minneapolis, Minnesota. Under the terms of
the Loan Agreement, Crown Bank extended to Southwest Casino & Hotel a
new $2.5 million term loan and assumed Southwest Casino & Hotels
$450,000 revolving line of credit with an outstanding balance of approximately
$446,000 from Associated Bank Minnesota, N.A. The $2.5 million term loan
is secured by the guaranties of 12 Southwest Casino Corporation shareholders.
In consideration for these shareholder guaranties, Southwest Casino Corporation
issued five-year fully exercisable warrants to purchase an aggregate of
1,250,000 shares of its common stock at an exercise price of $0.50 per share to
the non-affiliated shareholder guarantors and $0.58 per share to Mr. Druck,
Mr. Fox and Mr. Halpern. Each
guarantor received a warrant to purchase one share of Southwest Casino
Corporation common stock for each $2.00 of term loan guaranteed by that
shareholder. Warrant holders received the right to have the shares of our
common stock purchasable upon exercise of their warrants included in any
registration statement that we may file in the future under the terms of a
registration rights agreement.
On January 24, 2007,
we entered into a Securities Purchase Agreement with certain institutional and
other accredited investors, as defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended, pursuant to which we
sold in a private placement an aggregate of 4,792,391 shares of our common
stock and warrants to purchase an aggregate of 1,916,961 shares of our common
stock, at a purchase price of $0.55 per unit. Pursuant to the terms of a
Registration Rights Agreement dated January 24, 2007 with certain
investors, we have agreed to register the resale of the shares sold in the January 2007
private placement, including shares issuable upon exercise of the warrants, on
a registration statement to be filed by us with the Securities and Exchange
Commission. We have agreed to use commercially reasonable efforts to file the
registration statement with the SEC within 30 days after the closing of the
private placement, to cause such registration statement to be declared
effective by the SEC within the earlier of 120 days after the closing (or, in
the event, of a review by the SEC, 150 days after closing) or the 5
th
business day following the date on which we are notified by the SEC that the
SEC will not review the registration statement or that the SEC has no further
comments on the registration statement and to cause such registration statement
to remain effective for the required registration period. We are subject to certain covenants regarding
the ongoing effectiveness of the registration statement. If certain of
its obligations are not met, we have agreed to make pro-rata cash payments as
liquidated damages to each investor.
On February 26,
2007, we had a second closing of our January 2007 private placement in
which we entered into a Securities Purchase Agreement with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, pursuant
to which we sold in a private placement an aggregate of 2,659,342 shares of our
common stock and warrants to purchase an aggregate of 1,063,740 shares of our
common stock, at a purchase price of $0.55 per unit. These investors are entitled to the same
registration rights as the January 2007 investors.
The registration
statement, of which this prospectus is a part, satisfies our obligations to the
groups of shareholders and warrant holders described above. We are required to use good faith
commercially reasonable efforts to cause this registration statement to remain
effective until the earlier of (1) the sale of all the shares of our
common stock covered by this registration statement; or (2) such time as
the selling stockholders named in this registration statement become eligible
to resell the shares our common stock and the shares of our common stock
issuable upon the exercise of the warrants without volume restrictions pursuant
to Rule 144(k) under the Securities Act.
22
On March 7, 2008,
Southwest Casino and Hotel Corp. entered into a series of eight promissory
notes with Crown Bank of Minneapolis, Minnesota. Under the promissory
notes, Crown Bank loaned Southwest Casino & Hotel an aggregate $1.55
million. Each of the eight promissory notes is co-signed by a shareholder
of Southwest Casino Corporation. Each of these co-signers is fully
obligated to Crown Bank and individually liable for the principal amount and
any accrued and unpaid interest and costs outstanding under the co-signed
note. As a condition to entering into the Notes, Crown Bank required each
of James Druck, Chief Executive Officer, Thomas Fox, President and Chief
Operating Officer, and Jeffrey Halpern, Vice President of Government Affairs of
Southwest Casino Corporation to increase their previously existing $150,000
personal guarantees of Southwest Casino & Hotels outstanding $450,000
line of credit to $250,000 and extend those guarantees to cover both the line
of credit and the eight promissory notes through their respective repayment
terms.
In consideration of
co-signing the promissory notes, on March 10, 2008 Southwest Casino
Corporation issued five-year fully exercisable warrants to purchase an
aggregate of 2,300,000 shares of its common stock at an exercise price of $0.39
per share to the shareholder co-signers. Each co-signer received a
warrant to purchase one share of Southwest Casino Corporation common stock for
each $1.00 in principal amount of the promissory note co-signed by that
shareholder. In consideration of the increase in the amount and extension
of the term of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase one share of Southwest Casino Corporation
common stock for each $1.00 of guarantee, or 250,000 shares. The $0.39
per share exercise price of these warrants represented the average closing
market price of one share of Southwest Casino Corporations common stock over
the 5 trading days preceding the closing of the loan. Warrant holders
also received the right to have the shares of Southwest Casino Corporation
common stock purchasable upon exercise of their warrants included in any
registration statement that Southwest Casino Corporation may file under the
terms of a separate Registration Rights Agreement.
Anti-takeover Provisions
Nevada law prohibits
business combinations between Nevada corporations and interested stockholders
for a period of three years after the interested stockholders date of
acquiring shares unless the combination or the purchase of the shares by the
interested stockholder is approved by the Board of Directors.
Applicable Nevada law
also prohibits business combinations between Nevada corporations and interested
stockholders following the expiration of three years after the interested
stockholders date of acquiring shares unless the combination meets the
requirements specified in Section 78.439 for director and stockholder
approvals or Sections 78.441 through 78.444 with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable
Nevada law defines interested stockholders to include persons who, alone or
together with affiliates, beneficially own at least 10% of the outstanding
stock of the corporation. As allowed
under Nevada law, we have opted out of the application of these provisions
under our Articles of Incorporation.
Applicable Nevada law
also denies voting rights to a stockholder who acquires a controlling interest
in a Nevada corporation, unless the voting rights are approved by a majority of
the voting powers of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
Nevada law does not
require a stockholder vote of the surviving corporation in a merger if:
|
·
|
the merger does not
amend the existing articles of incorporation;
|
|
|
|
|
·
|
each outstanding share
of the surviving corporation before the merger is unchanged; and
|
|
|
|
|
·
|
the number of shares to
be issued by the surviving corporation in the merger does not exceed 20% of
the shares outstanding immediately prior to such issuance.
|
The effect of these
provisions may be to make more difficult the accomplishment of a merger or
other takeover or change in control. To
the extent that these provisions have this effect, removal of our incumbent
Board of Directors and management may be rendered more difficult. Further, these provisions may make it more
difficult for
23
stockholders to
participate in a tender or exchange offer for common stock and in so doing may
diminish the market value of the common stock.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert or counsel
named in this prospectus as having prepared or certified any part of this
prospectus or having given an opinion upon the validity of the securities being
registered or upon other legal matters in connection with the registration or
offering of the common stock was employed on a contingency basis, or had, or is
to receive, in connection with the offering, a substantial interest, direct or
indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the
registrant or any of its parents or subsidiaries as a promoter, managing or
principal underwriter, voting trustee, director, officer, or employee.
Eide Bailly LLP,
certified public accountants, have audited the annual financial statements to
the extent and for the periods set forth in their report appearing elsewhere in
this prospectus and in the registration statement, and are included in reliance
upon that report given upon the authority of Eide Bailly LLP as experts in
auditing and accounting.
PERSONAL
LIABILITY OF DIRECTORS AND OFFICERS
Nevada law authorizes a Nevada corporation to
eliminate or limit the personal liability of directors and officers to the
corporation and its stockholders for damages for breach of fiduciary duties as
a director. We believe that such a provision is beneficial in attracting and
retaining qualified directors and officers, and accordingly, our Articles of
Incorporation, as amended, include a provision eliminating liability for
damages for any breach of fiduciary duty as a director or officer, except for
the following:
|
·
|
acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law; or
|
|
|
|
|
·
|
authorizing an unlawful
distribution in violation of Nevada law.
|
Directors are not
insulated from liability for breach of their duty of loyalty or for claims
arising under the federal securities laws.
These provisions of our Articles of Incorporation, as amended, may
reduce the likelihood of derivative litigation against directors for breaches
of their fiduciary duties, even though such an action, if successful, might
otherwise have benefited us and our stockholders. We have comprehensive directors and officers
liability insurance coverage, with an aggregate limit of $10,000,000 for the
benefit of our officers and directors insuring them against various
liabilities, including liabilities under the securities laws.
Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons under these
provisions of our Articles of Incorporation, as amended, or otherwise, we have
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
DESCRIPTION OF BUSINESS
(a) Business Development.
Corporate Reorganization
On July 22, 2004, Southwest Casino and Hotel
Corp. merged with Lone Moose Acquisition Corporation, a wholly-owned subsidiary
of Lone Moose Adventures, Inc., a Nevada corporation. Southwest
Casino and Hotel Corp. was organized under the laws of the State of Minnesota
in 1992 under the name Southwest Casino and Hotel Ventures, Inc. and has
operated in the gaming industry since formation. Lone Moose Acquisition Corporation was formed
solely for the purpose of completing our reorganization. Southwest Casino
and Hotel Corp. was the surviving corporation in that merger and became a
wholly-owned subsidiary of Lone Moose Adventures, Inc., which changed its
name to Southwest Casino Corporation. Under the terms of the
reorganization agreement among Southwest
24
Casino and Hotel Corp., Lone Moose Adventures, Inc.
and certain shareholders of Lone Moose Adventures, Inc., Southwest Casino
Corporation acquired 100% of the issued and outstanding shares of Southwest
Casino and Hotel Corp. common and preferred stock in exchange for more than 16
million shares of Lone Moose common stock issued to the shareholders of
Southwest Casino and Hotel Corp. Including shares of Lone Moose common
stock acquired by principal shareholders of Southwest Casino and Hotel Corp.
before the reorganization, the former Southwest Casino and Hotel Corp. equity
security holders acquired approximately 92% of the outstanding securities of
Southwest Casino Corporation in the reorganization.
Lone Moose Adventures, Inc. was formed on January 2,
2002 and, before closing the reorganization described above, conducted only
minimal operations and received only minimal revenue. Lone Moose was
organized to take clients on adventure tours in the Wasatch mountain range of
Utah. Lone Moose conducted fewer than two dozen adventure tours before
our reorganization. Upon closing the reorganization, we sold
substantially all of the assets and liabilities of Lone Mooses adventure tour
business to Lone Mooses founding shareholders. Since the reorganization
and sale of the adventure tour business, Southwest has not engaged in any
aspect of the business conducted by Lone Moose before the reorganization.
Prior Bankruptcy
Gold Rush I, LLC,
a wholly-owned subsidiary of Southwest Casino and Hotel Corp., filed a
voluntary petition for Chapter 11 protection under the United States Bankruptcy
Act as a result of a dispute over rent with the landlord of the Gold Rush and
Gold Diggers Casinos in Cripple Creek, Colorado. Gold Rush I was successful in
its litigation against the landlord regarding the rent dispute and emerged from
bankruptcy on January 10, 2003 when the Bankruptcy Court confirmed its
reorganization plan, which provided for full payment to all creditors with
interest.
(b)
Business
of Company
.
Principal Products or Services and
Markets and Status of Publicly-Announced New Products or Services
Southwest develops, owns, operates, manages and provides
consulting services to casinos, gaming facilities and related amenities in
various markets across the United States. Based in Minneapolis, Minnesota, we
currently own two casinos in Colorado and a 50% membership interest in North
Metro Harness Initiative, LLC, which is developing Running Aces Harness Park, a
harness racetrack and card room in Minnesota.
North Metro is scheduled to begin harness racing April 11, 2008 and
open its 50-table card room in July 2008, after completion of 50 days of
racing. We have approximately 150 full
and part-time employees. We expect
Running Aces Harness Park to employ more than 400 additional people when fully
operational.
Our growth plans include diversifying and expanding
existing operations and pursuing new gaming opportunities.
Casino Operations
Gold Rush I, LLC, a wholly-owned
subsidiary of Southwest Casino and Hotel Corp. owns and operates the Gold Rush
Hotel & Casino and the Gold Diggers casino in Cripple Creek Colorado.
Cripple Creek is a small, historic mining town near Colorado Springs that is
permitted to engage in limited stakes ($5.00 per bet limit) gaming. Fifteen
casinos operate currently in Cripple Creek. The combined Gold Rush and Gold
Diggers facilities offer approximately 406 slot machines and a 4-table card
game area. We also own and operate the
Palladium, an outdoor amphitheater adjacent to the Gold Rush and Gold Diggers
facilities that offers live entertainment and other special events.
We also owned and
operated the Uncle Sams casino in Cripple Creek, Colorado until June 29,
2007. Uncle Sams offered approximately
65 slot machines and catered mostly to a local market. On June 25, 2007, we entered into an
agreement with the landlord to purchase the leased real property on which we
operated Uncle Sams. The purchase
agreement provided that Southwest would not be obligated to purchase the real
property unless we assigned our rights under the purchase agreement to a third
party. On June 26, 2007, Southwest
entered into an agreement to assign its rights under the purchase agreement and
the operating lease. We closed Uncle Sams
casino on July 29, 2007 and, on July 31, 2007, assigned our rights
under the purchase agreement and lease and received an assignment
25
fee of approximately
$487,000. We transferred the majority of
the equipment and slot machines from Uncle Sams to the Gold Rush and Gold
Diggers casinos. We also transferred all
Uncle Sams employees to the Gold Rush and Gold Diggers casinos and the Uncle
Sams customers were offered incentives to migrate their play at Uncle Sams to
the Gold Rush and Gold Diggers casinos.
Through North Metro Harness Initiative, LLC, Southwest
and its 50 percent partner MTR-Harness, Inc., an affiliate of MTR Gaming
Group, Inc., were granted Class A and Class B licenses from the
Minnesota Racing Commission on January 19, 2005 to develop and operate a
harness racing track and card room facility on approximately 180 acres of land
in Columbus Township, Anoka County, Minnesota. Lawsuits against the
Minnesota Racing Commission challenging the validity of those licenses
concluded in favor of the Racing Commission and North Metro during July 2006.
This project, named Running Aces Harness Park, is nearing completion and
scheduled to open with its first day of live harness racing on April 11,
2008.
Once constructed and operating, this racing facility
will offer pari-mutuel wagering on a 5/8-mile track with combined seating for
over 2,000 track, restaurant and card room patrons. In addition, the facility will accommodate
simulcast wagering on live harness racing events broadcast into the
facility. On January 17, 2008, the
Minnesota Racing Commission approved the plan of operation under which North
Metro will operate a 50-table card room in this facility. Minnesota law requires us to complete 50 days
of live harness racing before we can open the card room and the approval of the
plan of operation is contingent on satisfying that requirement. Under current
law, we are only permitted to simulcast harness races at this facility. We are seeking legislative authorization to
simulcast races by all horse breeds, but cannot provide any assurance that this
effort will succeed.
Consulting Services
In September 2007, we entered into a consulting
agreement to work with Palace Resorts in developing and opening a casino at the
Moon Palace Casino, Golf and Spa Resort now under construction in Punta Cana on
the easternmost tip of the Dominican Republic. Under the consulting agreement,
we assist Palace Resorts in all phases of design, game selection, training and
equipping the casino that will be part of the 1,700-room resort that is
scheduled to open in 2008. Southwest receives consulting fees of $50,000 per
month for 10 months beginning in October 2007. Palace Resorts provides world-class resort
vacations at all-inclusive properties throughout Cancun, the Riviera Maya,
Nuevo Vallarta, and Cozumel with the Punta Cana, Dominican Republic resort now
under construction.
Casino Management
Until August 17, 2007, Southwest Casino and Hotel
Corp. managed the Lucky Star Concho and Lucky Star Clinton casinos in
Concho and Clinton, Oklahoma, under the terms of a management agreement with
the Cheyenne and Arapaho Tribes of Oklahoma.
From May 19, 2007 to August 17, 2007, Southwest managed the
Lucky Star Concho and Lucky Star Clinton casinos under Amendment No. 11
to the Third Amended and Restated Gaming Management agreement between Southwest
and the Cheyenne and Arapaho Tribes of Oklahoma, which extended that agreement
for up to two years. On August 17,
2007, the Supreme Court of the Cheyenne and Arapaho Tribes declared Amendment No. 11
invalid. Also on August 17, 2007,
the National Indian Gaming Commission (NIGC) reversed its prior approval of
Amendment No. 11. On August 24,
2007, the NIGC rejected our challenge to its decision to reverse that
approval. We have not received
management fees from the Cheyenne and Arapaho Tribes since August 17,
2007.
On March 24, 2006,
we entered into a Gaming Management Agreement with the Otoe-Missouria Tribe of
Indians under which we were to manage the Tribes Seven Clans Paradise Casino
in Red Rock, Oklahoma. The
Otoe-Missouria Tribe submitted the Gaming Management Agreement to the National
Indian Gaming Commission for approval.
After receiving additional comments on and requested additional changes
to the management agreement on September 15, 2006, the Tribe did not
respond to the NIGC or to our efforts to complete a revised management agreement. On July 11, 2007, the NIGC delivered a
letter to us and the Chairman of the Tribe requesting that we submit a revised
management agreement or withdraw the request for approval of the current
agreement within 30 days. We met with
representatives of the Tribes Economic Development Authority (OMDA) on August 6,
2007 and discussed the status of the management agreement. The OMDA has told us that they do not intend
to go forward with the management agreement and we have withdrawn our request
for NIGC review of this management
26
agreement. We continue to
seek reimbursement from the Otoe-Missouria of expenses we incurred while
working with the Tribe in 2006.
Prior Business of Lone Moose
Adventures, Inc.
Prior to the July 2004 reorganization, Lone Moose
engaged in limited operations primarily related to the provision of adventure
tours in the State of Utah. Immediately after closing the reorganization in
which Lone Moose Adventures became Southwest Casino Corporation and Southwest
Casino and Hotel Corp. became a wholly-owned subsidiary of Southwest Casino
Corporation, we sold substantially all of the assets and liabilities of Lone
Mooses adventure tour business to the founding shareholders of Lone Moose.
Since closing the reorganization and sale of assets, Southwest has not engaged
in any aspect of the business Lone Moose conducted before the reorganization.
Competition.
The gaming industry, including the development,
operation and management of casinos, racetracks and other types of gaming
facilities, is highly competitive, especially given the rapid rate at which the
industry is expanding. For example, a number of management companies may
make proposals to a particular Native American tribe for the development and
management of a single Indian gaming facility, and any gaming facilities
developed or managed by us will compete with a rapidly expanding number of
other gaming facilities of varying quality and size, including gaming
facilities that are part of national or regional chains, along with other forms
of gaming and entertainment. Similarly, with respect to projects we are
pursuing or may pursue in the future, new competitors could surface at any time
and present alternative proposals for consideration. Many competitors have
available to them substantially greater financial and personnel resources than
us. Competition in the future may also be affected by overbuilding which can
adversely affect patronage levels. Given the current regulatory climate and
limited number of new gaming opportunities, it is likely that competition in
our industry will intensify in the future.
The Cripple Creek, Colorado market in which we operate
the Gold Rush Hotel & Casino and the adjoining Gold Diggers casino consists
of fifteen gaming facilities with approximately 4,266 machines (as of December 2007),
of which we operate 406. In June 2007
we closed the Uncle Sams casino that we had operated since 1999 due to poor
performance. The Cripple Creek market
generated total gaming revenues of approximately $155 million during calendar
year 2007. This is a very competitive market that has shown relatively
slow revenue growth in recent years, even as the number of gaming devices
continues to grow. A new casino, expected
to offer 700 gaming devices, is under construction, and expected to open in
late spring or early summer 2008. In
addition, Colorado banned smoking in casinos beginning January 1, 2008,
which may negatively impact revenue. Our
ability to maintain and grow our Colorado operations is largely dependent on
our ability to increase our market share in a highly competitive
environment. We believe that the Gold Rush and Gold Diggers Casinos
attract customers primarily from Colorado Springs, Pueblo and surrounding
areas.
We own a 50 percent membership interest in North Metro
Harness Initiative, LLC, which was granted licenses from the Minnesota Racing
Commission to build and operate a harness racing track and card room north of
the Twin Cities of Minneapolis and St. Paul, Minnesota on January 19,
2005. This facility, when completed, will compete with an existing
thoroughbred racetrack and card room on the south side of the Twin Cities
metropolitan area as well as several Indian gaming facilities located outside
of the Twin Cities areas.
For more information regarding the competitive
environment in which we operate, please see discussion under the heading Risk
Factors beginning on page 2 of this prospectus.
Dependence on One or a
Few Major Customers
Our current gaming activities are concentrated in our
Colorado operations. We currently
provide consulting services to Palace Resorts under a consulting agreement that
terminates in August 2008. The loss
of any of these opportunities or constriction in the scope or types of gaming
permitted in these facilities would have a material adverse effect on our
business.
27
During 2007, the management fees we received under a
gaming management agreement with the Cheyenne and Arapaho Tribes of Oklahoma
for the Lucky Star casinos in Concho, Oklahoma and Clinton, Oklahoma was our
primary source of operating revenue. This management agreement terminated on August 17,
2007. The loss of the management fees we
received for managing these facilities has had a material adverse effect on our
financial condition.
Patents, Trademarks,
Licenses, Franchises and Concessions, Royalty Agreements and Labor Contracts
In addition to the gaming licenses described below, we
own a federally registered trademark in the name Lucky Star for our
gaming-related businesses. We do not own any other registered trademarks
or patents or other significant intellectual property.
Need for Governmental Approvals of
Principal Services.
The gaming industry is highly regulated at the federal
and state levels and gaming on tribal land is further regulated by the National
Indian Gaming Commission and the Bureau of Indian Affairs. We must maintain the
gaming licenses applicable to each of our operations in order to continue our
current business and, in most instances, must obtain new or amended gaming
licenses in connection with any expansion of our current operations or
development of new gaming facilities.
In Colorado, we hold licenses issued by Colorado Division
of Gaming for our Gold Rush Hotel & Casino and Gold Diggers casino in
Cripple Creek. On January 19, 2005, the Minnesota Racing Commission
voted to grant North Metro Harness Initiative, LLC, in which we own a 50
percent membership interest, licenses to develop and operate a harness
racetrack and card room.
In connection with these licenses, the Colorado
Division of Gaming and the Minnesota Racing Commission must approve any
addition of a director, officer or five percent or greater shareholder. In addition, any affiliate of ours, such as
the joint ventures we have worked with in pursuit of some of our new gaming
opportunities, is subject to review by and the rules and regulations of
any jurisdiction in which we hold a gaming license, and we are subject to
review by and the rules of jurisdictions in which they hold licenses.
Effect of Existing or Probable
Governmental Regulations on Business.
The gaming industry and our operations within that
industry are regulated extensively.
Historically, we have provided services to Native American tribes that
are regulated under the federal Indian Gaming Regulatory Act, the rules and
regulations of the National Indian Gaming Commission, the rules and
regulations of the tribal gaming authority and, in some instances the state in
which the tribal lands are located. The Gold Rush Hotel and Casino and
Gold Diggers casino in Cripple Creek, Colorado are subject to the Colorado
Limited Gaming Act and related rules and regulations that are enforced by
the Colorado Division of Gaming. The Minnesota Racing Commission
regulates the activities of North Metro Harness Initiative, LLC, in which
Southwest Casino and Hotel Corp. owns a 50 percent membership interest, under
its class A and class B licenses to develop and operate a harness racetrack and
card room on the north side of the Minneapolis-St. Paul metropolitan area.
The process of complying with all applicable state and
federal governmental and tribal regulations is lengthy and has required and
will continue to require the expenditure of substantial time and
resources. There can be no assurance that we will be able to comply on a
continuous or timely basis with all applicable regulations, and delays in
compliance, or failure to comply, could have a material adverse effect on our
business, financial condition, results of operations and our ability to
maintain our licenses. Changes in existing regulations or the adoption of
new regulations at the federal level or in the states in which we currently
operate or are pursuing new opportunities could delay or prevent our compliance
with such regulations. Our failure to comply with applicable laws or
regulations, whether federal, state or tribal, could result in, among other
things, the termination of management agreements to which we may be a party in
the future or the suspension of one or more of our operations, either of which
would have a material adverse effect on our business.
28
Gaming Regulation in Colorado
The Colorado Division of Gaming has broad power to
ensure compliance with the Colorado gaming laws and regulations (collectively,
the Colorado Regulations). The Division may inspect without notice,
impound or remove any gaming device. The Colorado Director may examine and copy
any licensees records, may investigate the background and conduct of licensees
and their employees, and may bring disciplinary actions against licensees and
their employees. The Division of Gaming may also conduct detailed
background investigations of persons who loan money to, or otherwise provide
financing to, a licensee.
Colorado issues five types of gaming and
gaming-related licenses. These licenses are revocable and
non-transferable. All persons employed at our Colorado casinos, and
involved in gaming operations must obtain a Colorado gaming license. All
licenses must be renewed annually, except those for key and support employees,
which must be renewed every two years. Failure to maintain any of the
licenses or approvals required to operate any of our Colorado casinos would
have a material adverse effect on our operations.
As a general rule, no person may have an ownership
interest in more than three retail gaming licenses in Colorado. In
addition, Colorado Regulations restrict the ability of any person with a
substantial interest in a manufacturer or distributor of slot machines to also
hold a substantial interest in a casino operator. The Division of Gaming
has ruled that a person does not have a substantial interest if that persons
sole ownership interest in a licensee is through the ownership of less than 5%
of the outstanding voting securities of a publicly traded licensee or publicly
traded affiliated company of a licensee.
Under the Colorado Regulations, any person or entity
having any direct or indirect interest in us may be required to supply the
Colorado Commission with substantial information, including, but not limited
to, background information, source of funding information, a sworn statement
that such person or entity is not holding his or her interest for any other
party, and fingerprints. This information, investigation and licensing as
an associated person will be required automatically of all persons (other
than certain institutional investors) that directly or indirectly own
beneficially 10 percent or more of our outstanding voting securities. Persons
that own more than 10 percent of our outstanding securities must report their
interest within 10 days and file appropriate applications within 45 days after
acquiring that interest. Persons who directly or indirectly own beneficially 5%
or more (but less than 10%) of a direct or indirect beneficial ownership or
interest in our voting securities, must report their interest to the Colorado
Commission within 10 days after acquiring that interest and may be required to
provide additional information and to be found suitable. All licensing
and investigation fees will have to be paid by the person in question. If the
person is unable to receive approval from the Division of Gaming or chooses not
to provide information requested by the Division of Gaming that person will be
required to dispose of their Southwest stock holdings in accordance with our
Articles of Incorporation.
The Colorado Commission also has the right to request
information from any person directly or indirectly interested in, or employed
by, a licensee, and to investigate the moral character, honesty, integrity,
prior activities, criminal record, reputation, habits and associations of: (1) all
persons licensed pursuant to the Colorado Limited Gaming Act; (2) all
officers, directors and stockholders of a licensed privately held corporation; (3) all
officers, directors and stockholders holding either a 5% or greater interest or
a controlling interest in a licensed publicly traded corporation; (4) all
general partners and all limited partners of a licensed partnership; (5) all
persons that have a relationship similar to that of an officer, director or
stockholder of a corporation (such as members and managers of a limited
liability company); (6) all persons supplying financing or loaning money
to any licensee connected with the establishment or operation of limited
gaming; (7) all persons having a contract, lease or ongoing financial or
business arrangement with any licensee, where such contract, lease or
arrangement relates to limited gaming operations, equipment devices or
premises; and (8) all persons contracting with or supplying any goods and
services to the gaming regulators.
The Division of Gaming interprets the Colorado
Regulations to permit investigations of persons or entities providing financing
to or acquiring securities from us or our Colorado casinos. While the
Colorado Regulations do not require prior approval for credit facilities or debt
securities, the Division reserves the right to approve, require changes to or
require the termination of any financing. In any event, lenders, note
holders, and others providing financing will not be able to exercise certain
rights and remedies without the prior approval of the Colorado gaming
authorities.
29
Information regarding lenders and holders of
securities will be periodically reported to the Colorado gaming authorities.
An application for licensure or suitability may be
denied for any cause deemed reasonable by the Colorado Commission or the
Colorado Director, as appropriate. Specifically, the Colorado Commission and
the Colorado Director must deny a license to any applicant who, among other things:
(1) fails to prove by clear and convincing evidence that the applicant is
qualified; (2) fails to provide information and documentation requested; (3) fails
to reveal any fact material to qualification, or supplies information which is
untrue or misleading as to a material fact pertaining to qualification; (4) has
been convicted of, or has a director, officer, general partner, stockholder,
limited partner or other person who has a financial or equity interest in the
applicant who has been convicted of specified crimes; or (5) has refused
to cooperate with any state or federal body investigating organized crime,
official corruption or gaming offenses.
If the Colorado Commission determines that a person or
entity is unsuitable to directly or indirectly own interests in our company,
one or more of our Colorado casinos may be sanctioned, which may include the
loss of our approvals and licenses.
In addition, the Colorado Regulations prohibit us from
paying any unsuitable person any dividends or interest upon any voting
securities or any payments or distributions of any kind (except as set forth
below), paying any unsuitable person any remuneration for services, or
recognizing the exercise of any voting rights by any unsuitable person.
Further, under the Colorado Regulations, we may repurchase voting securities
from anyone found unsuitable at the lesser of the cash equivalent to the
original investment or the current market price as of the date of the finding
of unsuitability unless such voting securities are transferred to a suitable
person (as determined by the Colorado Commission) within sixty (60) days after
the finding of unsuitability.
Because of their authority to deny an application for
a license or suitability, the Colorado Commission and the Colorado Director
effectively can disapprove a change in corporate position of a licensee and can
cause us to suspend or dismiss managers, officers, directors and other key
employees or sever relationships with other persons who refuse to file
appropriate applications or who the authorities find unsuitable to act in such
capacities.
The sale, lease, purchase and conveyance or
acquisition of a controlling interest in a Colorado casino is subject to the
approval of the Colorado Commission. Under some circumstances, we may not sell
any interest in our Colorado gaming operations without the prior approval of
the Colorado Commission.
We are required to provide information and file
periodic reports with the Colorado Division identifying those who have a 5% or
greater ownership, financial or equity interest in us, or who have the ability
to control us or exercise significant influence over us, or who loan money or
other things of value to us, or who have the right to share in our limited
gaming revenues, or to whom any interest or share in profits of limited gaming
has been pledged as security for a debt or performance of an act. Any
person licensed by the Division of Gaming and any associated person of a
licensee must report criminal convictions and criminal charges to the Colorado
Division.
The Colorado Commission has broad authority to
sanction, fine, suspend and revoke a license for violations of the Colorado
Regulations. Violations of many provisions of the Colorado Regulations also can
result in criminal penalties.
We were fined a total of $55,000 in June 2004 for
failure to comply with Colorado gaming regulations related to maintenance and
review of statistical information regarding slot machine performance and have
entered into an agreement with the Colorado Division of Gaming under which we
agreed to bring our practices into compliance. Failure to do so could lead to
suspension or revocation of our license. For more information, see the risk
factor regarding risks we face in connection with obtaining, maintaining and
renewing our gaming licenses under the heading
Risk
Factors,
beginning on page 2 of this prospectus.
30
Regulation of Horse Racing and Card
Playing in Minnesota
In December 2003, North Metro Harness Initiative,
LLC and Southwest Casino and Hotel Corp. filed applications for Class A
and Class B licenses, respectively, to develop and operate a harness
racing track and card room in Anoka County, Minnesota. The Class B
license application was subsequently amended and, on January 19, 2005, the
Minnesota Racing Commission voted to grant Class A and Class B
licenses to North Metro. The class A License is effective until revoked
or suspended by the Racing Commission, or relinquished by the licensee.
The Class B License is renewable each year by the Racing Commission after
a public hearing (if required by the Racing Commission).
Minnesota established the Minnesota Racing Commission
to regulate horse racing and card playing in the state under its pari-mutuel
horse racing statute. North Metro and Southwest, as a 50 percent owner of
North Metro, have been subject to the horse racing statute and rules and
regulations promulgated under it (the Racing Act) since we filed the Class A
and Class B license application. Our horse racing operations will
also be subject to the federal Interstate Horse Racing Act of 1978.
The Racing Commission has broad authority to enforce
the Racing Act and regulate substantially all aspects of horse racing in
Minnesota. The Racing Commission granted and will oversee North Metros
ownership and operating licenses, will: license all employees of North Metros
racetrack as well as jockeys, trainers, veterinarians and other participants;
regulate the transfer of ownership interests in licenses; allocate live race
days and simulcast-only race days; approve race programs; regulate the conduct
of races; set specifications for the racing ovals, animal facilities, employee
quarters and public areas of North Metros racetrack; and regulate the types of
wagers on horse races and approve significant contractual arrangements with
North Metro, including management agreements, simulcast arrangements, totalizator
contracts and concessionaire agreements. Decisions by the Racing
Commission in regard to any one or more of these matters could adversely affect
the Companys operations.
The Racing Act requires prior approval by the Racing
Commission of all officers, directors, 5% shareholders, or other persons having
a present or future direct or indirect financial or management interest in any
person applying for a Class A and Class B license, and if a change of
ownership of more than 5% of the licensees shares is made after an application
is filed or the license issued, the applicant or licensee must notify the
Racing Commission of the changes within five days of this occurrence and
provide the information required by the Racing Act.
North Metro submitted a card room plan of operation
for approval by the Racing Commission in connection with North Metros Class B
license. The card room plan has been submitted to the Racing Commission;
however under current law North Metro will not receive formal approval of the
plan until 50 days of live racing have been completed. Once the card room
plan of operation is approved, the Racing Commission will regulate the playing
of unbanked or player pool card games at North Metros card room, as well
as harness racing. North Metro must reimburse the Racing Commission for
its actual costs, including personnel costs, of regulating the card room.
North Metro must have the Class B license and card room authorization
renewed annually by the Racing Commission after a public hearing (if required
by the Racing Commission).
Regulation of Indian Gaming
The Company is not currently managing the operations
of Indian-owned casinos or otherwise involved in gaming on Indian land in the
United States, activities which are subject to the Indian Gaming Regulatory Act
(IGRA), which is administered by NIGC, and also are subject to the provisions
of statutes relating to contracts with Indian tribes, which are administered by
the Secretary of the Interior and the Bureau of Indian Affairs (BIA).
If we were to enter into new management agreements
with Indian-owned casinos we would be required to provide the NIGC with
background information on each of our directors and each shareholder who holds
five percent or more of our outstanding securities, including a complete
financial statement, a description of that persons gaming experience, and a
list of jurisdictions in which that person holds gaming licenses. Background
investigations of key employees also may be required. Under IGRA, the
Chairman of the NIGC must approve any management contracts we enter into as
well as any amendments to those management contracts and certain related
agreements.
31
The NIGC will not approve a management contract if any
of our directors or a 5% shareholders (i) is an elected member of the
Indian tribal government that owns the facility we contract with; (ii) has
been or is convicted of a felony gaming offense; (iii) has knowingly and
willfully provided materially false information to the NIGC or the tribe; (iv) has
refused to respond to questions from the NIGC; or (v) is a person whose
prior history, reputation and associations pose a threat to the public interest
or to effective gaming regulation and control, or create or enhance the chance
of unsuitable activities in gaming or the business and financial arrangements
incidental thereto. In addition, the
NIGC will not approve a management contract if we or any of our agents have
attempted to unduly influence any decision or process of tribal government
relating to gaming, or if the management company has breached materially the
terms of the management contract or the tribes gaming ordinance, or a trustee,
exercising due diligence, would not approve such management contract.
The NIGC also will not approve a management contract
unless the NIGC determines that the contract provides, among other things, for (i) adequate
accounting procedures and verifiable financial reports to be furnished to the
tribe; (ii) tribal access to the daily operations of the gaming
enterprise, including the right to verify daily gross revenues and income; (iii) minimum
guaranteed payments to the tribe, which must have priority over the retirement
of development and construction costs; (iv) a ceiling on the repayment of
development and construction costs; and (v) a contract term not exceeding
five years and a management fee not exceeding 30% of profits; provided that the
NIGC may approve up to a seven year term and a management fee not to exceed 40%
of profits if NIGC is satisfied that the capital investment required, the risk
exposure, and the income projections for the particular gaming activity justify
the larger profit allocation and longer term.
In addition to IGRA, tribal-owned gaming facilities on
Indian land are subject to a number of other federal statutes. The operation of
gaming on Indian land is also dependent upon whether the law of the state in
which the casino is located permits gaming by non-Indian entities, which may
change over time. Indian tribes are sovereign nations with their own
governmental systems, which have primary regulatory authority over gaming on
land within the tribes jurisdiction. Because of their sovereign status, Indian
tribes possess immunity from lawsuits to which the tribes have not otherwise
consented or otherwise waived their sovereign immunity defense. Therefore, we
may not be able to enforce our contracts with Indian tribes unless the tribe
has expressly waived its sovereign immunity as to the tribes contractual
obligations. Courts strictly construe such waivers.
Securities Law Regulation
We are also subject to certain aspects of the
Sarbanes-Oxley Act of 2002. This Act requires creation of a strong and
independent accounting oversight board to oversee the conduct of auditors of
public companies and strengthens auditor independence. It also requires
us to take steps to enhance the direct responsibility of senior members of
management for financial reporting and for the quality of financial disclosures
we make; establishes clear statutory rules to limit, and to expose to
public view, possible conflicts of interest affecting securities analysts;
creates guidelines for audit committee members appointment, compensation and
oversight of the work of our auditors; prohibits certain insider trading during
pension fund blackout periods; and establishes a federal crime of securities
fraud, among other provisions.
Costs and Effects of Compliance with
Environmental Laws.
Gold Rush I, LLC, leases
real property in Cripple Creek, Colorado, a portion of which included a gas
station and convenience store. The gas station and related storage tanks
were removed in October 1998, before Gold Rush I leased the property. We
participate in a Corrective Action Plan approved by the Colorado Department of
Labor and Employment, Division of Oil and Public Safety related to groundwater
monitoring and remediation at the site. We have spent approximately $212,000 monitoring and remediating
this site since we leased it in March 1999
.
We have applied for reimbursement of some or all of these
expenses from the Colorado Petroleum Storage Tank Fund and have received a
total of approximately $113,000
in reimbursement to date. We have additional requests for reimbursement
pending and will continue to request reimbursement of any additional expenses
incurred in connection with monitoring and remediation. We typically
receive reimbursement of one-half to two-thirds of our expenses incurred from
the Petroleum Tank Storage Fund, but are uncertain whether we will continue to
receive some or all of that reimbursement.
32
Number of Employees
We currently employ
approximately 150 full and part-time employees.
MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following is a discussion and analysis of the financial position and operating
results of Southwest Casino Corporation (referred to in this discussion,
together with its consolidated subsidiaries where appropriate, as Southwest Casino,
the Company, we, our and us) for the years ended December 31, 2007
and 2006.
Summary of Consolidated Operating Results:
For the year ended December 31, 2007, we had a
net loss of $1,493,699 on revenues of $19,536,740 compared to net income of
$1,157,211 on revenues of $21,474,908 for the same period in 2006. This
amounts to a basic loss per outstanding share during the year ended December 31,
2007 of $0.06 and basic and fully diluted earnings per outstanding share during
the year ended December 31, 2006 of $0.06.
The net loss of $1,493,699 in the year ended December 31,
2007, compared to net income of $1,157,211 for the same period in 2006,
primarily results from a reduction in revenues of approximately $2.3 million
from our management contract with the Cheyenne and Arapaho Tribes of Oklahoma,
which terminated on August 17, 2007 and increased operating expenses of
approximately $1.3 million, primarily due to an increase in corporate expenses
of $1.0 million. We also incurred other expenses of $1.0 million during
the year ended December 31, 2007 compared to $1.2 million in 2006. The
significant components of the $0.2 million decrease related to a decrease in
interest expense of $0.3 million and a gain on the disposition of the Uncle Sams
casino of $0.5 million, which were offset by the write off of financing costs
of $0.6 million. During the year ended December 31, 2006 we
recognized income tax expense of $0.7 million compared to $0 in 2007.
Overview:
Our principal business is the management, operation
and development of gaming facilities in emerging and established gaming
jurisdictions. Currently, we operate two casinos in Cripple Creek,
Colorado Gold Rush Hotel and Casino and Gold Diggers Casino. Until July 28,
2007, we also operated Uncle Sams Casino in Cripple Creek. Until August 17,
2007 we managed two Native American gaming operations in Oklahoma for the
Cheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star
Clinton. We also own a 50% membership interest in North Metro Harness
Initiative, LLC, (North Metro). North Metro is building a harness
racetrack and 50-table card room in Columbus, Minnesota on the north side of
the Minneapolis St. Paul Metropolitan area. North Metro secured
financing for the project and began construction in April 2007 and plans
to begin harness racing in April 2008 and open the card room after
completing 50 days of live racing (as required by Minnesota statue). In September 2007,
we entered into a consulting agreement to work with Palace Resorts in
developing and opening a casino at the Moon Palace Casino, Golf and Spa Resort
now under construction in Punta Cana on the easternmost tip of the Dominican
Republic. Under the consulting agreement, we will assist Palace Resorts in all
phases of design, game selection, training and equipping the casino that will
be part of the 1,700-room resort that is scheduled to open in the last quarter
of 2008. Southwest receives a consulting fee of $50,000 per month for 10 months
beginning in October 2007 under the consulting agreement. Palace
Resorts provides world-class resort vacations at all-inclusive properties
throughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumel with the new
resort under construction at Punta Cana, Dominican Republic.
From May 19, 2007 to August 19, 2007, we
managed the Lucky Star Concho and Lucky Star Clinton casinos under
Amendment No. 11 to the Third Amended and Restated Gaming Management
agreement between Southwest Casino and Hotel Corp. and the Cheyenne and Arapaho
Tribes of Oklahoma, which extended that agreement for up to two years. On
August 17, 2007, the Supreme Court of the Cheyenne and Arapaho Tribes
declared Amendment No. 11 invalid. Also on August 17, 2007, the
National Indian Gaming Commission reversed its prior approval of Amendment No. 11.
On August 24, 2007, the NIGC rejected our challenge to its decision and we
have not received management fees from the Cheyenne and Arapaho Tribes since August 17,
2007. Due to the loss of management fees from this management contract,
in March 2008 we secured additional debt financing to fund our current
operations including project development costs.
We continually evaluate other management, consulting,
development and acquisition opportunities related to gaming that have the
potential to generate new revenue streams for us.
33
Operating segments:
Our executive officers review operating results,
assess performance and make decisions related to the allocation of resources on
a property by property basis; however, certain properties are combined into one
operating segment for financial reporting purposes as they meet the criteria
for aggregation under Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and Related Information
paragraph 17. We have grouped the following properties into the following
two operating segments that are described in further detail below:
Casino Management and Consulting:
|
|
Casino Operations:
|
Lucky Star Concho
|
|
Gold Rush/ Gold Diggers Casinos
|
Lucky Star Clinton
|
|
Uncle Sams Casino
|
Palace Resorts
|
|
|
Casino Management:
We managed two casinos for the Cheyenne and Arapaho
Tribes of Oklahoma under the Third Amended and Restated Gaming Management
Agreement dated June 16, 1995 between us and the Cheyenne and Arapaho
Tribes of Oklahoma (the Tribes) until August 17, 2007.
On May 18, 2007, the National Indian Gaming
Commission approved Amendment No. 11 to the Third Amended and Restated
Gaming Management Agreement. Southwest continued to manage the Tribes
Lucky Star Concho and Lucky Star Clinton casinos under the terms of
Amendment No. 11 until August 17, 2007.
The May 18, 2007 NIGC approval was based on a May 18,
2007 decision of the Cheyenne and Arapaho Trial Court finding Amendment No. 11
valid under the Tribes constitution. On May 21, 2007, the Governor
of the Cheyenne and Arapaho Tribes filed an appeal to the Cheyenne and Arapaho
Supreme Court seeking to overturn the decision of the tribal Trial Court.
On August 17, 2007, the Supreme Court reversed the Trial Court order and
declared the contract extension invalid. Also on August 17, 2007, the NIGC
issued a decision and order reversing its May 18, 2007 approval of the
two-year contract extension based on the tribal Supreme Court decision.
Based on the decision of the NIGC, tribal representatives took control of the
casinos on Sunday, August 19, 2007. On August 21, 2007,
Southwest appealed the decision of the NIGC to reverse its approval of the
two-year contract extension. On August 24, 2007, the NIGC rejected
that appeal and affirmed its decision. Southwest has not received
management fees from the casinos since August 17, 2007.
Lucky
Star - Concho
We earned management fees of $2,045,984 and $3,501,795
from Lucky Star - Concho during the year ended December 31, 2007 and 2006,
respectively. The decrease in management fees for the year ended December 31,
2007 compared to the same period in the prior year is due to the amendment of
our management contract in May 2007 that changed the management fee
structure and the subsequent termination of the management contract on August 17,
2007.
Lucky Star - Clinton
We earned management fees of $1,520,125 and $2,363,885
from Lucky Star - Clinton during the year ended December 31, 2007 and
2006, respectively. The decrease in management fees for the year
ended December 31, 2007 compared to the same period in the prior year is
due to the amendment of our management contract in May 2007 that changed
the management fee structure and the subsequent termination of the management
contract on August 17, 2007.
Palace Resorts
In September 2007, we entered into a consulting
agreement to work with Palace Resorts to develop and open a casino at the Moon
Palace Casino, Golf and Spa Resort, now under construction in Punta Cana on the
easternmost tip of the Dominican Republic. Under the consulting agreement, we
immediately began assisting Palace Resorts in
34
all phases of design, game selection, training and
equipping the casino that will be part of the 1,700-room resort scheduled to
open in the last quarter of 2008. We receive $50,000 per month for 10 months
under the consulting agreement, which began October 2007. Palace
Resorts provides world-class resort vacations at all-inclusive properties
throughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumel with the new
resort under construction at Punta Cana, Dominican Republic. We recognized $150,000 of consulting revenue
for the year ended December 31, 2007.
Otoe-Missouria Tribe of Indians
Southwest entered into a Gaming Management Agreement
with the Otoe-Missouria Tribe of Indians under which we were to manage the
Tribes Seven Clans Paradise Casino in Red Rock, Oklahoma, on March 24,
2006. The Otoe-Missouria Tribe submitted the Gaming Management Agreement
to the National Indian Gaming Commission, which must approve it before it can
be effective, on April 10, 2006. In response to comments from
the NIGC, Southwest and the Tribe submitted a revised agreement to the NIGC in August 2006.
The NIGC provided additional comments on and requested additional changes to
the management agreement on September 15, 2006. The Tribe did not
respond to the NIGC or to our efforts to complete a revised management
agreement.
On July 11, 2007, the NIGC delivered a letter to
Southwest and the Chairman of the Tribe requesting that we submit a revised
management agreement or withdraw the request for approval of the current
agreement within 30 days. We met with representatives of the Tribes
Economic Development Authority (OMDA) on August 6, 2007 and discussed
the status of the management agreement. The OMDA has told us that they do
not intend to go forward with the management agreement and we have withdrawn
our request for NIGC review of this management agreement. We continue to seek
reimbursement from the Otoe-Missouria of expenses we incurred while working
with the Tribe in 2006.
Casino operations:
Gold Rush/Gold Diggers Casino (GR/GD)
Results
|
|
Year
Ended
December 31, 2007
|
|
Year
Ended
December 31, 2006
|
|
Percentage
Increase
(Decrease)
|
|
Casino revenues
|
|
$
|
14,635,321
|
|
$
|
13,930,824
|
|
5.1
|
%
|
Total revenues
|
|
15,278,862
|
|
14,640,824
|
|
4.4
|
%
|
Profit before
income taxes
+
|
|
749,182
|
|
768,011
|
|
(2.5
|
)%
|
Earnings margin
*
|
|
4.9
|
%
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
+
|
Profit before income
taxes is determined by reducing total revenues by, among other things, primarily
related to interest expense on our capital lease at the Gold Rush and depreciation
and amortization expenses. The capital lease was carried on our
Consolidated Balance Sheet in the amount of approximately $7.25 million as of
December 31, 2007. Interest expense was $795,000 and $844,000 for
the years ended December 31, 2007 and 2006, respectively.
Depreciation and amortization expense was $1,450,000 and $1,527,000 for years
ended December 31, 2007 and 2006, respectively.
|
|
|
*
|
The earnings margin is
calculated by dividing profit before income taxes by total revenues.
|
For the year ended December 31, 2007, GR/GDs
total casino revenues increased by 5.1% over the prior year. The Cripple
Creek market grew by 1.2% during this same time period. We increased
marketing expenses as a result of closing Uncle Sams (see below) and offering
incentives to players in order to attract customers who played at Uncle Sams
to play at GR/GD. This resulted in a slight decrease in our earnings
margin.
We closed Uncle Sams casino on July 29,
2007. We transferred approximately eight employees to our GR/GD
properties. Thus certain salaries and expenses previously incurred by
Uncle Sams have been included with operations of the GR/GD properties since
the closure of Uncle Sams casino on July 29, 2007. Additionally, the players/customers who played
at Uncle Sams were offered incentives to migrate their play to the Gold Rush
and
35
Gold Diggers casino. We have estimated that we retained
approximately 40% - 70% of the revenues from those players who played
previously at Uncle Sams and now are playing at the Gold Rush and Gold Diggers
casinos. The Gold Rush and Gold Diggers casinos had available capacity to
absorb the players from Uncle Sams. The Uncle Sams brand name is no
longer used in our operations. However, since inception we have used an
integrated players club for all three Cripple Creek casinos whereby the player
could redeem points earned at one casino at any of the casinos.
We also include within the operating segment Casino
Operations our outdoor amphitheatre at the Gold Rush. Revenues from the
amphitheatre are less than 1% of total revenues.
Uncle Sams
Casino
:
|
|
Year
Ended
December 31, 2007
|
|
Year
Ended
December 31, 2006
|
|
Total revenues
|
|
464,697
|
|
940,562
|
|
Profit (loss) before
income taxes
|
|
126,011
|
|
(574,866
|
)
|
Operating results at Uncle Sams continued to
deteriorate in 2007 because the property was small, detached from the GR/GD and
we did not make significant improvements to the property. On June 25,
2007, we entered into an agreement with the landlord to purchase the leased
real property on which we operated Uncle Sams Casino in Cripple Creek,
Colorado. The purchase agreement provided that we would not be obligated
to purchase the real property unless we assigned our rights under the purchase
agreement to a third party. On June 26, 2007, we entered into an
agreement to assign our rights under the purchase agreement and the operating
lease. On July 29, 2007, we closed Uncle Sams Casino and, on July 31,
2007, we assigned our rights under the purchase agreement and lease and
received an assignment fee of approximately $487,000. We recognized a
gain of $477,407 on this transaction that is recorded in the Consolidated
Statement of Operations during year ended December 31, 2007 as a separate
line item within Other Income (Expense) and included in the schedule above in
Profit (loss) before income taxes. We transferred the majority of the
equipment and slot machines to the Gold Rush and Gold Diggers casinos in the amount
of their net book value of approximately $58,000. Additionally,
approximately eight employees were transferred to the Gold Rush and Gold
Diggers casinos and the customers were offered incentives to migrate their play
at Uncle Sams to the Gold Rush and Gold Diggers casinos.
Project Development
costs for the year ended December 31, 2007 and 2006 were $374,384 and
$290,623, respectively. The increase for the year ended December 31,
2007 is primarily a result of increased costs associated with the management
contract with the Cheyenne and Arapaho Tribes see above discussion under Casino
Management, and costs associated with obtaining our consulting agreement with
Palace Resorts in September 2007.
Corporate expenses
were $3,782,615 and $2,774,022 during the year ended December 31, 2007 and
2006, respectively, an increase of approximately $1.0 million. The increase in corporate expenses of
approximately $1.0 million during the year ended December 31, 2007 over
the prior year is primarily due to increased salary and benefit expense of
approximately $600,000 which included discretionary performance bonuses
approved by the board of directors in March 2007 of approximately $385,000
(with no corresponding amount in the same period in 2006), fees for investor relations
and financial consulting services of approximately $215,000 and increased legal
and accounting fees of approximately $140,000 due primarily to Sarbanes Oxley
compliance and legal fees associated with the Cheyenne and Arapaho legal and
arbitration matters (see Discussion under the heading Legal Proceeding
beginning on page 15 of this prospectus and Note 24 to our 2007 consolidated
financial statements included with this prospectus). The bonus approved
and recorded in March 2007 consists of $210,000 that was paid in March 2007,
and $175,000 to be paid on or after July 1, 2007 at such time as
management determines that we have sufficient financial resources for the
payment. The $175,000 is accrued as a liability at December 31,
2007.
36
Impairment loss
was approximately $400,000 for the year ended December 31, 2007. The
impairment loss relates to the write-off of costs related to the termination of
the management contract with the Cheyenne and Arapaho Tribes of Oklahoma.
Interest Expense
was $877,585 and $1,204,296 for the year ended December 31, 2007 and 2006,
respectively, a decrease of approximately $327,000. The decrease is primarily due to lower
interest from our $2.5 million term loan as the loan was fully paid in April 2007.
Loss of
unconsolidated subsidiary, net of tax benefit
represents
our share of the losses of North Metro, which were $436,494 and 182,873 for the
year ended December 31, 2007 and 2006, respectively. The increase in losses in 2007 compared to
2006 is primarily due to increased real estate taxes in 2007, as a result of
higher assessed land values following the purchase of land by North Metro in
late 2005.
Effective tax rate.
For the year ended
December 31, 2007, we did not record a tax benefit for the net loss as a
result of our evaluation of deferred tax assets and our ability to utilize the
deferred tax assets in the future. During the year ended December 31,
2006 we recorded a tax provision of approximately $671,000, a 33.4% effective
tax rate. As of December 31, 2005, we evaluated all evidence and
determined that a portion of the deferred tax assets relating to net operating
losses in previous years would be utilized in 2006 based upon forecasted income
for 2006. At December 31, 2006 we recorded 100% valuation allowance
against the deferred tax assets due to the uncertainty surrounding the Cheyenne
and Arapaho management relationship. We
continue to record a 100% valuation allowance against the deferred tax assets at
December 31, 2007 because of the termination of our management agreement
with the Cheyenne and Arapaho Tribes, effective August 17, 2007. As
of December 31, 2007, our deferred tax asset is zero.
Liquidity and
Capital Resources:
We generated cash flow from our Oklahoma management
activities until our management agreement terminated in August 2007, and
continue to generate cash flow from our casino operations in Colorado. We
use the cash flows generated to pay off debt in accordance with our agreements,
fund reinvestment in existing properties for both refurbishment and replacement
of assets, and to pursue additional growth opportunities. As the existing
cash flows are inadequate to fund our cash requirements we are required to seek
and obtain funds provided from financing activities.
On January 24, 2007 and February 26, 2007,
we entered into a Securities Purchase Agreement (SPA) with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, under
which we sold in private placements an aggregate of 7.44 million shares of our
common stock with accompanying warrants to purchase an aggregate of 2.98
million shares of our common stock, at a purchase price of $0.55 per share of
common stock. The warrants are exercisable for a period of five years,
beginning six months after the date of issuance, at an exercise price of $0.61
per share. The number of shares issuable upon exercise of the warrants
and the exercise price of the warrants are adjustable in the event of stock
splits, combinations and reclassifications, but not in the event of the
issuance by us of additional securities, unless such issuance is pursuant to a
rights offering or pro rata distribution to all security holders except the
investors.
The securities that were issued in this private
placement were not registered under the Securities Act of 1933, as
amended. However, under the terms of the Registration Rights Agreements
dated January 24, 2007 and February 26, 2007 between us and the
investors, we agreed to register the resale of the shares sold in the private
placement, including shares issuable upon exercise of the warrants. The
registration statement became effective on May 11, 2007. Under the
Securities Purchase Agreement, we and the investor parties have made other
covenants and representations and warranties regarding matters that are
customarily included in financings of this nature. If certain of our
obligations are not met, we have agreed to make pro-rata cash payments as
liquidated damages to each investor.
The private placement resulted in net proceeds to us
of approximately $3.94 million, after the deduction of approximately $150,000
of direct offering expenses. The placement agent agreed to accept the
cash portion of the placement agent commission in common stock and warrants on
the same terms as the investors, which resulted in the placement agent
receiving approximately 517,000 shares of common stock and warrants to purchase
an aggregate of approximately 207,000 shares of common stock. In
addition, the placement agent received a warrant to
37
purchase approximately 277,000 shares of common stock,
which is exercisable for a period of five years, beginning six months after the
date of issuance, at an exercise price of $1.00 per share.
The following officers and directors participated in
the private placement on the same terms as the other investors: James B. Druck,
Chief Executive Officer and Director; Thomas E. Fox, President and Chief
Operating Officer and entities in which Mr. Fox holds an ownership
interest; Jeffrey S. Halpern, Vice President of Government Affairs; Gus A.
Chafoulias, Director; and David H. Abramson, Director. Other than with
respect to their participation in this offering, there are no material
relationships between us and any of the other investors in the private
placement.
On April 20, 2007, North Metro entered into a
Credit Agreement (the Credit Agreement) with Black Diamond Commercial
Finance, L.L.C. (Black Diamond) as agent and lender. Under the terms of
the Credit Agreement, North Metro will borrow $41.7 million to construct, equip
and open its harness racetrack and card room facility in Columbus, Minnesota on
the north side of the Minneapolis St. Paul metropolitan area. As part of the
loan agreement the members of North Metro agreed to complete aggregate
membership contributions of $20.8 million before closing the loan. The total
cost of the project is expected to approximate $62 million. As of December 31,
2007, Southwest contributed $9.0 million of the total amount of $21.3 million
contributed by the members. Certain amounts related to non-construction
costs continue to be funded by the members. These amounts are not
considered to be material.
While the Credit Agreement does not provide for
recourse against us in the case of a default by North Metro, we have pledged
our membership interest in North Metro and North Metro pledged its membership
interest in North Metro Hotel, LLC as security for repayment of the loan under
the terms of a Pledge Agreement with Black Diamond (the Pledge Agreement).
We also entered into a Subordination Agreement with
Black Diamond (the Subordination Agreement) under which we agreed that
repayment of a $1.65 million membership preferred capital contribution to North
Metro, which North Metro was to repay to us out of the first available revenue
from operations, will be subordinated to the payments due under the loan agreements.
In addition, we entered into a Sponsor Support
Agreement (the Support Agreement) under which Southwest may be required under
certain circumstances to contribute additional capital to North Metro if
proceeds from financing and equity investments in North Metro are insufficient
to complete construction and open the facility. We believe the financings
and equity contributions available to North Metro will be sufficient to
construct and open the facility.
As a result of the termination of our management
contract with the Cheyenne and Arapaho Tribes of Oklahoma (see above discussion
under the operating segment Casino Management) we have secured additional
debt financing to fund our future operations including project development
costs. We closed on a bank loan of $1.55 million on March 7,
2008. The interest rate is the prime
rate plus 1.5% with a minimum interest rate of 7%. We are required to make interest only
payments through January 2009 after which time the loan will begin to
fully amortize in equal installments over the remaining twelve months. Eight shareholders of the Company, including
a member of our board of directors, cosigned portions of the loan. Our three principal executive officers also
guaranteed portions of this loan. As
consideration for the co-signatures and personal guarantees we issued warrants
to purchase 2,300,000 shares of our common stock (one warrant share for each
dollar guaranteed or cosigned) at an exercise price of $0.39 per share. The warrants have a five-year term. The Company will be required to seek
additional debt and/or equity financing for future operations including debt
repayment.
During January and February 2008,
we pursued a financing alternative to the bank loan discussed above. We
were unable to agree upon the terms with the lender and we ultimately chose not
to continue negotiations with the lender. We incurred costs in connection with
this financing of approximately $200,000 that will be expensed during the first
quarter of fiscal year 2008.
We continue to review additional opportunities to
acquire or invest in companies, properties and other investments that meet our
strategic and return on investment criteria. If we complete a material
acquisition or investment, our operating results and financial condition could
change significantly in future periods. In addition, any new opportunity
we undertake would in all likelihood require additional equity or debt
financing.
38
On December 18, 2006, we entered into an Asset
Purchase Agreement and a long-term lease with Pinnacle Casinos and Resorts, LLC
(Pinnacle). Under the Asset Purchase Agreement, we agreed to acquire the
operating assets and lease the real property of the Double Eagle Hotel and
Casino and Gold Creek Casino in Cripple Creek, Colorado (collectively, the Double
Eagle). On April 13, 2007, we notified Pinnacle that we had elected
to terminate the Asset Purchase Agreement.
We terminated the Asset Purchase Agreement in response
to notice we received on April 10, 2007 from Pinnacle that the separate
Stock Purchase Agreement under which Pinnacle was to acquire all of the
outstanding capital stock of Colorado Casino Resorts, Inc. (CCRI), the
owner of the Double Eagle, had terminated in accordance with its terms when
Pinnacle did not make a required payment. Because Pinnacle was unable to
complete its proposed acquisition of the CCRI stock in accordance with the
Stock Purchase Agreement, as amended, Pinnacle was also unable to perform its
obligations under the Asset Purchase Agreement with us. In connection
with this acquisition we incurred $126,650 of transaction costs specific to
this acquisition that have been written-off during the year ended December 31,
2007.
We also incurred financing costs with a lender in the
amount of approximately $462,000. These financing costs were initially
associated with the financing of the original arrangements to acquire the
Double Eagle. Even though the proposed Double Eagle acquisition ceased effective
June 30, 2007, the financing arrangement and negotiations continued.
In July 2007 we received a revised term sheet from the lender that
provided for a non-specific property acquisition line of credit and also
included a working capital amount available immediately, as defined in the
agreement. As part of the terms of this new term sheet we wired an
additional expense deposit to the lender on August 6, 2007. We
scheduled to close on this financing by the end of August 2007.
As a result of the termination of the management
agreement with the Cheyenne and Arapaho Tribes of Oklahoma, effective August 17,
2007, the financing contemplated with this lender did not occur and the
arrangement was terminated. Thus we wrote-off amounts related to the
financing of approximately $462,000 during the year ended December 31,
2007. In October 2007 we incurred
$25,000 of additional financing costs which have been written-off in 2007 as
the financing contemplated with this lender did not close.
We have recorded the write-off of acquisition and
financing costs of $613,372 during the year ended December 31, 2007 in the
Consolidated Statements of Operations as a separate line item within Other
Income (Expense).
Net cash provided by operating activities during year
ended December 31, 2007 was $1,836,855 compared to $4,610,466 during the
prior year, a decrease of approximately $2.8 million. The decrease
between periods is primarily due to a decrease in revenues of approximately
$1.9 million and an increase in operating expenses of approximately $1.3
million, offset by timing of working capital items.
Net cash used in investing activities for the year
ended December 31, 2007 and 2006 was $2,902,603 and $1,427,981,
respectively, an increase of approximately $1.5 million. The increase in
use of cash between the periods was due primarily to an increase in our
investment in North Metro of approximately $1.6 million in connection with the
closing of the construction financing secured by North Metro in April 2007.
We also had additional costs of approximately $439,000 associated with
obtaining our two-year extension of the Cheyenne and Arapaho management
contract, which was subsequently terminated on August 17, 2007.
These costs were offset by proceeds from the sale of Uncle Sams casino of
approximately $490,000.
Net cash provided by
financing activities for the year ended December 31, 2007 was $1,426,889
compared to net cash used in financing activities for the year ended December 31,
2006 of $2,846,370. During the years ended December 31, 2007 and
2006 we had the following financing activities:
|
·
|
We completed an equity financing resulting in
proceeds of approximately $4.0 million, see further discussion above.
|
|
|
|
|
·
|
We made payments of approximately $1.7 million on
long-term borrowings compared to approximately $2.7 million during the year
ended December 31, 2006.
|
39
|
·
|
We paid costs of approximately $322,000 related to
the redemption of 357,000 shares of common stock in accordance with
Article XI of our Articles of Incorporation effective January 22,
2007. The shares were redeemed at a price of $0.90 per share based upon
the closing stock price of our common stock as reported on January 22,
2007. We recorded the redemption as a reduction to stockholders equity
for the buy back of shares. The shares of common stock are included in
Treasury Stock in the Consolidated Statements of Changes in Stockholders
Equity as of December 31, 2007.
|
|
|
|
|
·
|
We made payments of approximately $565,000 related
to financing and acquisition costs, see discussion above.
|
|
|
|
|
·
|
We made payments of $110,000 during the year ended
December 31, 2006 to three officers related to accrued but unpaid
compensation from prior years. No such amount was paid during 2007.
|
|
|
|
|
·
|
We received proceeds of $30,000 and $12,000 during
the years ended December 31, 2007 and 2006 related to the exercise of
warrants.
|
Line of Credit.
On October 20, 2005, we established a $450,000 line of credit with
Crown Bank of Minneapolis, Minnesota. The line of credit is due April 30,
2008 with a variable interest rate at one percent above prime but not less than
7.5% (8.25% at December 31, 2007). As of December 31, 2007, the
outstanding balance was $450,000. Our three principal officers have
guaranteed up to $450,000 of this line of credit.
Term Note
.
On October 20, 2005, we entered into a term loan to borrow $2.5
million. The loan terminated on April 30, 2007 and had a variable interest
rate of one percent above prime but not less than 7.5%. Twelve shareholders of
the Company, including our three principal officers and a member of our board
of directors, guaranteed the loan. As of April 30, 2007 the loan was paid
in full.
Equipment Loan.
On December 23, 2005, we negotiated a loan of $460,324 to pay off
outstanding payables in connection with the installation of a player tracking
system at our casinos in Cripple Creek, Colorado. The loan is for a term of 48
months with interest equal to the prime rate, which is 7.25% as of December 31,
2007. The outstanding balance as of December 31, 2007 was
approximately $240,000.
Seasonality:
We believe that the operations of all casinos owned by
us will be affected by seasonal factors, including holidays, weather and travel
conditions.
Effects of Current
Economic and Political Conditions:
Competitive Pressures:
Many casino operators are either entering or expanding
in our markets thereby increasing competition. As companies have completed new
or expanded projects, supply has sometimes grown at a faster pace than demand,
and competition has increased significantly. Furthermore, several operators,
including Southwest, have plans for additional developments or expansions in
our markets.
Although, the short-term effect on Southwest of these
competitive developments generally has been negative, we are not able to
determine the long-term impact, whether favorable or unfavorable, that
development and expansion trends and events will have on current or future
markets. We believe that the geographic diversity of our operations, our
service training, our rewards and customer loyalty programs, and our continuing
efforts to improve our facilities will insure continued customer loyalty and
will enable us to face the competitive challenges present within our industry.
The Governor of Colorado signed a bill that removed
the exemption for casinos from the states 2006 smoking ban, effective January 1,
2008. We expect the extension of the ban to Colorado casinos will have
some negative impact on business volumes at our Cripple Creek property, the
magnitude of which we cannot predict at this time.
40
Political Uncertainties:
The
casino entertainment industry is subject to political and regulatory
uncertainty. From time to time, individual jurisdictions have considered
actions, legislation or referendums that could adversely impact our
operations. The likelihood or outcome of similar actions, legislation and
referendums in the future is difficult to predict.
The
casino entertainment industry represents a significant source of tax revenues
to the various jurisdictions in which casinos operate. From time to time,
various state and federal legislators and officials have proposed changes in
tax laws, or in the administration of tax laws, that would affect the
industry. It is not possible to determine with certainty the scope or
likelihood of possible future changes in tax laws or in the administration of
tax laws. If adopted, changes in tax law could have a material adverse
effect on our financial results.
Significant
Accounting Policies and Estimates:
We
prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States. Certain of our
accounting policies, including, but not limited to, the estimated lives
assigned to our assets, the determination of bad debt, asset impairment, valuation
of stock option or warrant awards, and income taxes, require that we apply
significant judgment in defining the appropriate assumptions for calculating
financial estimates.
By
their nature, these judgments are subject to an inherent degree of
uncertainty. Our judgments are based on our historical experience, terms
of existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. We cannot assure you that our actual results will not
differ from our estimates. For a discussion of our significant accounting
policies and estimates, please refer to Notes to Consolidated Financial
Statements presented in our 2007 Financial Statements.
New Accounting Pronouncements
:
We
adopted Statement of Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation
No. 48) effective January 1, 2007, which did not have a significant
impact to our financial statements.
In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements which is effective for fiscal years beginning after November 15,
2007 and for interim periods within those years. This statement defines
fair value, establishes a framework for measuring fair value and expands the
related disclosure requirements. We are currently evaluating the
potential impact of this statement. On February 12,
2008 a FASB Staff Bulletin FSP FAS 157 -2 was issued which defers the
effective date of FAS 157 to fiscal years beginning after November 15,
2008, and applies to nonfinancial assets and nonfinancial liabilities.
In February 2007,
the FASB released SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an
amendment of FASB Statement No. 115
. This Statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. This Statement is effective as of the beginning of
an entitys first fiscal year that begins after November 15, 2007. Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007, provided the entity also elects to apply the
provisions of FASB Statement No. 157, Fair Value Measurements. We
are evaluating the impact of this statement.
Description of Property:
We own, lease or manage the following real property:
Gold
Rush I, LLC, operates the Gold Rush Casino with 321 slot machines, four table
games, a bar/restaurant and 13 hotel rooms, and the Gold Diggers Casino with
86 slot machines and a bar. These properties are physically connected,
but operate under separate Colorado gaming licenses. We lease the casino
buildings, another building that houses our marketing and accounting offices,
the Gold Rush Palladium site, two additional storefronts and related parking
lots under a 20-year lease from Mark and Annesse Brockley, Cripple Creek
Development Corporation and Blue Building Corporation that expires in June 2019.
Gold Rush I pays base rent in the amount of
41
$40,000
per month for this property, plus an additional payment based on the combined
net income of the Gold Rush and Gold Diggers casinos. Through 2007, we have
not been required to make any additional payments based on combined net income.
In addition, Gold Rush I assumed obligations to make numerous payments to third
parties for outstanding accounts payable and debt obligations related to
acquisition and operation of the Gold Rush and Gold Diggers before we entered
into this lease. These additional payments are capped at $125,000 per
month. If the payments exceed that amount, the excess amount is deducted from
the base rent due. In 2007, these assumed obligations averaged
approximately $91,000 per month.
Southwest
Entertainment, Inc., a wholly owned subsidiary of Southwest Casino and
Hotel Corp., operates the Gold Rush Palladium, an outdoor music amphitheatre
with 1,200 seats. The Palladium is located behind the Gold Rush and Gold Diggers
casinos on a portion of the property leased by Gold Rush I, LLC from Mark and
Annesse Brockley, Cripple Creek Development Corporation and Blue Building
Corporation under the lease described above that expires in June 2019.
Southwest Entertainment hosts music events at the Palladium intended to
increase traffic at the Gold Rush and Gold Diggers casinos. Under the sublease
between Southwest Entertainment and Gold Rush I for this site, Southwest
Entertainment is required to pay rent of $1,000 per month.
In
addition to the Gold Rush and Gold Diggers casinos, the lease with Mark and
Annesse Brockley, Cripple Creek Development and Blue Building Corporation
includes two additional storefronts that we sublease to a third party.
The monthly rent we receive for these properties is $1,000.
North
Metro Harness Initiative, LLC, in which we own a 50 percent membership
interest, purchased approximately 180 acres of real property in Columbus
Township, Anoka County, Minnesota during October 2005. North Metro is
building a harness racetrack and card room on this site. North Metro also
acquired a separate 24-acre parcel in the city of Hugo in Washington County,
Minnesota that will be used for wetland mitigation required in connection with
the development of the harness racetrack and card room. We estimate the
total cost of this development to be approximately $62 million. As of December 31,
2007, the members of North Metro have provided approximately $21.3 million of
that amount. (See Note 4 to the Consolidated Financial Statements
included with this prospectus).
Southwest
Casino Corporation leases 4,780 square feet of office space at 2001 Killebrew
Drive, Suite 350 in Minneapolis, Minnesota with a base rent of
approximately $9,000 per month plus certain operating costs for its corporate
offices under a five-year lease that expires in December 2009.
Southwest
does not own any interest in real property solely for investment
purposes. Southwest does not invest in real estate mortgages or in the
securities of persons primarily engaged in real estate activities.
Our
management considers our leased properties suitable and adequate for our
current operations. In the opinion of our management, all of these
properties are adequately covered by insurance.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
issued warrants to purchase 250,000 shares of its common stock at a price of
$0.39 per share to each of James B. Druck, CEO, Thomas E. Fox, President and
COO, and Jeffrey S. Halpern, Vice President of Government Affairs, on March 10,
2008. These warrants are exercisable for
a period of five years. We issued these
warrants to Messrs. Druck, Fox and Halpern in consideration of their
agreement to increase the amount of their personal guarantees of our
indebtedness from $150,000 to $250,000 and to extend the termination date of
those guarantees from April 19, 2008 to January 11, 2010.
We
issued a warrant to purchase 300,000 shares of our common stock at a price of
$0.39 per share to Gus Chafoulias, a member of the companys Board of
Directors, on March 10, 2008. This
warrant is exercisable for a period of five years. We issued this warrant to Mr. Chafoulias
in consideration of his agreement to co-sign a $300,000 promissory note with
Southwest Casino & Hotel Corp. for a bank loan to Southwest.
On January 24
and February 26, 2007, we held separate closings in a private placement of
common stock with accompanying warrants in which we raised $4.1 million. We sold units consisting of one share of
common stock and a warrant to purchase 0.4 shares of common stock at a price of
$0.55 per unit. The warrants are
exercisable for
42
five years at a price of $0.61 per share. James B. Druck, CEO, Thomas E. Fox, President
and COO, Jeffrey S. Halpern, Vice President of Government Affairs, Gus
Chafoulias, Director and David Abramson, Director each participated in this
offering on the same terms as all other investors. The amounts of their respective investments
were:
Name
|
|
Title
|
|
Common Shares
|
|
Warrant Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
James Druck
|
|
CEO, Director
|
|
68,000
|
|
27,200
|
|
$
|
37,400
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Fox
|
|
President, COO
|
|
318,183
|
|
127,274
|
*
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Halpern
|
|
VP Govt. Affairs
|
|
68,200
|
|
27,280
|
|
$
|
37,510
|
|
|
|
|
|
|
|
|
|
|
|
Gus Chafoulias
|
|
Director
|
|
181,819
|
|
72,728
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
David Abramson
|
|
Director
|
|
30,000
|
|
12,000
|
|
$
|
16,500
|
|
*
Consists of common shares and warrants to
purchase common shares acquired by entities in which Mr. Fox has an ownership
interest. Does not include 381,819
shares and warrants to purchase 152,728 shares held by Richfield Hotel
Associates Limited Partnership (RHALP).
Mr. Fox is general partner of a partnership that is a limited
partner of RHALP and does not have or share investment control over RHALP and
disclaims any beneficial ownership interest in these shares.
As of December 31, 2007 the Company had a receivable due from
North Metro of approximately $41,000 for reimbursement of salary, benefits and
travel. This amount was subsequently
paid to the Company by North Metro.
As of December 31, 2007, Southwest had accrued liabilities in the
amount of $140,000 for bonuses awarded but not paid to executive officers of
the company.
The Company had outstanding liabilities to James B. Druck, Thomas E.
Fox and Jeffrey S. Halpern for unpaid compensation and expense reimbursements
of $122,467 as of December 31, 2007 and $122,467 as of December 31,
2006.
Southwest Casino and Hotel Corp. and North Metro Harness Initiative, LLC
purchased furniture and equipment from Berc & Fox for $25,000 during
2007. The operations of Berc &
Fox were sold in January 2007 and as a result certain furniture and
equipment were available for purchase.
The purchase price for the furniture and equipment was less than their
value as determined by independent third-party appraisers. Thomas Fox, the Companies President, is a
shareholder and officer in Berc & Fox Limited.
During the year ended December 31, 2007, Southwest paid Jennifer
Sparlin Druck $1,000 for performing at the Gold Rush Palladium. Ms. Druck
is the wife of James B. Druck.
Virginia Skruppy is a part-time employee of North Metro Harness
Initiative, LLC. Ms. Skruppy is the
wife of Tom Fox, President of Southwest Casino Corporation. We anticipate that her earnings in 2008 from
North Metro will not exceed $20,000.
Each
of Mr. Abramson, Mr. Chafoulias, Mr. Holmes and Mr. Schatzman
has been determined to be independent under the rules of the Nasdaq
stock market.
43
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the Over-the-Counter
Bulletin Board (OTCBB) of the National Association of Securities Dealers, Inc.
under the symbol SWCC.OB. The market for shares in our common stock is
limited because only a small number of our outstanding shares are available for
trading in the public market. The following table sets forth the high and low
bid prices for our common stock, as reported by the OTCBB, for the fiscal
quarters indicated:
Fiscal Year ended
December 31, 2007:
|
|
High
|
|
Low
|
|
Quarter ended Dec. 31, 2007
|
|
$
|
0.55
|
|
$
|
0.34
|
|
Quarter ended Sept. 30, 2007
|
|
$
|
0.70
|
|
$
|
0.32
|
|
Quarter ended June 30, 2007
|
|
$
|
1.24
|
|
$
|
0.50
|
|
Quarter ended March 31, 2007
|
|
$
|
1.26
|
|
$
|
0.59
|
|
Fiscal Year ended
December 31, 2006:
|
|
High
|
|
Low
|
|
Quarter ended Dec. 31, 2006
|
|
$
|
0.70
|
|
$
|
0.42
|
|
Quarter ended Sept. 30, 2006
|
|
$
|
0.71
|
|
$
|
0.40
|
|
Quarter ended June 30, 2006
|
|
$
|
0.84
|
|
$
|
0.51
|
|
Quarter ended March 31, 2006
|
|
$
|
0.73
|
|
$
|
0.40
|
|
These bid
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Number of Record Holders
As of March 10,
2008 there were 344 record holders of our common stock.
44
EXECUTIVE
COMPENSATION
The
following table provides summary information concerning cash and non-cash
compensation paid to or earned by our principal executive officer and our two
other highest paid executive officers during the Southwest Casino Corporation
fiscal year ended December 31, 2007.
We will provide a copy of our revised Code of Conduct and Ethics to any
person, without charge, upon written request submitted to our office at 2001
Killebrew Drive, Suite 350, Minneapolis, MN 55425, Attn: Investor
Relations. We intend to disclose any
amendments to and any waivers from a provision of our Code of Conduct and
Ethics on a Form 8-K filed with the SEC.
SUMMARY COMPENSATION TABLE
Name And
|
|
|
|
Salary
|
|
Bonus
|
|
Stock
Award(s)
|
|
Option
Awards
|
|
Nonequity
Incentive
Plan
Compensation
|
|
Non qualified
deferred
compensation
earnings
|
|
All Other
Compensation
|
|
Total
|
|
Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
James B. Druck,
|
|
2007
|
|
243,100
|
|
55,000
|
|
|
|
|
|
|
|
|
|
48,637
|
(2)
|
346,737
|
|
CEO & Director
|
|
2006
|
|
220,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
44,988
|
(2)
|
264,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Fox,
|
|
2007
|
|
243,100
|
|
55,000
|
|
|
|
|
|
|
|
|
|
42,200
|
(2)
|
340,300
|
|
President & COO
|
|
2006
|
|
220,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
31,961
|
(2)
|
251,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian L. Foster,
|
|
2007
|
|
46,500
|
(3)
|
192,422
|
|
|
|
|
|
|
|
|
|
17,536
|
(4)
|
256,458
|
|
VP Native American Operations -
|
|
2006
|
|
|
(3)
|
203,790
|
|
|
|
|
|
|
|
|
|
14,746
|
(4)
|
218,536
|
|
(1)
Does not include $50,000 paid to Mr. Druck and $10,000
paid to Mr. Fox during the second quarter of 2006 as partial payment of
salary earned in years before 1998 but not paid.
(2)
Consists of company paid medical, dental, life and
disability insurance, 401(k) matching funds, and a car allowance.
(3)
Mr. Foster managed two gaming facilities owned by
the Cheyenne and Arapaho Tribes of Oklahoma until August 17, 2007. Mr. Foster
also received compensation, including a salary, directly from the Cheyenne and
Arapaho Tribes of Oklahoma tribal enterprises.
(4)
Consists of company paid medical, dental, life and
disability insurance, and 401(k) matching funds.
James Druck Employment Agreement
In July 2004,
we entered into an employment agreement with James B. Druck under which Mr. Druck
serves as our Chief Executive Officer. The initial term of this agreement
continued until July 1, 2006, after which the term renews automatically
for additional one-year periods unless terminated earlier by either party.
Under this agreement, Mr. Druck receives a base salary of $220,000 per
year, an automobile allowance of $1,000 per month, and is eligible for an
additional performance bonus if granted by our Board of Directors. Any
adjustment to base salary will be determined by the Board of Directors.
Effective April 1, 2007, the base salary was increased to $250,800 per
year. Bonuses are discretionary and no
bonus was awarded during fiscal year 2006. Our Board of Directors
approved bonus payments of $110,000 at its meeting on March 13, 2007. The initial $55,000 of that bonus was paid on
March 31, 2007 and the remaining $55,000 will be paid on or after July 1,
2007, at such time as management determines that Southwest has sufficient
financial resources for the payments. As
of December 31, 2007 the $55,000 remaining bonus payment is included in
accrued liabilities on the Consolidated Balance Sheet. This is the first bonus or salary increase
awarded to Mr. Druck since entering into their employment agreements in
2004. Under the employment agreement Mr. Druck
was also granted a non-plan option to purchase 300,000 shares of our common
stock at a price of $1.00 per share that is now fully vested. After the initial two-year term of the
agreement if Mr. Druck is terminated without cause, in connection with a
change in control of the company, or if Mr. Druck terminates his
45
employment
for good reason, Mr. Druck may elect to continue employment with us in a
diminished capacity. If Mr. Druck so elects, Mr. Druck will continue
to receive his base salary and medical benefits for 12 months. After 12 months,
Mr. Druck will receive a salary of not less than $25,000 and continuing
medical benefits. Mr. Druck is also subject to customary assignment
of inventions, confidentiality, non-solicitation and non-compete provisions.
Thomas Fox Employment Agreement
In July 2004,
we entered into an employment agreement with Thomas E. Fox under which Mr. Fox
serves as our President and Chief Operating Officer. The initial term of this
agreement continued until July 1, 2006, after which the term renews
automatically for additional one-year periods unless terminated earlier by
either party. Under this agreement, Mr. Fox receives a base salary of
$220,000 per year, an automobile allowance of $1,000 per month, and is eligible
for an additional performance bonus if granted by our Board of Directors.
Any adjustment to base salary will be determined by the Board of
Directors. Effective April 1, 2007;
the base salary was increased to $250,800 per year. Bonuses are discretionary and no bonus was
awarded during fiscal year 2006. Our Board of Directors approved bonus
payments of $110,000 at its meeting on March 13, 2007. The initial $55,000 of that bonus was paid on
March 31, 2007 and the remaining $55,000 will be paid on or after July 1,
2007, at such time as management determines that Southwest has sufficient
financial resources for the payments. As
of December 31, 2007 the $55,000 remaining bonus payment is included in
accrued liabilities on the Consolidated Balance Sheet. This is the first bonus or salary increase
awarded to Mr. Fox since entering into their employment agreements in
2004. Under the employment agreement Mr. Fox
was also granted a non-plan option to purchase 300,000 shares of our common
stock at a price of $1.00 per share that is now fully vested. After the initial two-year term of the
agreement if Mr. Fox is terminated without cause, in connection with a
change in control of the company, or if Mr. Fox terminates his employment
for good reason, Mr. Fox may elect to continue employment with us in a
diminished capacity. If Mr. Fox so elects, Mr. Fox will continue to
receive his base salary and medical benefits for 12 months. After 12 months, Mr. Fox
will receive a salary of not less than $25,000 and continuing medical
benefits. Mr. Fox is also subject to customary assignment of
inventions, confidentiality, non-solicitation and non-compete provisions.
Change in Control Arrangements.
Under
our employment agreements with Mr. Druck and Mr. Fox, if either of
them is terminated within nine months after a change in control occurs, they
may elect to continue their employment with us in a diminished capacity and
receive continuing salary and medical benefits at his then base rate for 12
months after which his salary may be reduced to not less than $25,000 with
continuing medical benefits. In addition, any unexpired stock options
will vest immediately.
For purposes of these employment agreements, a change
in control includes:
·
any merger, acquisition, reorganization
or consolidation after which the shareholders of Southwest immediately before
the transaction do not own a majority of the surviving corporation;
·
any sale, lease, license or transfer of
substantially all of our assets;
·
any statutory exchange of securities with
another entity (except where we are the acquiring entity);
·
acquisition by any individual or group of
more than 50 percent of our outstanding voting stock from existing
shareholders;
·
members of our Board of Directors as of July 1,
2004 or new board members approved by a majority of those board members cease
to constitute a majority of our Board of Directors; or
·
any other transaction or series of
transactions (other than venture capital or institutional investor financings)
that the SEC would require us to report.
46
Under our 2004 Stock Incentive Plan, incentive awards
granted under the plan will become fully exercisable after certain changes in
control of our company, such as:
·
the sale, lease, exchange or other
transfer of all or substantially all of our assets;
·
our shareholders approve any plan of or
proposal for the liquidation or dissolution of our company;
·
any person becomes the beneficial owner
of:
·
20% or more, but not 50% or more, of the
combined voting power of our outstanding securities ordinarily having the right
to vote at elections of directors, unless the transaction resulting in their
ownership was approved in advance by the continuity directors who are members
of the Board of Directors at the time of the special meeting or whose
nomination for election meets certain approval requirements related to
continuity with our current Board of Directors; or
·
50% or more of the combined voting power
of our outstanding securities ordinarily having the right to vote at elections
of directors (regardless of any approval by the continuity directors);
provided that a traditional institution or venture capital financing
transaction are excluded from this definition;
·
we are a party to a merger or
consolidation that results in our shareholders beneficially owning securities
representing:
·
more than 50%, but less than 80%, of the
combined voting power of the surviving corporations then outstanding
securities ordinarily having the right to vote at elections of directors,
unless the merger or consolidation was approved in advance by the continuity
directors; or
·
50% or less of the combined voting power
of the surviving corporations then outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any approval by the continuity
directors);
·
a change in control that outside legal
counsel determines must be reported under Section 13 or 15(d) of the
Exchange Act, whether or not we are then subject to these reporting
requirements; or
·
the continuity directors cease, for any reason, to constitute at
least a majority of the Board of Directors, at any time after the date that our
securities are first sold in a registered public offering.
47
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END TABLE
The following table provides information regarding
unexercised options for our named executive officers that remain outstanding at
December 31, 2007.
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
Option
Exercise
price
($/share)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or Units
of Stock
that
have
not
Vested
(#)
|
|
Market
Value of
Shares
or Units
of Stock
that
have
not
Vested
($)
|
|
Equity
Incentive
Plan
Awards:
Number
of Shares
that have
not
Vested (#)
|
|
Equity
Incentive
Plan
Awards;
Market
Value of
Shares or
Units of
Stock that
have not
Vested ($)
|
|
James Druck
|
|
300,000
|
(1)(2)
|
|
|
|
|
1.00
|
|
6/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Fox
|
|
300,000
|
(1)(2)
|
|
|
|
|
1.00
|
|
6/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Foster
|
|
250,000
|
|
|
|
|
|
0.12
|
|
12/7/2013
|
|
|
|
|
|
|
|
|
|
(1)
Does not include warrants issued to Mr. Druck, Mr. Fox
or parties in which Mr. Fox has a beneficial ownership interest in
connection with (a) their participation in our October 2005 private
placement of warrants in connection with guaranteeing a $2.5 million term loan
with Crown Bank that was paid in full in April 2007, (b) our January and
February 2007 private placement of common stock with accompanying
warrants, and (c) with their participation of our March 2008 private
placement of warrants in connection with guaranteeing a $1.55 million loan with
Crown Bank.
(2)
Does not include options to purchase 170,000 shares of
our common stock awarded to each of Mr. Druck and Mr. Fox on March 20,
2008. These options were issued under
our 2004 Stock Incentive Plan. The
exercise price under each of these options is $0.48 per share, the closing
market price for one share of Southwest Casino Corporation common stock on the
grant date. The options became
exercisable immediately with respect to 42,500 shares and will become
exercisable with respect to the remaining shares in equal installments on the
last day of each fiscal quarter over a three-year period.
48
DIRECTOR COMPENSATION
The following table
states information concerning the compensation of members of our Board of
Directors during the fiscal year ended December 31, 2007.
Name
|
|
Fees
earned
or paid
in cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-equity
incentive
plan
compensation
($)
|
|
Non-qualified deferred
compensation earnings ($)
|
|
All other
compensation
($)
|
|
Total ($)
|
|
David H. Abramson(1)
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,500
|
|
Gus A. Chafoulias(2)
|
|
$
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,000
|
|
Jim Holmes (2)
|
|
$
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,000
|
|
Gregg P. Schatzman(2)
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,500
|
|
(1)
As of December 31, 2007, Mr. Abramson
had options to acquire an aggregate of 225,000 shares of common stock at a
price of $0.65 per share outstanding that had been awarded to him in 2006 in
connection with his service as an independent director and Chairman of the
Audit Committee of the Board of Directors.
Does not include options to purchase an aggregate of 225,000 shares of
common stock at a price of $0.48 per share that were awarded to Mr. Abramson
on March 20, 2008 in connection with his continued service as an
independent director and Chairman of the Audit Committee.
(2)
As of December 31, 2007, Messrs. Chafoulias,
Holmes and Schatzman each had options to acquire an aggregate of 150,000 shares
of common stock at a price of $0.65 per share outstanding that had been awarded
to them in 2006 in connection with their service as independent directors. Does not include options to purchase 150,000
shares of common stock at a price of $0.48 per share that were awarded to each
of Messrs. Chafoulias, Holmes and Schatzman on March 20, 2008 in
connection with their continued service as independent directors.
Our
Board of Directors consists of four independent, non-employee directors and
James Druck, our CEO. Mr. Druck does not receive any additional
compensation for his service as a director.
Beginning
in the first quarter of 2006, the non-employee members of our Board of
Directors receive a quarterly retainer of $2,500, with an initial retainer of
$5,000 paid for the fourth quarter of 2005, their first quarter of service.
Each director also received a non-qualified option to purchase 150,000 shares
of Southwest common stock under our 2004 Stock Incentive Plan. These options
were granted on January 10, 2006 and have an exercise price of $0.65 per
share. The options become exercisable in 12 equal quarterly installments on the
last day of each quarter over three years. We also pay directors meeting fees
of $1,000 for each in-person meeting and $500 for each telephonic meeting at
which formal action is taken by our board or any committee of the board. These
meeting fees do not apply to one in-person meeting of the Board of Directors
and one meeting of each committee on which a board member serves each quarter.
The increased retainer during the first quarter of a directors service is
intended to compensate the director for the extra time and meetings required to
orient a director to Southwest and the work of our Board.
We
also issued a non-qualified option to purchase 75,000 shares of Southwest
common stock, on the same terms as described above, to David Abramson to
compensate him for his work as Chairman of the Audit Committee of the Board of
Directors.
On March 20,
2008, we issued additional non-qualified options to purchase 150,000 shares of
our common stock under our 2004 Stock Incentive Plan to each of our independent
directors. These options have an
exercise price of $0.48 per share and become exercisable in 12 equal quarterly
installments on the last day of each quarter over three years beginning on the
last day of the fourth quarter of 2008 (the first quarter after the options
granted to our independent directors on January 10, 2006 are fully
vested). We also issued an additional
non-qualified option to purchase 75,000 shares of our common stock, on the same
terms, to David Abramson to compensate him for his work as Chairman of the
Audit Committee of the Board of Directors.
49
REPORTS TO SECURITY HOLDERS
We are subject to the reporting
and other requirements of the Exchange Act and furnish to our stockholders
annual reports containing financial statements audited by our independent
auditors and to make available quarterly reports containing unaudited financial
statements for each of the first three quarters of each year. We also file these reports with the United
States Securities and Exchange Commission.
You may read and copy any
materials we file with the SEC at the SECs Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. We
file these reports electronically and the SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding Southwest Casino Corporation that we file electronically. You may access this information through the
SEC website at www.sec.gov.
The mailing address and telephone number of our
principal executive offices is:
Southwest Casino Corporation
2001 Killebrew Drive, Suite 350
Minneapolis, MN 55425
Phone: 952-853-9990
50
FINANCIAL STATEMENTS
Table
of Contents
F-1
[Letterhead of Eide Bailly
LLP]
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Southwest Casino Corporation
Minneapolis, Minnesota
We
have audited the accompanying consolidated balance sheets of
Southwest Casino Corporation
(the Company)
as of December 31, 2007 and 2006, and the related consolidated statements
of operations, stockholders equity and cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based upon our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we do not
express such an opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of
Southwest Casino Corporation
as of December 31,
2007 and 2006 and the results of its operations its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
|
/s/ Eide Bailly LLP
|
|
|
Minneapolis, Minnesota
|
|
March 31, 2008
|
|
F-2
SOUTHWEST CASINO CORPORATION
Consolidated
Balance Sheets
December 31, 2007
ASSETS
|
|
|
|
2007
|
|
2006
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,892,401
|
|
$
|
1,531,260
|
|
Accounts Receivable
|
|
54,582
|
|
157,506
|
|
Accounts Receivable - Related Party
|
|
41,572
|
|
|
|
Inventories
|
|
141,041
|
|
173,216
|
|
Prepaid Expenses and Other Current Assets
|
|
679,583
|
|
709,649
|
|
Total Current Assets
|
|
$
|
2,809,179
|
|
$
|
2,571,631
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
Leasehold Improvements
|
|
15,389,750
|
|
15,747,888
|
|
Furniture and Equipment
|
|
5,280,282
|
|
6,046,315
|
|
Accumulated Depreciation
|
|
(10,835,938
|
)
|
(10,940,192
|
)
|
Net Property and Equipment
|
|
$
|
9,834,094
|
|
$
|
10,854,011
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
Other Assets
|
|
33,374
|
|
375,287
|
|
Investment in Unconsolidated Subsidiary
|
|
7,218,720
|
|
5,054,020
|
|
Total Other Assets
|
|
$
|
7,252,094
|
|
$
|
5,429,307
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
19,895,367
|
|
$
|
18,854,949
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Accounts Payable
|
|
$
|
659,284
|
|
$
|
535,294
|
|
Accounts Payable - Related Party
|
|
25,000
|
|
|
|
Accrued Expenses
|
|
1,085,797
|
|
972,804
|
|
Accrued Liabilities - Related Parties
|
|
122,467
|
|
122,467
|
|
Notes Payable
|
|
450,000
|
|
446,292
|
|
Current Portion of Long-Term Liabilities
|
|
1,005,940
|
|
1,720,193
|
|
Accrued Interest Payable
|
|
55,465
|
|
5,927
|
|
Total Current Liabilities
|
|
$
|
3,403,953
|
|
$
|
3,802,977
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
Long-Term Liabilities Net of Current Portion
|
|
$
|
6,486,365
|
|
$
|
7,495,224
|
|
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Preferred Stock, $.001 Par Value; 30,000,000 Shares Authorized
|
|
$
|
|
|
$
|
|
|
Common Stock, $.001 Par Value
75,000,000 Shares Authorized, 27,817,953 Shares
Issued and 27,460,953 Outstanding at December 31, 2007
|
|
27,819
|
|
19,689
|
|
Additional Paid-in Capital
|
|
21,496,064
|
|
17,239,894
|
|
Accumulated Deficit
|
|
(11,196,534
|
)
|
(9,702,835
|
)
|
|
|
10,327,349
|
|
|
|
Less Treasury Stock (357,000 shares redeemed)
|
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
10,005,049
|
|
7,556,748
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
19,895,367
|
|
$
|
18,854,949
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-3
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Operations
For
the Year Ended December 31, 2007 and 2006
|
|
For the year
|
|
For the year
|
|
|
|
ended
December 31,
2007
|
|
ended
December 31,
2006
|
|
|
|
|
|
|
|
NET REVENUES
|
|
|
|
|
|
Casino
|
|
$
|
15,087,784
|
|
$
|
14,844,607
|
|
Food & Beverage/Hotel
|
|
501,057
|
|
556,475
|
|
Management and Consulting
|
|
3,716,109
|
|
5,865,680
|
|
Entertainment
|
|
67,807
|
|
17,429
|
|
Other
|
|
163,983
|
|
190,717
|
|
|
|
19,536,740
|
|
21,474,908
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Casino
|
|
$
|
11,685,289
|
|
$
|
11,492,218
|
|
Food & Beverage/Hotel
|
|
1,379,610
|
|
1,410,887
|
|
Corporate Expense
|
|
3,782,615
|
|
2,774,022
|
|
Project Development Costs
|
|
374,384
|
|
290,623
|
|
Entertainment
|
|
187,333
|
|
117,905
|
|
Impairment Loss - Management Contract
|
|
400,435
|
|
|
|
Depreciation and Amortization
|
|
1,781,570
|
|
2,169,990
|
|
|
|
19,591,236
|
|
18,255,645
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
$
|
(54,496
|
)
|
$
|
3,219,263
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest Income
|
|
$
|
3,421
|
|
$
|
2,849
|
|
Interest Expense
|
|
(877,585
|
)
|
(1,204,296
|
)
|
Gain (Loss) on Disposition of Property and Equipment
|
|
7,420
|
|
(6,932
|
)
|
Gain on Disposition of Casino
|
|
477,407
|
|
|
|
Write-off of Acquisition and Financing Costs
|
|
(613,372
|
)
|
|
|
|
|
(1,002,709
|
)
|
(1,208,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, equity in earnings
of unconsolidated subsidiaries
|
|
(1,057,205
|
)
|
2,010,884
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
|
(670,800
|
)
|
Loss of Unconsolidated Subsidiaries, Net of Tax Benefit
|
|
(436,494
|
)
|
(182,873
|
)
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
(1,493,699
|
)
|
1,157,211
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(1,493,699
|
)
|
$
|
1,157,211
|
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
$
|
(0.06
|
)
|
$
|
0.06
|
|
Income (loss) per share -
diluted
|
|
|
|
$
|
0.06
|
|
Weighted average common shares
outstanding - basic
|
|
26,847,743
|
|
19,675,779
|
|
Weighted average common shares
outstanding - diluted
|
|
|
|
20,651,331
|
|
See
Notes to Consolidated Financial Statements
F-4
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Cash Flows
For the Year Ended
December 31, 2007 and 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(1,493,699
|
)
|
$
|
1,157,211
|
|
Adjustments to Reconcile Net Income (Loss) to
|
|
|
|
|
|
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
Depreciation and Amortization
|
|
1,781,570
|
|
2,169,990
|
|
Amortization of Loan Costs
|
|
56,619
|
|
162,906
|
|
Impairment Loss - Management Contract
|
|
400,435
|
|
|
|
Write-off of Acquisition and Financing Costs
|
|
613,372
|
|
|
|
(Gain) Loss on Disposition of Property and Equipment
|
|
(7,420
|
)
|
6,932
|
|
Issuance of Common Stock for Services
|
|
12,500
|
|
|
|
Stock Based Compensation Expense
|
|
278,833
|
|
175,078
|
|
Loss of Unconsolidated Subsidiary
|
|
436,494
|
|
244,673
|
|
Gain on Disposition of Casino
|
|
(477,407
|
)
|
|
|
Change in Current Assets
and Liabilities,
|
|
|
|
|
|
(Increase) Decrease in Restricted Cash
|
|
|
|
2,656
|
|
(Increase) Decrease in Receivables
|
|
102,924
|
|
411,288
|
|
(Increase) Decrease in Receivables - Related Party
|
|
(41,572
|
)
|
|
|
(Increase) Decrease in Inventories
|
|
32,175
|
|
(24,933
|
)
|
(Increase) Decrease in Prepaid Expenses
|
|
(30,327
|
)
|
(14,360
|
)
|
(Increase) Decrease in Other Assets
|
|
48,375
|
|
(42,849
|
)
|
(Increase) decrease in Deferred Tax Asset
|
|
|
|
573,000
|
|
Increase (Decrease) in Accounts Payable
|
|
(33,909
|
)
|
(96,067
|
)
|
Increase (Decrease) in Accrued Expenses
|
|
108,354
|
|
(103,434
|
)
|
Increase (Decrease) in Accrued Interest Payable
|
|
49,538
|
|
(11,625
|
)
|
Net Cash Provided By Operating Activities
|
|
$
|
1,836,855
|
|
$
|
4,610,466
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
(364,062
|
)
|
(426,927
|
)
|
Proceeds from Sale of Property and Equipment
|
|
15,121
|
|
|
|
Proceeds from Disposition of Casino
|
|
490,018
|
|
|
|
Receipt (Payment) of Deposit
|
|
(3,318
|
)
|
(728
|
)
|
Payment of Costs Associated with Management and Consulting Contracts
|
|
(439,168
|
)
|
|
|
Investment in Unconsolidated Subsidiary
|
|
(2,601,194
|
)
|
(1,000,326
|
)
|
Net Cash Used in Investing Activities
|
|
$
|
(2,902,603
|
)
|
$
|
(1,427,981
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
Net Payments on Short-Term Notes Payable
|
|
$
|
3,708
|
|
|
|
Principal Payments on Long-Term Borrowings
|
|
(1,723,112
|
)
|
(2,675,826
|
)
|
Proceeds from Issuance of Common Stock upon Exercise of Warrants
|
|
30,000
|
|
12,000
|
|
Proceeds from Issuance of Common Stock and Warrants
|
|
4,003,360
|
|
|
|
Redemption of Common Stock
|
|
(322,300
|
)
|
|
|
Payment of Financing Costs
|
|
|
|
(72,544
|
)
|
Payment of Financing Costs Written-Off
|
|
(564,767
|
)
|
|
|
Payments for Liabilities Owed to Related Parties
|
|
|
|
(110,000
|
)
|
Net Cash Provided (Used) by Financing Activities
|
|
$
|
1,426,889
|
|
$
|
(2,846,370
|
)
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
361,141
|
|
336,115
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Beginning of Period
|
|
1,531,260
|
|
1,195,145
|
|
End of Period
|
|
$
|
1,892,401
|
|
$
|
1,531,260
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
|
|
|
|
|
|
Interest Paid
|
|
$
|
825,492
|
|
$
|
1,006,812
|
|
Income Taxes Paid
|
|
$
|
41,632
|
|
$
|
22,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Capital assets acquired with acounts payable
|
|
$
|
135,492
|
|
$
|
7,303
|
|
Capital assets acquired with acounts payable - related party
|
|
$
|
25,000
|
|
|
|
Financing costs included in accounts payable
|
|
$
|
13,606
|
|
$
|
11,352
|
|
Costs related to management contract included in accounts payable
|
|
$
|
27,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-5
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Changes in Stockholders Equity
For the Years Ended
December 31, 2007 and 2006
|
|
Treasury Stock
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Retained
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2005
|
|
|
|
|
|
19,588,656
|
|
$
|
19,589
|
|
$
|
17,052,916
|
|
$
|
(10,860,046
|
)
|
$
|
6,212,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock Upon Exercise of Warrants
|
|
|
|
|
|
100,000
|
|
100
|
|
11,900
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
175,078
|
|
|
|
175,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
1,157,211
|
|
1,157,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
|
$
|
|
|
19,688,656
|
|
$
|
19,689
|
|
$
|
17,239,894
|
|
$
|
(9,702,835
|
)
|
$
|
7,556,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock and Warrants, Net
|
|
|
|
|
|
7,954,787
|
|
7,955
|
|
3,935,012
|
|
|
|
3,942,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
Warrants and Issuance of Common Stock
|
|
|
|
|
|
150,000
|
|
150
|
|
29,850
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock for Services
|
|
|
|
|
|
24,510
|
|
25
|
|
12,475
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of
Common Stock
|
|
(357,000
|
)
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
278,833
|
|
|
|
278,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,493,699
|
)
|
(1,493,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
(357,000
|
)
|
$
|
(322,300
|
)
|
27,817,953
|
|
$
|
27,819
|
|
$
|
21,496,064
|
|
$
|
(11,196,534
|
)
|
$
|
10,005,049
|
|
See
Notes to Consolidated Financial Statements
F-6
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 1 ORGANIZATION AND
NATURE OF OPERATIONS
Southwest Casino Corporation
Southwest Casino and Hotel Corp. is the primary,
wholly-owned operating subsidiary of Southwest Casino Corporation and was the
parent company until the July 2004 reorganization that resulted in the
current structure. Southwest Casino and Hotel Corp. was organized under
the laws of the State of Minnesota in 1992 under the name Southwest Casino and
Hotel Ventures, Inc. The Company has operated in the gaming
industry since formation.
On July 22, 2004, Southwest Casino and Hotel
Corp. merged with Lone Moose Acquisition Corporation, a wholly-owned subsidiary
of Lone Moose Adventures, Inc., a Nevada corporation. Lone Moose
Acquisition Corporation was formed solely for the purpose of completing our
reorganization. Southwest Casino and Hotel Corp. was the surviving
corporation in that merger and became a wholly-owned subsidiary of Lone Moose
Adventures, Inc., which changed its name to Southwest Casino
Corporation. The reorganization represented a recapitalization of
Southwest Casino Corporation with accounting treatment similar to that used in
a reverse acquisition, except that no goodwill or intangible is recorded.
A recapitalization is characterized by the merger of a private operating
company into a non-operating public shell corporation with nominal net assets
and typically results in the owners and managers of the private company having
effective operating control after the transaction. Southwest Casino
Corporation emerged as the surviving reporting entity after the reorganization.
The Companys principal business is the management,
operation and development of gaming facilities in emerging and established
gaming jurisdictions. Southwest Casino Corporation, through its
wholly-owned subsidiaries, operates two casinos in Cripple Creek, Colorado
Gold Rush Hotel and Casino and Gold Diggers Casino. Until July 28,
2007, the Company also operated Uncle Sams Casino in Cripple Creek.
Until August 17, 2007 the Company managed two Native American gaming
operations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma, Lucky
Star - Concho and Lucky Star Clinton. The Company also owns a 50%
membership interest in North Metro Harness Initiative, LLC, (North Metro).
North Metro is building a harness racetrack and 50-table card room in Columbus,
Minnesota on the north side of the Minneapolis St. Paul Metropolitan
area. In September 2007, the Company entered into a consulting
agreement to work with Palace Resorts in developing and opening a casino at the
Moon Palace Casino, Golf and Spa Resort now under construction in Punta Cana on
the easternmost tip of the Dominican Republic.
Southwest Casino Corporations operations include the
following consolidated and unconsolidated subsidiaries:
Southwest Casino and Hotel Corp
.
Southwest Casino and Hotel Corp. was formed in 1992
and provides management and consulting services for casinos under contractual
agreements and operated Uncle Sams Casino in Cripple Creek, Colorado until July 2007,
see Note 7.
Gold Rush I, LLC
Gold Rush I, LLC, was formed during 1999 and operates
the Gold Rush Hotel and Casino and Gold Diggers Casino both in Cripple Creek,
Colorado under a long-term capitalized lease agreement.
Southwest Entertainment. Inc
.
Southwest Entertainment, Inc., located in
Minneapolis, Minnesota, was formed on November 4, 1998. The company
operates an outdoor amphitheatre for entertainment events in Cripple Creek,
Colorado.
North Metro Harness Initiative, LLC (Unconsolidated)
North Metro Harness Initiative, LLC (North Metro) (a
development stage Minnesota limited liability company) was formed on June 16,
2003 for the purpose of developing, owning, and operating a harness racetrack
and card room north of Minneapolis, Minnesota, in Anoka County. North
Metro was issued licenses to own and operate the racetrack by the Minnesota
Racing Commission on February 16, 2005. Southwest Casino Corporation
owns a 50% interest in North Metro.
SW Missouri, LLC
SW Missouri, LLC was formed on May 25,
2004. Its sole asset is a 30% membership interest in Southwest Missouri
Gaming, LLC (which is currently a shell company).
F-7
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Southwest Missouri Gaming, LLC (unconsolidated)
SW Missouri, LLC owns a 30% membership interest in
Southwest Missouri Gaming, LLC, which was formed March 29, 2004.
This entity had no activities in 2006 or 2007.
Southwest Eagle, LLC
On February 22, 2006, the Company formed a new
subsidiary, Southwest Charitable Enterprises, LLC, a Minnesota limited
liability company. Southwest is the sole member of Southwest Charitable
Enterprises, LLC, which was established to pursue business opportunities in
charitable gaming. In December 2006, the subsidiarys name was
changed to Southwest Eagle, LLC for purposes of the Double Eagle acquisition
that never came to fruition.
NOTE 2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of Southwest Casino Corporation, its wholly-owned
subsidiaries (referred to as the Company or Southwest), and North Metro
Harness Initiative, LLC, which is accounted for as an equity investment, see
Note 4. All material inter-company transactions and balances have been
eliminated in consolidation.
Basis of Accounting
The consolidated financial statements of the Company
are prepared using the accrual basis of accounting whereby revenues are
recognized when earned and expenses are recognized when incurred. This
basis of accounting conforms to generally accepted accounting principles in the
United States of America.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from
those estimates.
Cash Equivalents
The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less when purchased to
be cash equivalents.
Revenue Recognition
Casino revenue is the net win from gaming activities,
which is the difference between gaming wins and losses. Revenue from
food, beverage and hotel operations is recorded upon delivery of goods or
services, and excludes promotional allowances. Revenue from casino
management and consulting contracts with outside parties is recognized over the
term of the agreements. Consideration given in exchange for entering into
long-term contracts is amortized over the life of the agreement.
Receivables and Credit Policies
Accounts receivable are carried at face value less an
estimated allowance for doubtful accounts. The carrying amount of receivables
is reduced by a valuation allowance that reflects managements best estimate of
the amounts that will be collected. Management reviews all trade
receivable balances that exceed 30 days from the invoice date and, based on an
assessment of the current creditworthiness, estimates the portion, if any, of
the balance that will not be collected.
F-8
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Net Income Per Share Basic and Diluted
Net income per share is computed by dividing the net
income for the period by the weighted average number of common shares
outstanding during the period presented. Basic earnings per share exclude
the dilutive effect of options and warrants, while diluted earnings per share
include such effects only during years when the Company reports net income.
Inventories
Inventories consist principally of food and beverage
products and gift shop merchandise. Inventories are carried at cost,
determined under the first-in, first-out (FIFO) method.
Concentrations of Credit Risk
The Companys cash balances maintained in bank
depositories periodically exceed federally insured limits.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expense for the years ended December 31, 2007
and 2006 was approximately $287,925 and $343,000, respectively.
Employee Benefit Plan
The Company has established a defined contribution
profit sharing plan for its eligible employees. To be eligible, an
employee must be 21 years of age and have completed one year of service.
Contributions to the plan are made at the discretion of management, based on
results of operations from year to year. No discretionary contributions
were made during 2007 or 2006.
The Company has adopted a 401(k) retirement
plan. The plan provides for employee pre-tax salary deferrals of up to
10% of a participants compensation (not to exceed federal limits) and a
matching contribution by the Company dollar for dollar up to 3% and fifty
cents per dollar up to 5% of the participants compensation. Employees are
eligible for the plan if they have completed one year of service, as defined in
the plan, and are at least 21 years old. A participant is fully-vested
after one year of service, as defined in the plan. The Companys matching
contribution made and expensed for the years 2007 and 2006 was $134,789 and
$109,383, respectively.
Property and Equipment
Property and equipment are carried on the books at
cost. Depreciation on property and equipment is calculated using the
straight-line method over their estimated useful lives, which range from 3 to
10 years. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts, and the resulting
gain or loss is included in the income statement.
Repair and maintenance charges, which do not increase
the useful lives of the assets, are charged to expense as incurred.
Depreciation expense was $797,140 and $934,840 for the
years ended December 31, 2007 and 2006, respectively.
Leaseholds attributable to the lease in Note 12 have
been capitalized in accordance with generally accepted accounting principles
and are being amortized over the length of the lease, 20 years, using the
straight-line method.
Amortization expense for these leaseholds was $725,340
for each of the years ended December 31, 2007 and 2006. Total
accumulated amortization of these leaseholds was $6,316,503 and $5,591,163 at December 31,
2007 and 2006, respectively.
Long-lived assets to be held and used are tested for
recoverability whenever events or changes in circumstances indicate that the
related carrying amount may not be recoverable. When required, impairment
losses on assets to be held and used are recognized based on the fair value of
the asset. Certain long-lived assets to be disposed of by sale are reported at
the lower of carrying amount or fair value less cost to sell.
F-9
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Income taxes
The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109).
Under this method, the Company determines deferred tax assets and liabilities
based upon the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to affect taxable income. The tax consequences of
events recognized in the current years consolidated financial statements are
included in determining income taxes currently payable. However, because tax
laws and financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, revenue, expenses, gains and
losses, differences arise between the amount of taxable income and pretax
financial income for a year and between the tax bases of assets or liabilities
and their reported amounts in the consolidated financial statements.
Because it is assumed that the reported amounts of
assets and liabilities will be recovered and settled, respectively, a
difference between the tax basis of an asset or a liability and its reported
amount in the balance sheet will result in a taxable or a deductible amount in
some future years when the related liabilities are settled or the reported amounts
of the assets are recovered, hence giving rise to deferred tax assets and
liabilities. The Company must then assess the likelihood that deferred tax
assets will be recovered from future taxable income and, to the extent
management believes that recovery is not likely, they must establish a
valuation allowance. The Company recorded a 100 percent valuation
allowance against all deferred income tax assets as of December 31, 2007
and 2006. See Note 15.
Stock based compensation
Effective the beginning of fiscal year 2006, the
Company adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004) (SFAS 123(R)),
Share-Based Payment
, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation
.
The Company implemented SFAS 123(R) using the modified prospective method,
which does not result in the restatement of previously issued financial
statements. In all prior periods, the Company accounted for stock-based
compensation awards to employees using the intrinsic value method prescribed by
APB Opinion No. 25 and, as such, recognized no compensation cost for
employee stock options, but rather disclosed the related pro forma effect on
net loss, see Note 13.
Operating segments
The Company has segregated its activities into three
operating segments based on operating and management characteristics related to
its sources of revenue or basis for accumulating assets or expenses. The
segments are defined as casino operations, casino management for unrelated parties,
and project development activities. Separate operations are aggregated
based on the above general segment descriptions.
Legal defense costs
The Company does not accrue for estimated future legal
and related defense costs, if any, to be incurred in the event of any pending
or threatened litigation or other disputed matters but rather, records such as
period costs when the services are rendered.
Other comprehensive income
The Company does not have amounts to be disclosed as
other comprehensive income.
Reclassifications
Certain minor reclassifications to previously reported
amounts have been made to conform to the current year presentation.
New accounting standards
Effective January 1, 2006, the company adopted
SFAS No. 123(R) using the modified prospective method. See Note
13 for information regarding stock-based compensation.
The Company adopted Statement of Financial Accounting
Standards Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
(Interpretation No. 48)
effective January 1, 2007, see Note 15.
In September 2006, the FASB issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (FAS
157) which is effective for fiscal years beginning after November 15,
2007 and for interim periods within those years. This statement defines
fair value,
F-10
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
establishes a framework for measuring fair value and
expands the related disclosure requirements. The Company is currently
evaluating the potential impact of this statement. On February 12, 2008 a FASB Staff
Bulletin FSP FAS 157 -2 was issued which defers the effective date of FAS 157
to fiscal years beginning after November 15, 2008, and applies to
nonfinancial assets and nonfinancial liabilities.
In February 2007, the FASB released SFAS No. 159,
The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115
. This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. This
Statement is effective as of the beginning of an entitys first fiscal year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No. 157,
Fair Value Measurements. The Company is evaluating the impact of this statement.
Management Financial Plans
The Company has completed two closings on an equity
financing, see Note 10. The net proceeds from the sale of securities were
approximately $4 million. In connection
with the financing agreement entered into by North Metro, see Note 4, the
Company was required to make additional membership contributions to North Metro
of approximately $2.35 million to North Metro from January 1, 2007 to the
time the loan closed on April 20, 2007. Due to the loss of
management fees from the termination of our management contract with the
Cheyenne and Arapaho Tribes of Oklahoma (see Note 5) the Company secured
additional debt financing in March 2008 (see Note 26) to fund our current
operations including project development costs. The Company believes the amount of funds
received from the debt financing will be adequate to fund operations during the
2008 fiscal year; however the Company will have to seek additional debt or
equity financing for future operations.
NOTE 3 PROMOTIONAL ALLOWANCES
Revenue does not include the retail amount of rooms,
food, and beverage provided gratuitously to customers, which was $1,197,558 and
$1,155,521in 2007 and 2006, respectively.
NOTE 4UNCONSOLIDATED SUBSIDIARY
North Metro Harness Initiative, LLC (North
Metro)
Organization
:
North Metro (a development stage Minnesota Limited
Liability Company) was formed on June 16, 2003 for the purpose of
developing, owning, and operating a horse race track and card room north of
Minneapolis, Minnesota, in Anoka County. North Metro has purchased land
and obtained zoning, permitting and regulatory approvals for the proposed
operations. On June 8, 2004, Southwest Casino and Hotel Corp. (Southwest)
sold a 50% interest in the Company to MTR Harness Inc. (MTR), a wholly
owned subsidiary of MTR Gaming, Inc. for $10,000, and a commitment to make
additional contributions as discussed below.
Under the North Metro Member Control Agreement dated June 8,
2004, MTR was required to contribute $7,500,000, upon satisfaction of certain
conditions and Southwest was required to contribute $2,500,000. The
amounts contributed in excess of the amounts agreed to under the Member Control
Agreement were agreed upon by Southwest and MTR as managing members of the
Company. These amounts were contributed on an equal basis.
As specified in the Companys Member Control
Agreement, membership interests include financial rights, governance rights and
voting rights. Voting rights are assigned to members based on their
proportionate voting interest. Financial rights include allocation of net
profits, losses and distributions. Governance rights include all of a
members rights other than financial rights and the right to assign financial
rights. A member of the Company may only assign governance and voting
rights to another party with the consent of the remaining members, which
consent may be withheld in any members sole and absolute discretion. If
a member assigns membership rights to another party and the other member or
members do not consent to the assignee becoming a substitute member, the
assignee will only be entitled to receive those distributions and allocations
that would have been made to the assigning member and the assignee will not
have any voting or governance rights. As of December 31, 2007,
Southwest and MTR each hold 50% of the voting rights. Financial and governance rights are
determined in accordance with the Member Control Agreement dated June 8,
2004.
Net income, losses and distributions are allocated on
a 50/50 basis to members in accordance with the member control agreement.
North Metros Member Control Agreement requires North
Metro to make tax distributions to members on a quarterly and annual basis
equal to 40% of the estimated taxable income of the company for the applicable
time period, with annual tax distributions reduced by the amount of any
F-11
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
quarterly tax distributions made during the tax
year. The tax distributions were reduced to 35% under the Credit
Agreement with Black Diamond, described below.
Tax distributions to the members shall be made in proportion to each
members respective share of the taxable income of North Metro.
North Metro was formally organized as a limited
liability company on June 16, 2003. Prior to that date, agreements
were consummated and amounts related to the business purpose of the Company
were directly incurred and paid by Southwest or entities related to Southwest.
North Metro will do business in Minnesota under the
name Running Aces Harness Park.
Accounting for North Metro
:
The Company evaluates whether North Metro should be
treated as a variable interest entity (VIE) subject to consolidation during
the applicable reporting periods under Financial Accounting Standards Board
Interpretation 46(R) -
Consolidation of
Variable Interest Entities (as amended
).
Due to contributions of capital made by MTR as of October 20,
2005, in accordance with the North Metro Member Control Agreement dated June 8,
2004, the Company no longer provided financial support in excess of its 50
percent
decision
making power. As of December 31, 2007, the Company has provided
approximately 42 percent of the financial support, but still retains its 50
percent decision making power. Therefore, since October 20, 2005,
the Company has accounted for its investment in North Metro on the equity
method. The Companys investment in North Metro as of December 31,
2007 and 2006 was $7,218,720 and $5,054,020, respectively, which is recorded on
the Companys consolidated balance sheets.
As of December 31, 2007, the Company has
contributed $7,320,974 in consideration of its membership interests in North
Metro. In addition, the Company has advanced $1,656,051 for costs related
to North Metro that the Company paid, and which exceeded the Companys agreed
pre-license capital contribution of $1,000,000, before the Minnesota Racing
Commission granted racing licenses to North Metro. These advances,
together with interest, will only be paid out of first available cash from
operations (and then after certain distributions to the members for income tax
purposes). The pre-licensing advances to North Metro are characterized as
a membership preferred contribution made by the Company under the North Metro
Harness Initiative, LLC Member Control Agreement dated June 8, 2004.
The Company treats these payments as an additional investment in North
Metro. The Company has combined the advances (accounted for as a
membership preferred contribution) and its capital contributions into an
investment in an unconsolidated subsidiary on its financial statements and has
accounted for this investment and all North Metro activity since October 20,
2005 under the equity method of accounting.
For the years ended December 31, 2007 and 2006,
the Company has recorded a loss from this unconsolidated subsidiary, net of tax
benefit of $436,494 and $182,873.
F-12
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
The following represents summary financial information
for North Metro as of December 31, 2007 and 2006:
|
|
As of and For
|
|
As of and For
|
|
|
|
The Year
|
|
The Year
|
|
|
|
Ended
|
|
Ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
North Metro:
|
|
|
|
|
|
Total current assets
|
|
$
|
2,185,535
|
|
$
|
644,250
|
|
Total assets
|
|
51,556,814
|
|
15,587,187
|
|
Total current liabilities
|
|
4,903,259
|
|
1,084,062
|
|
Total liabilities
|
|
33,051,334
|
|
1,411,109
|
|
Results of operations:
|
|
|
|
|
|
Revenues
|
|
$
|
107,715
|
|
$
|
|
|
Lobbying expenses
|
|
133,992
|
|
126,000
|
|
License fees Minnesota Racing Commission
|
|
263,810
|
|
248,907
|
|
Other expenses
|
|
568,602
|
|
135,722
|
|
Total expenses
|
|
966,404
|
|
510,629
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest Income
|
|
20,704
|
|
21,280
|
|
Interest Expense
|
|
(35,004
|
)
|
|
|
Net (loss)
|
|
$
|
(872,989
|
)
|
$
|
(489,349
|
)
|
|
|
|
|
|
|
Southwest Casino
Corporation:
|
|
|
|
|
|
50% share of net (loss)
|
|
(436,494
|
)
|
(244,675
|
)
|
Net tax benefit
|
|
|
|
61,802
|
|
(Loss) of unconsolidated subsidiary net of tax benefit
|
|
$
|
(436,494
|
)
|
$
|
(182,873
|
)
|
In 2006, North Metro formed a wholly-owned subsidiary
that acquired a nearby motel in December 2006 that North Metro continues
to operate in 2007 and will be used to house personnel involved in the care of
horses at the track during the racing season. The motel has 15 rooms available
to rent.
Southwest did not record a tax benefit related to
North Metros losses during the year ended December 31, 2007, while
Southwest did record a tax benefit during the year ended December 31,
2006, see Note 15.
At December 31, 2007, North Metros assets
consisted principally of cash, land, construction in progress and related
deposits and financing costs. Liabilities consisted primarily of construction
payables and borrowings under its financing agreement discussed below.
North Metro Financing Agreement
On April 20, 2007, North Metro entered into a
Credit Agreement (the Credit Agreement) with Black Diamond Commercial
Finance, L.L.C. (Black Diamond) as agent and lender. Under the terms of the
Credit Agreement, North Metro will borrow $41.7 million to construct, equip and
open its harness racetrack and card room facility in Columbus, Minnesota on the
north side of the Minneapolis St. Paul metropolitan area. As part of the loan agreement the members of
North Metro agreed to complete aggregate membership contributions of $20.8
million prior to closing the loan. The total cost of the project is expected to
approximate $62 million. As of December 31, 2007, Southwest
contributed $9.0 million of the total amount of $21.3 million contributed by
the members. Certain amounts related to non-construction costs continue
to be funded by the members (the Company contributed $250,000 subsequent to the
loan closing thru the end of fiscal year 2007).
These amounts are not considered to be material to the total cost of the
project. Under the Credit Agreement, the initial advance of loan proceeds
was followed by additional advances based on progress in building and opening
the racetrack and card room facility. During construction, North Metro is
making monthly payments of interest only based on a floating index rate plus 4
percent or on a 1-month, 2-month or 3-month LIBOR rate plus 6 percent, at North
Metros option. After the project opens, interest rates will reduce to the
applicable index rate plus 2.5 percent or the applicable LIBOR rate plus 4.5
percent, again at North Metros option. North Metro must also pay a fee equal
to 4.5% per annum on any unused portion of the $41.7 million credit facility.
Principal payments of $104,250 will be due on the last day of each fiscal
quarter beginning
F-13
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
the first full quarter after the project opening, as
defined in the agreement. North Metro will also be required to prepay the loan
in an amount equal to 50 percent of the projects excess cash flow for each
fiscal year beginning with the fiscal year ended December 31, 2008, as
defined in the agreement. Final payment equal to all outstanding principal and
accrued interest is due April 20, 2014.
North Metro may prepay the loan, in whole or in part,
at any time, subject to the payment of certain fees and costs. The loan is
secured by substantially all of the assets of North Metro. The Credit Agreement
does not provide for recourse against the members of North Metro.
The Credit Agreement contains standard affirmative and
negative covenants regarding North Metro and its wholly-owned subsidiary North
Metro Hotel, LLC that restrict, among other things, North Metros ability to
dispose of assets, transfer or pledge equity interests, incur indebtedness, and
make investments or distributions. Financial covenants applicable to North
Metro include, among other things, limits on capital expenditures after
opening, minimum EBITDA requirements, satisfaction of leverage ratio limits,
and delivery of financial statements.
In addition to customary and standard events of
default included in the Credit Agreement, failure to substantially complete (as
defined in the Credit Agreement) construction of the North Metro project by June 30,
2008, and failure to operate the card room that is part of the North Metro
project at any time after July 1, 2008, would constitute a default under
the Credit Agreement.
Additional Membership Contribution, Pledge,
Subordination and Sponsor Support Agreements of Southwest
While the Credit Agreement does not provide for
recourse against Southwest in the case of a default by North Metro, Southwest
has pledged its membership interest in North Metro and North Metro pledged its
membership interest in North Metro Hotel, LLC as security for repayment of the
loan under the terms of a Pledge Agreement with Black Diamond (the Pledge
Agreement).
Southwest also entered into a Subordination Agreement
with Black Diamond (the Subordination Agreement) under which Southwest has
agreed that repayment of a $1.65 million membership preferred capital
contribution to North Metro, which North Metro was to repay to Southwest out of
the first available revenue from operations, will be subordinated to the
payments due under the loan agreements.
In addition, Southwest entered into a Sponsor Support
Agreement (the Support Agreement) under which Southwest may be required under
certain circumstances to contribute additional capital to North Metro if
financings and equity investments are insufficient to complete construction and
open the facility. The Company believes
the financings and equity investments secured by North Metro will be sufficient
to construct and open the facility.
NOTE 5 TERMINATION OF MANAGEMENT
CONTRACT WITH THE CHEYENNE AND ARAPAHO TRIBES AND RELATED LITIGATION
Management and consulting revenue of $3,566,109 and
$5,865,680 included on the Consolidated Statement of Operations for the year
ended December 31, 2007 and 2006 relate to revenues earned from the
management agreement with the Cheyenne and Arapaho Tribes of Oklahoma. As
described below, the Cheyenne and Arapaho Tribes contract with the Company has
terminated and the Company has not and will not receive any revenues from
managing those casinos after August 17, 2007. In addition, as described
below, the remaining contract costs, recorded as an intangible asset, on the
Companys Consolidated Balance Sheet have been written off.
On May 18, 2007, the National Indian Gaming
Commission (NIGC) approved Amendment No. 11 to the Third Amended and
Restated Gaming Management Agreement dated June 16, 1995 between the
Company and the Cheyenne and Arapaho Tribes of Oklahoma (the Tribes).
Southwest continued to manage the Tribes Lucky Star Concho and Lucky Star
Clinton casinos under the terms of Amendment No. 11 until August 17,
2007.
The May 18, 2007 NIGC approval was based on a May 18,
2007 decision of the Cheyenne and Arapaho Trial Court finding Amendment No. 11
valid under the Tribes constitution. On May 21, 2007, the Governor
of the Cheyenne and Arapaho Tribes filed an appeal to the Cheyenne and Arapaho
Supreme Court seeking to overturn the decision of the tribal Trial Court.
On August 17, 2007, The Supreme Court reversed the Trial Court order and
declared the contract extension invalid. Also on August 17, 2007, the NIGC
issued a decision and order reversing its May 18, 2007 approval of the
two-year contract extension based on the tribal Supreme Court decision.
Based on the decision of the NIGC, tribal representatives took control of the
casinos on Sunday, August 19, 2007. On August 21, 2007,
Southwest appealed the decision of the NIGC to reverse its approval of the
two-year contract extension. On August 24, 2007, the NIGC rejected
that appeal and affirmed its decision. Southwest has not managed the casinos
since August 17, 2007.
In connection with obtaining the two-year extension on
May 18, 2007, the Company incurred approximately $438,000 of direct
costs. The Company had accounted for
these costs as an intangible asset to be expensed over
the two-year term of the extension of the management
F-14
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
contract beginning May 19, 2007. As a result of
the termination effective August 17, 2007 the remaining unamortized costs
of approximately $400,000 were expensed consistent with Statement of Financial
Accounting Standards No. 144
Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS #144)
and included as a separate line-item as an impairment loss on the Consolidated
Statement of Operations for the year ended December 31, 2007.
The Company accounted for this contract and included
the revenues and costs in its operating segment Casino Management in
accordance with Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an Enterprise and
Related Information
(SFAS #131), see Note 18. The Company
has also disclosed information about this major customer in accordance with
SFAS #131 paragraph #39. In connection with the termination of this
agreement, the Company applied Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets
and SFAS #144 in recognizing the impairment loss. The Company also
considered SFAS #144 paragraph #41 relating to the reporting of discontinued
operations and has determined that this does not meet those requirements and
has reported the transaction in continuing operations.
The Company is involved in litigation related to the
management contract and its termination, see Note 24.
NOTE 6 CONSULTING AGREEMENT WITH
PALACE RESORTS
In September 2007, the Company entered into a
consulting agreement to work with Palace Resorts in developing and opening a
casino at the Moon Palace Casino, Golf and Spa Resort, now under construction
in Punta Cana on the easternmost tip of the Dominican Republic. Under the consulting agreement, Southwest
immediately began assisting Palace Resorts in all phases of design, game
selection, training and equipping the casino that will be part of the
1,700-room resort scheduled to open in the last quarter of 2008. Southwest
receives $50,000 per month for 10 months, which began in October 2007.
Palace Resorts provides world-class resort vacations at all-inclusive
properties throughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumel with
the new resort now under construction in Punta Cana, Dominican Republic. The Company recognized $150,000 of consulting
revenue for the year ended December 31, 2007.
NOTE 7 SALE OF UNCLE SAMS CASINO
On June 25, 2007, the Company entered into an
agreement with the landlord to purchase the leased real property on which it
operated Uncle Sams Casino in Cripple Creek, Colorado. The purchase
agreement provided that the Company would not be obligated to purchase the real
property unless the Company assigned its rights under the purchase agreement to
a third party. On June 26, 2007, the Company entered into an
agreement to assign its rights under the purchase agreement and the operating
lease. On July 29, 2007 the Company closed Uncle Sams Casino and on
July 31, 2007 the Company assigned its rights under the purchase agreement
and lease and received an assignment fee of approximately $487,000. The
Company recognized a gain of $477,407 on this transaction that is recorded in
the Consolidated Statement of Operations during the year ended December 31,
2007 as a separate line item within Other Income (Expense). The Company
transferred the majority of the equipment and slot machines to the Gold Rush
and Gold Diggers casinos in the amount of the net book value of approximately
$58,000. Additionally, the Uncle Sams employees were transferred to the
Gold Rush and Gold Diggers casinos and the customers were offered incentives to
migrate their play at Uncle Sams to the Gold Rush and Gold Diggers casinos.
The Company has recorded the transaction involving
Uncle Sams casino in continuing operations as the Company reviewed SFAS #144
and determined that it did not meet the requirements for accounting as
discontinued operations. The transaction was completed and recorded
during the year ended December 31, 2007.
NOTE 8 SHORT-TERM NOTES PAYABLE
On April 16, 2007, the Company entered into the
Third Amendment to the Revolving Credit and Term Loan Agreement with Crown
Bank. The agreement has been amended to extend the maturity date of the
$450,000 revolving line of credit to April 30, 2008. The amendment
did not alter the terms of the $2.5 million term loan and the Company made the
final payment on the term loan on April 30, 2007. Additionally,
under the amendment, three principal officers of the Company each agreed to
increase their personal guarantees of the line of credit from $100,000 to
$150,000 plus expenses. As of December 31, 2007, $450,000 is
outstanding under the Revolving Credit facility.
The interest rate is Prime +1%, and not less than
7.5%. As of December 31, 2007 the interest rate is 8.25%. At December 31,
2007, the full amount of the line was drawn and outstanding. Subsequent to
December 31, 2007, the line of credit was repaid see Note 26.
F-15
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 9 EARNINGS PER SHARE
For all periods, basic earnings (loss) per share is
calculated by dividing earnings (loss) by the weighted-average number of common
shares outstanding. Diluted earnings per share for the year ended December 31,
2006, reflect the effect of all potentially dilutive common shares outstanding
by dividing net earnings by the weighted-average of all common and potentially
dilutive shares outstanding. The Company had a net loss for the year
ended December 31, 2007; therefore a calculation of loss per share on a
fully diluted basis would be anti-dilutive, thus stock options and warrants to
purchase 8,446,102 common shares were not included in the calculation of loss
per share for 2007, but were outstanding at December 31, 2007, see Notes
13 and 14. Additional options and warrants were granted subsequent to December
31, 2007, see Note 26.
The following is a reconciliation of basic and diluted
earnings per share:
Year ended December 31, 2006:
|
|
Net Earnings
(Numerator)
|
|
Weighted Average
Equity
(Denominator)
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
1,157,211
|
|
19,675,779
|
|
$
|
.06
|
|
Effect of Dilutive
Securities:
|
|
|
|
|
|
|
|
Outstanding Options and Warrants
|
|
|
|
975,552
|
|
|
|
|
|
$
|
1,157,211
|
|
20,651,331
|
|
$
|
.06
|
|
Options and warrants to purchase 1,395,000 shares of
common stock at an exercise price of $1.00 per share, options to purchase
675,000 shares at $0.65 and options to purchase 50,000 shares of common stock
at an exercise price of $0.75 per share were not included in the computation of
diluted earnings per share for the year ended December 31, 2006 because
the exercise price was greater than the average market price of common shares
during the period. All of these options were outstanding as of December 31,
2006.
NOTE 10 STOCKHOLDERS EQUITY
The Company has authorized the issuance of up to
75,000,000 shares of common stock with a par value of $.001 and up to
30,000,000 shares of undesignated preferred stock with a par value of $0.001
per share with preferences
and designations determined by the Board of
Directors. As of December 31, 2007, there were no shares of
preferred stock designated or outstanding. Each share of common stock is
entitled to one vote on all matters submitted to shareholders. Under the
terms of a gaming license held by a subsidiary of the Company, the Company has
amended its Articles of Incorporation to provide that all shares of common
stock are subject to redemption, at the discretion of the Board of Directors,
at fair market value if an owner is determined to be a disqualified
holder. A disqualified holder is a stockholder whose ownership of Company
stock or refusal to provide information to the Company or any applicable gaming
authorities may result in the disapproval, modification or non-renewal of any
contract, license or franchise related to the Companys gaming operations.
During the years ended December 31, 2007 and
2006, the company issued the following shares of common stock:
Year Ended December 31, 2007
On January 24, 2007 and February 26, 2007,
Southwest Casino Corporation (Southwest) entered into a Securities Purchase
Agreement (SPA) with certain institutional and other accredited investors, as
defined in Rule 501 of Regulation D promulgated under the Securities Act
of 1933, as amended, under which Southwest sold in a private placement an
aggregate of 7.44 million shares of its common stock with accompanying warrants
to purchase an aggregate of 2.98 million shares of its common stock, at a
purchase price of $0.55 per share of common stock. The warrants are exercisable
for a period of five years, beginning six months after the date
of issuance, at an exercise price of
$0.61 per share. The number of shares issuable upon exercise of the warrants
and the exercise price of the warrants are adjustable in the event of stock
splits, combinations and reclassifications, but not in the event of the
issuance by Southwest of additional securities, unless such issuance is
pursuant to a rights offering or pro rata distribution to all security holders
except the investors.
The securities that were issued in this private
placement were not registered under the Securities Act of 1933 but did include registration
rights in accordance with the terms of a Registration Rights Agreement dated January 24,
2007 and February 26, 2007 between Southwest and the investors. Under this agreement, Southwest agreed to
register the resale of the shares sold in the private placement, including
shares issuable upon exercise of the warrants on a registration statement that
became effective on May 11, 2007. Under the Securities Purchase
Agreement, Southwest and the investor parties have made other covenants and
representations and warranties regarding matters that are customarily included
in financings of this nature. If certain of its obligations are not met,
Southwest has agreed to make pro-rata cash payments as liquidated damages to
each investor.
F-16
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The
private placement resulted in net proceeds to Southwest of approximately $3.94
million, after the deduction of approximately, $150,000 of direct offering
expenses. The placement agent agreed to accept the cash portion of its
placement agent fee in common stock and warrants on the same terms as the
investors, which resulted in the placement agent receiving approximately
517,000 shares of common stock and warrants to purchase an aggregate of
approximately 207,000 additional shares of common stock. In addition, the
placement agent received a warrant to purchase approximately 277,000 shares of
common stock, which is exercisable for a period of five years, beginning six
months after the date of issuance, at an exercise price of $1.00 per share.
The following officers and directors of Southwest
participated in the private placement on the same terms as the other investors:
James B. Druck, Chief Executive Officer and Director; Thomas E. Fox, President
and Chief Operating Officer and entities in which Mr. Fox holds an
ownership interest; Jeffrey S. Halpern, Vice President of Government Affairs;
Gus A. Chafoulias, Director; and David H. Abramson, Director. Other than with
respect to the SPA, there are no material relationships between Southwest and
any of the other investors in the private placement.
On December 27, 2007, the Company issued 150,000
shares upon exercise of warrants to purchase 150,000 shares of common stock and
the receipt of $30,000 in cash.
In October 2007, the Company issued 24,510 shares
of common stock in connection with a financing transaction that did not
occur. The shares were valued at $12,500
(also the Company paid and expensed an additional $12,500), see Note 21.
In January 2007, the Company redeemed 357,000
shares, see Note 23.
Year Ended December 31, 2006
On February 16, 2006, the Company issued 100,000
shares upon exercise of warrants to purchase 100,000 shares of common stock and
the receipt of $12,000 in cash.
NOTE 11 OPERATING LEASES
On May 1, 1998, the Company entered into a
five-year agreement to lease property located in Cripple Creek, Colorado.
The lease started the first day of the month that Uncle Sams began operations,
April 9, 1999, and terminated on March 31, 2004. The lease
required payments of $12,000 per month. During February 2004, the
Company extended the lease for an additional five years. The new lease payments
are $14,000 per month, expiring March 2009. The lease agreement includes provisions
whereby the Company had the option to purchase the property for $2,000,000 plus
50% of the increase in the fair market value of the building as of the expiration
of the initial term. In July 2007,
the Company assigned its rights under the purchase agreement and lease
agreement with the lessor to a third-party, see Note 7.
The Company also leases office space for corporate
offices. The lease expires December 31, 2009. Rent expense was approximately $215,300 and
$284,400 for the years ended December 31, 2007 and 2006,
respectively. Future operating lease
payments (base rent) required as of December 31, 2007 are as follows:
2008
|
|
$
|
110,000
|
|
2009
|
|
110,000
|
|
Total
|
|
$
|
220,000
|
|
F-17
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 12 LONG-TERM OBLIGATIONS
Capital
Lease
On April 9, 1999,
the Company entered into a 20-year capital lease for the land and buildings
relating to The Gold Rush Hotel and Casino and Gold Diggers Casino. The
amount capitalized is based upon:
Present
value of $53,437 monthly payments for 20 years
|
|
$
|
5,799,170
|
|
Principal
due on assumed obligations of outstanding debts
|
|
8,707,661
|
|
|
|
$
|
14,506,831
|
|
Under this capital lease,
the Company is required to make additional rent payments if the net income from
the Gold Rush and Gold Diggers casinos exceeds certain thresholds stated in
the lease. Under the terms of this lease the Company is permitted to
allocate a portion of its general overhead expenses to these operations when
calculating net income for purposes of determining additional rent due. To
date, the Company has not been required to make additional rent payments.
Future minimum lease payments required under the
capital leases as of December 31, 2007, are as follows:
2008
|
|
$
|
1,524,273
|
|
2009
|
|
1,265,651
|
|
2010
|
|
1,111,783
|
|
2011
|
|
1,077,766
|
|
2012
|
|
923,396
|
|
Thereafter
|
|
5,031,146
|
|
Total
minimum lease payments
|
|
10,934,015
|
|
Less
amount representing interest
|
|
(3,681,462
|
)
|
Present
value of minimum lease payments
|
|
7,252,553
|
|
Less
current portion
|
|
890,859
|
|
Long-term
portion
|
|
$
|
6,361,694
|
|
Crown Bank Term
Loan and IGT Note
On October 20, 2005, the Company entered into a
term loan to borrow $2.5 million. The loan was secured by the majority of
the Companys assets. The interest rate was Prime +1%, not less than
7.5%, and the loan was due April 30, 2007. The loan required twelve
equal monthly principal payments of $208,333 beginning April 1, 2006. The loan was guaranteed by twelve
shareholders of the Company, including three principal officers.
In October 2006, the Company entered into an
amendment of its term loan with Crown Bank. The agreement was amended to
allow the Company to repay the remaining principal in seven equal payments
beginning November 1, 2006 through April 30, 2007 as opposed to the
original agreement under which the Company would have been required to repay
the remaining principal in five equal principal payments through March 1,
2007. The final payment was made in
accordance with the amendment in April 2007. As of December 31, 2007 and 2006 the
principal balance outstanding was $0 and $744,049.
On December 23, 2005, the Company negotiated a
loan of $460,324 to pay off outstanding payables in connection with the
installation of a player tracking system at our three casinos in Cripple Creek,
Colorado. The loan is for a term of 48 months with interest equal to the
prime rate (7.25% at December 31, 2007).
As of December 31, 2007 and 2006 the principal balance outstanding
was $239,752 and $354,833.
F-18
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Future minimum principal payments required as of December 31,
2007 are:
2008
|
|
$
|
115,081
|
|
2009
|
|
115,081
|
|
2010
|
|
9,590
|
|
|
|
|
|
Total:
|
|
$
|
239,752
|
|
NOTE
13 STOCK OPTIONS
Stock option plans:
On July 15, 2004, Southwest Casino and Hotel
Corp. shareholders approved the Southwest Casino and Hotel Corp. 2004 Stock
Incentive Plan that had been adopted by the companys Board of Directors
effective June 1, 2004. Under the terms of the reorganization
completed July 22, 2004, Southwest Casino Corporation assumed the rights
and obligations of Southwest Casino and Hotel Corp. under this plan. The
plan permits Southwest Casino Corporation to issue incentive awards to all
employees of Southwest Casino Corporation or any of its subsidiaries and any
non-employee directors, consultants or independent contractors of the Company
or any of its subsidiaries. Incentive awards under the plan include incentive
options under Section 422 of the Internal Revenue Code of 1986, non-statutory
stock options that do not qualify for incentive option treatment, stock
appreciation rights, restricted stock awards, performance units and stock
bonuses. The plan was amended with shareholder approval in June 2007,
increasing the number of shares of Southwest Casino Corporation common stock
reserved for issuance under the plan from 1,500,000 to 3,000,000. As of December 31, 2007, 925,000 options
were issued and are outstanding.
In addition to the assumption of the 2004 Stock
Incentive Plan, Southwest Casino Corporation assumed outstanding non-plan
options to acquire shares of Southwest Casino and Hotel Corp. common stock as
part of its reorganization. The Company assumed obligations in the form
of stock options to issue 1,575,000 shares of its common stock at a weighted
average exercise price of $.62 per share.
Valuation and Expense Information under SFAS 123(R)
SFAS 123(R) requires
companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Companys consolidated statement of operations.
SFAS 123(R) supersedes the Companys previous accounting under the
provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation
(SFAS 123). As permitted by
SFAS 123, the Company measured compensation cost for options granted
before January 1, 2006, in accordance with Accounting Principles Board
Opinion (APB) No. 25,
Accounting
for Stock Issued to Employees
and related interpretations.
Accordingly, before January 1, 2006 no accounting recognition was given to
stock options granted at fair market value until they were exercised. Upon
exercise, net proceeds, including tax benefits realized, were credited to
equity.
The Company adopted
SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the first day of the Companys fiscal year 2006.
Options are granted to employees and directors at
prices equal to the market value of the stock on the dates the options are
granted. The options granted have terms of 5 to 10 years from the grant date
and granted options typically vest quarterly over a one to three year
period. The fair value of each option is amortized into compensation
expense over the period the option vests. We have estimated fair value of
all stock options as of the date of grant applying the Black-Scholes pricing
valuation model. The application of this valuation model involves
assumptions that are judgmental and sensitive in the determination of
compensation expense. The key assumptions used in determining the fair
value of options during the year ended December 31, 2006 were:
|
|
Year Ended
December 31, 2006
|
|
Expected
price volatility
|
|
105% - 112
|
%
|
Risk-free
interest rate
|
|
4.42% - 5.05
|
%
|
Weighted
average expected life in years
|
|
10 years
|
|
Dividend
yield
|
|
0
|
%
|
Pre-vesting
forfeiture rate
|
|
0
|
%
|
Weighted-average
Fair value
|
|
$
|
0.61
|
|
|
|
|
|
|
No options were granted during the year ended December 31,
2007.
F-19
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Historical information
was the primary basis for the selection of the expected volatility, expected
dividend yield, and the expected lives of the options. The risk-free
interest rate was selected based upon yields of U.S. Treasury issues with a
term equal to the expected life of the option being valued. SFAS 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
Pre-vesting forfeitures were estimated to be zero for the year ended December 31,
2006 based primarily on historical experience. If pre-vesting forfeitures
occur in the future, the Company will record the benefit related to those
forfeitures as the forfeitures occur.
Status of options:
|
|
Options
Outstanding
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Balance
at December 31, 2005
|
|
1,775,000
|
|
$
|
0.64
|
|
|
|
|
|
Granted
(1)
|
|
725,000
|
|
$
|
0.66
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
Granted
|
|
|
|
$
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
outstanding at December 31, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
5.1 years
|
|
$
|
|
|
Options
exercisable at December 31, 2007
|
|
2,310,417
|
|
$
|
0.65
|
|
4.8 years
|
|
$
|
|
|
The aggregate
intrinsic value in the preceding table
represents the total pre-tax intrinsic value, based on Southwest Casino
Corporation closing stock price of $0.364 on December 31, 2007, that the
option holders would have received had all option holders exercised their
options as of that date. As of December 31, 2007, the Companys
unrecognized share-based compensation related to stock options was
approximately $131,000. This cost is expected to be expensed over a
weighted average period of less than one year.
The Company recognized compensation expense during the years ended December 31,
2007 and 2006 of $173,416 and $166,703, respectively.
Subsequent to December 31,
2007, additional options were granted under the 2007 stock Incentive Plan, see Note
26.
On November 10, 2005, the FASB issued FASB Staff
Position No. FAS 123(R)-3 (FSP 123(R)), Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards. FSP
123(R)-3 permits the Company to elect from alternative transition methods for
calculating the pool of tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of FAS 123(R). No tax benefit has
been recorded on the share based compensation expense for the years ended December 31,
2007 and 2006.
F-20
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 14 WARRANTS
Status of warrants:
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Warrants
outstanding as of December 31, 2005
|
|
2,087,500
|
|
$
|
0.51
|
|
Granted
|
|
0
|
|
|
|
Exercised
|
|
(100,000
|
)
|
0.12
|
|
Cancelled
|
|
(150,000
|
)
|
0.20
|
|
Warrants
outstanding as of December 31, 2006
|
|
1,837,500
|
|
$
|
0.56
|
|
Granted
|
|
4,258,602
|
|
0.64
|
|
Exercised
|
|
(150,000
|
)
|
0.20
|
|
Cancelled
|
|
0
|
|
|
|
Warrants
outstanding as of December 31, 2007
|
|
5,946,102
|
|
$
|
0.63
|
|
As part of the July 22, 2004 reorganization,
Southwest Casino Corporation assumed outstanding warrants of Southwest Casino
and Hotel Corp. (predecessor parent company which was reorganized in July 2004
with the new parent being Southwest Casino Corporation a public entity, see
Note 1) to acquire 1,187,500 shares of the Companys common stock of which
warrants to purchase 387,500 shares with a weighted average exercise price of
$0.80 per share remained outstanding as of December 31, 2007. These
warrants expire at various times through July 2009.
At December 31, 2007 and 2006, the Company had
5,946,102 and 1,837,500 shares of common stock reserved for the exercise of
warrants that have been granted in connection with debt and equity offerings
and in lieu of cash payment for services provided. The Company received
$30,000 and $12,000 during 2007 and 2006, respectively on the exercise of
warrants. The warrants expire at various times through 2012. The Company
has not computed any value or recognized any expense for those warrants where
the conditions to exercise were considered unlikely to occur.
Sale of Unregistered
Securities
In connection with the
Securities Purchase Agreement (SPA) entered into on January 24, 2007 and
February 26, 2007, the Company issued warrants to purchase 2,975,293
shares of common stock to investors and warrants to purchase and an additional
483,309 shares of common stock to the placement agent, see Note 10.
Investor Relations Services and Financial Consulting
Services
On January 17, 2007,
the Company entered into two agreements with Strategic Growth International, Inc.
(SGI) regarding investor relations and financial consulting services. As part
of these agreements, the Company issued to SGI warrants to purchase 800,000
shares of Southwest common stock at a
price of $0.63 per share that are exercisable for two years from the date of the
agreements. Beginning January 17,
2008, SGI will have the right to require Southwest to file a registration
statement covering those shares.
Southwest has the right to terminate the agreement at
the end of any month of its term during the second year of the agreement.
Southwest also agreed to indemnify SGI against certain claims that may arise in
connection with the services provided by SGI under the agreements.
The Company reviewed EITF 96-18
Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services
in determining the fair value of the warrants. The
Company valued the warrants based upon the consideration received. The warrants
have been valued at $220,000, which is being amortized to consulting expense
and additional paid in capital quarterly over the term of the service
agreements. For the year ended December 31, 2007, $105,417 has been
expensed.
F-21
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The following is a description of each agreement:
·
Investor Relations
Services:
Under
the terms of a letter agreement accepted January 17, 2007, Southwest
retained SGI to assist the company as an investor relations advisor and develop
a comprehensive financial relations program designed to achieve increased
awareness of Southwest and its business and enhanced liquidity in the public
market for the Companys stock.
Southwest agreed to pay
SGI $10,000 per month for a period of two years for these investor relations
services. Southwest also agreed to reimburse SGIs reasonable accountable
expenses incurred in connection with these services. In addition, Southwest
issued to SGI a warrant to purchase 100,000 shares of Southwest common stock,
see terms of warrant described above.
·
Financial Consulting
Services:
Southwest also entered into an agreement with SGI for financial
consulting services on January 17, 2007 (the Consulting Agreement).
Under the Consulting Agreement, SGI will assist Southwest in developing a
strategy to raise additional capital for gaming projects the company is
pursuing and for general working capital. SGI will also help Southwest arrange
and conduct meetings with potential sources of capital and advise Southwest
regarding the terms of any proposed financing arrangements.
Southwest is to
pay SGI $8,000 per month for 24 months for the financial consulting services
provided under this agreement, however, SGI agreed to waive the monthly fee in
exchange for a warrant to purchase 700,000 shares of Southwest common stock,
see terms of warrant discussed above.
The Company will
also be required to pay an additional consulting fee of $100,000 or $200,000 if
SGI assists the Company in completing equity or debt financing, respectively,
that meets standards stated in the agreement.
In addition, if the Company issues warrants as part of such a debt
financing, it will also issue warrants to purchase 100,000 shares of its common
stock to SGI, on the same terms as the warrants issued as part of debt
financing.
NOTE 15 PROVISION FOR INCOME TAXES
|
|
2007
|
|
2006
|
|
Current
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
(683,701
|
)
|
State
|
|
|
|
(88,479
|
)
|
Total Current
|
|
|
|
(772,180
|
)
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
|
|
|
89,764
|
|
State
|
|
|
|
11,616
|
|
Total Deferred
|
|
|
|
101,380
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
(670,800
|
)
|
|
|
|
|
|
|
|
|
A reconciliation of the income tax provision with
amounts determined by applying the federal statutory rate to income before
income taxes is as follows:
|
|
2007
|
|
2006
|
|
Federal
statutory income tax rate
|
|
34.0
|
%
|
(34.0
|
)%
|
State
and local income tax rate
|
|
4.4
|
%
|
(4.4
|
)%
|
Change
in valuation allowance
|
|
(38.4
|
)%
|
5.0
|
%
|
Effective
Tax Rate
|
|
|
%
|
(33.4
|
)%
|
F-22
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes are reflected in deferred income
taxes. Significant components of the Companys deferred tax liabilities as of December 31,
2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
|
Current
deferred tax assets (liabilities)
|
|
$
|
|
|
$
|
|
|
Non-current
deferred tax assets:
|
|
|
|
|
|
Operating loss and contribution carryforwards
|
|
1,718,000
|
|
1,473,000
|
|
Property and Equipment
|
|
418,000
|
|
329,000
|
|
Alternative minimum tax carryforward
|
|
58,000
|
|
58,000
|
|
Total Deferred
|
|
2,194,000
|
|
1,860,000
|
|
|
|
|
|
|
|
Less
Valuation Allowance
|
|
(2,194,000
|
)
|
(1,860,000
|
)
|
Net
Deferred Tax Asset
|
|
$
|
|
|
$
|
|
|
Property and equipment deferred tax asset includes the
development and pre-opening expenses capitalized for tax purposes in connection
with the development of the racetrack and card room.
As of December 31, 2007, the Company has federal
and state net operating loss carryforwards of approximately $4.5 million. These
operating losses expire between 2021 and 2027. The Internal Revenue Code
limits the availability of net operating loss carryforwards to offset future
taxable income if there has been a change of ownership as defined in Section 382
of the Internal Revenue Code. Such a change of ownership could be
triggered by sales of the Companys securities by the Company or its shareholders.
Additionally, the excess of the alternative minimum tax (AMT) over regular
federal income tax is a tax credit, which can be carried forward indefinitely
to reduce future federal income tax liability. At December 31, 2007,
the Company has available $58,000 of AMT credit carryforward. The income
tax rate does not correspond to statutory tax rates due to the difference in
the valuation allowance for deferred tax assets.
The Company adopted
Statement of Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007.
Interpretation No. 48 clarifies the accounting for uncertain tax positions
in accordance with SFAS 109, Accounting for Income Taxes. Pursuant to
Interpretation No. 48, the Company is required to recognize in its
financial statements the largest tax benefit of a tax position that is more-likely-than-not
to be sustained on audit, based solely on the technical merits of the position
as of the reporting date. Only tax positions that meet the more-likely-than-not
threshold at that date may be recognized. The term more-likely-than-not
means a likelihood of more than 50 percent.
The Company accounts for
interest and penalties (if any) as interest expense in the Statement of
Operations.
The Company does not have
any unrecorded tax benefits as of January 1, 2007 or December 31,
2007.
The Companys tax returns
for the tax years 2003 through 2006 remain subject to examination by major tax
jurisdictions. However, as the Company has net operating losses from
prior years these tax returns can also be examined once these net operating
losses are utilized in future tax filings.
Management evaluated its
probable ability to utilize deferred tax assets arising from net operating loss
carry forwards, deferred tax assets and other ordinary items and determined
that a valuation allowance was appropriate as of December 31, 2007 and
2006 based upon the uncertainty and ultimate termination of the Companys management
contract with the Cheyenne and Arapaho Tribes, see Note 5. As a result of this evaluation, a tax benefit
was reduced by a comparable valuation allowance for the year ended December 31,
2007. As of December 31, 2007 and 2006 the Companys deferred tax
asset is zero.
At December 31,
2003, the Company established a deferred tax asset relating to net operating
losses. As of December 31, 2005, management evaluated all evidence
and determined that a portion of the deferred tax assets relating to net operating
losses would be utilized in 2006 based upon forecasted income for the Company
in 2006. During the year ended December 31, 2006, the Company
recorded a tax provision to reduce the previously established deferred tax
asset.
F-23
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 16 RELATED PARTY TRANSACTIONS
In addition to $140,000 of unpaid bonuses to officers,
see Note 24, the Company has a liability to certain officers and stockholders
for unpaid compensation and expenses of $122,467 as of December 31, 2007
and 2006, relating to periods prior to December 31, 2003. At its meeting on April 26, 2006, the
independent members of the Companys Board of Directors approved one-time
payments to James Druck, CEO, Thomas Fox, President, and Jeffrey Halpern, Vice
President of Government Affairs, as partial repayments of the Companys
outstanding liabilities for their unpaid salaries, the majority of which is
from years before 1998. The Board approved payments of $50,000 to Mr. Druck
and Mr. Halpern and $10,000 to Mr. Fox. The Company made these
payments to Mr. Halpern on April 28, 2006 and Mr. Druck and Mr. Fox
on May 15, 2006.
James B. Druck, Chief Executive Officer and Director;
Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, Vice
President of Government Affairs; Gus A. Chafoulias, Director; and David H.
Abramson, Director each participated in our private placement of common stock
with accompanying warrants that closed on January 24 and February 26,
2007. See Note 10.
During the year ended December 31, 2006, the
Company paid Berc & Fox Limited $17,950 for tax and accounting
services. North Metro paid Berc & Fox Limited $975 during the
years ended December 31, 2006 for tax services. The operations of
Berc & Fox were acquired in January 2007 by Virchow Krause,
Ltd. Thomas Fox, our President, is a shareholder and officer in Berc &
Fox Limited. In 2007, as a result of the
sale of Berc & Fox Limited, certain furniture and equipment were
acquired from Berc & Fox Limited by the Company in the amount of
$25,000. This amount is included in
accounts payable at December 31, 2007.
Subsequent to the year ended December 31, 2007 this furniture and
equipment was sold to North Metro for $25,000.
As of December 31, 2007 the Company has a
receivable due from North Metro of approximately $41,000 for reimbursement of
salary, benefits and travel. This amount
was subsequently paid to the Company by North Metro.
During the year ended December 31, 2007, the
Company paid Jennifer Sparlin Druck $1,000 for entertainment services at the
Gold Rush Palladium. No amounts were paid during 2006. Ms. Druck
is the wife of James Druck, an officer of the Company.
NOTE 17 PROJECT DEVELOPMENT COSTS
The Company continues to pursue additional gaming
opportunities and as a result continues to incur project development
expenses. For the years ended December 31, 2007 and 2006,
development expenses were $374,384 and $290,623.
NOTE 18 SEGMENTED INFORMATION
The Company has grouped its operations into three
segments, Casino Operations, Casino Management and Project Development.
The segment Casino Operations includes the Companys operations in Cripple
Creek, Colorado where the Company operates two casinos and an outdoor
amphitheatre. In July 2007 the Company disposed of a casino, see
Note 7. The segment Casino Management relates to our management and
consulting business. The segment Project Development relates to the
Companys investments in projects under development including any acquisition
efforts. These include North Metro; see Note 4, and other development
activities and their related specific costs.
Corporate expenses are included as a reduction in Casino Management
income. Corporate expenses have not been allocated to Casino Operations
or Project Development.
F-24
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Segmented information related to the year ended December 31,
2007 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
15,820,631
|
|
$
|
3,716,109
|
|
$
|
|
|
$
|
19,536,740
|
|
Interest
revenue
|
|
131
|
|
3,290
|
|
|
|
3,421
|
|
Interest
expense
|
|
794,714
|
|
82,871
|
|
|
|
877,585
|
|
Depreciation &
amortization
|
|
1,505,089
|
|
276,481
|
|
|
|
1,781,570
|
|
Impairment
loss, see Note 5
|
|
|
|
400,435
|
|
|
|
400,435
|
|
Segmented
profit (loss) before income taxes
|
|
753,554
|
|
(823,003
|
)
|
(1,424,250
|
)
|
1,493,699
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
Gain on disposition of casino (included in above
segment
profit (loss) before income taxes), see Note 7
|
|
477,407
|
|
|
|
|
|
477,407
|
|
Write-off of acquisition and financing costs
(included in
above segment profit (loss) before income taxes), see
Note 21
|
|
|
|
|
|
613,372
|
|
613,372
|
|
Loss of unconsolidated subsidiary, net of tax
benefit
(included in above segment profit (loss) before income
taxes), see Note 4
|
|
|
|
|
|
436,494
|
|
436,494
|
|
Investment
in unconsolidated subsidiary, see Note 4
|
|
|
|
|
|
7,218,720
|
|
7,218,720
|
|
Total
segmented assets
|
|
12,294,773
|
|
378,874
|
|
7,221,720
|
|
19,895,367
|
|
Expenditures
for segmented assets
|
|
342,771
|
|
24,609
|
|
2,601,194
|
|
2,968,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segmented information related to the year ended December 31,
2006 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
15,609,228
|
|
$
|
5,865,680
|
|
$
|
|
|
$
|
21,474,908
|
|
Interest
Revenue
|
|
659
|
|
2,190
|
|
|
|
2,849
|
|
Interest
Expense
|
|
844,465
|
|
359,831
|
|
|
|
1,204,296
|
|
Depreciation &
amortization
|
|
1,646,473
|
|
523,517
|
|
|
|
2,169,990
|
|
Segmented
profit (loss) before income taxes
|
|
91,007
|
|
2,210,500
|
|
(473,496
|
)
|
1,828,011
|
|
Income
tax expense (benefit)
|
|
30,487
|
|
737,672
|
|
(97,359
|
)
|
670,800
|
|
Loss of unconsolidated subsidiary, net of tax
benefit
(included in above segment profit (loss) before income
taxes)
|
|
|
|
|
|
182,873
|
|
182,873
|
|
Investment
in unconsolidated subsidiary
|
|
|
|
|
|
5,054,020
|
|
5,054,020
|
|
Total
segmented assets
|
|
12,942,003
|
|
833,926
|
|
5,079,020
|
|
18,854,949
|
|
Expenditures
for segmented assets
|
|
417,948
|
|
9,707
|
|
1,000,326
|
|
1,427,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses are included as a reduction in
Casino Management income. Corporate expenses have not been allocated to
Casino Operations or Project Development.
During the years ended December 31, 2007 and 2006
we recognized revenues of $3,566,109 and $5,865,680, respectively, included in
the operating segment Casino Management which related to our management
contract with the Cheyenne and Arapaho Tribes of Oklahoma which terminated
effective August 17, 2007, see Note 5.
NOTE 19 BOARD OF DIRECTORS
On January 10, 2006, as part of the Companys
compensation for independent members of its Board of Directors, Southwest
granted non-qualified options to purchase 150,000 shares of its common stock at
a price of $0.65 per share to each of the four independent members of its Board
of Directors. These options vest in 12 equal installments on the last day
of each fiscal quarter of the company over the next three years and remain
exercisable for 10 years. If a directors service on the Southwest Board
terminates due to mandatory retirement, the option will continue to vest and
remain exercisable for the full 10 years. If a directors service
terminates due to death or disability, the option will remain exercisable, to
the extent vested at the time service terminated, for 12 months. If a
directors service terminates for any other reason, the option
F-25
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
will remain exercisable, to the extent vested at the
time service terminated, for 90 days. If a change in control of Southwest
occurs, as defined in the Companys 2004 Stock Incentive Plan, the option will
immediately vest in full and remain exercisable for the entire 10-year term.
Subsequent to December 31,
2007, additional options were granted, see Note 26.
On January 10, 2006, the Board of Directors
established an Audit Committee and elected David Abramson, Jim Holmes, and
Gregg Schatzman to serve on the Committee. The Board of Directors elected
David Abramson as Chair of its Audit Committee. Mr. Abramson
received an option to purchase 75,000 shares of common stock, on the same terms
as described in the preceding paragraph, in consideration of his service as
Audit Committee Chair.
On February 1, 2006, the Board of Directors
established a Compensation Committee and a Nominating Committee. On November 5,
2007 the Board broadened the Nominating Committees responsibilities and
renamed it Governance and Nominating Committee. The Board elected Gus
Chafoulias and David Abramson as its members and elected Gus Chafoulias as its
Chair. The Board elected Jim Holmes and Gregg Schatzman to serve on the
Compensation Committee and elected Gregg Schatzman as its Chair.
NOTE 20 FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company believes it is not practical to estimate
the fair value of its investment in North Metro because there is no established
market for these securities and it is inappropriate to estimate future cash
flows because they are dependent on the ability of North Metro to develop,
construct and then generate earnings from the operation of its proposed harness
track and card room. There were no other financial instruments with significant
differences between the carrying amount and the fair value due to the short
maturity of the instruments.
NOTE 21 ACQUISITION AND FINANCING
COSTS
On December 18, 2006, Southwest Eagle, LLC (Southwest
Eagle), a wholly-owned subsidiary of Southwest Casino Corporation, entered
into an Asset Purchase Agreement and a long-term lease with Pinnacle Casinos
and Resorts, LLC (Pinnacle). Under the Asset Purchase Agreement,
Southwest Eagle had agreed to acquire the operating assets and lease the real
property of the Double Eagle Hotel and Casino and Gold Creek Casino in Cripple
Creek, Colorado (collectively, the Double Eagle).
On April 13, 2007, Southwest Casino Corporation
and its wholly-owned subsidiary Southwest Eagle notified Pinnacle that
Southwest had elected to terminate the Asset Purchase Agreement between
Southwest Eagle and Pinnacle dated December 18, 2006 and all related
agreements.
Southwest terminated the Asset Purchase Agreement in
response to notice Southwest received on April 10, 2007 from Pinnacle that
the separate Stock Purchase Agreement under which Pinnacle was to acquire all
of the outstanding capital stock of Colorado Casino Resorts, Inc. (CCRI),
the owner of the Double Eagle, had terminated in accordance with its terms when
Pinnacle did not make a required payment. Because Pinnacle was unable to
complete its proposed acquisition of the CCRI stock in accordance with the
Stock Purchase Agreement, as amended, Pinnacle was also unable to perform its
obligations under the Asset Purchase Agreement with Southwest Eagle. The
Company incurred $126,650 of transaction costs specific to this acquisition.
The Company also incurred financing costs with a
lender in the amount of approximately $461,722. These financing
costs were initially associated with the financing of the Companys efforts to
acquire the Double Eagle, which ceased effective June 30, 2007, but
negotiations then continued for alternate financing. As a result of the termination of the
management agreement with the Cheyenne and Arapaho Tribes of Oklahoma,
effective August 17, 2007, the financing contemplated with this lender did
not occur and the arrangement was terminated.
In October 2007, the Company incurred additional
financing costs of $25,000, see Note 10.
The Company wrote-off amounts related to the
acquisition described above and financing costs of $613,372 included as a
separate line item within Other Income (Expense) in the Consolidated Statement
of Operations for the year ended December 31, 2007.
NOTE 22 SETTLEMENT AGREEMENT
On February 15, 2006, the Company entered into a
Settlement and Release Agreement with MBC Global, LLC. Under the terms of
the Settlement and Release Agreement, the Company paid MBC $66,000 that the
Company had previously agreed it owed to MBC under a terminated advisory
services agreement and the Company and MBC released each other from all claims
raised in an arbitration proceeding initiated by MBC in September 2005.
The Company did not release MBC from any potential liability related to its
actions on behalf of the Company in its 2004 sale of convertible notes and
corporate reorganization, and MBC did not release any rights to indemnification
it may have under the terminated advisory agreement.
F-26
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE 23
REDEMPTION OF SECURITIES
The Company redeemed 357,000 shares of common stock in
accordance with Article XI of the Companys Articles of Incorporation
effective January 22, 2007. The shares were redeemed at a price of
$0.90 per share based upon the closing stock price of the Companys common
stock as reported on January 22, 2007. The Company recorded the
redemption as a reduction to stockholders equity for the buy back of
shares. The shares of common stock are included in Treasury Stock in the
Consolidated Statements of Changes in Stockholders Equity as of December 31,
2007.
NOTE 24 COMMITMENTS AND
CONTINGENCIES
In 2004, the Company purchased player tracking
software and slot accounting software from IGT. On December 29,
2005, the Company entered into an agreement with IGT to finance $460,324 of the
purchase price for this system over 48 months with interest rate equal to the
prime rate, which was 7.25% at December 31, 2007 (see Note 12). In
addition, the Company agreed to purchase additional software for $200,000,
which will allow the Company to offer bonusing to its customers. The
purchase is contingent upon IGT receiving necessary approvals for the bonusing
system from the Colorado Division of Gaming.
Under the Companys employment agreements with James
B. Druck, CEO, Thomas E. Fox, President and COO, and Jeffrey S. Halpern, Vice
President of Government Affairs, which were effective July 1, 2004, these
executives can elect to continue their employment in a reduced capacity, with
continuing medical benefits and a salary equal to their base pay at the time of
termination for 12 months and not less than $25,000 after 12 months if the
Company terminates the executives employment without cause or in connection
with a change in control of the Company (as defined in the employment
agreement) or if the executive terminates his employment with the Company for
good cause (as defined in the employment agreement). The initial term of
these agreements expired July 1, 2006, after which the agreement renewed
and will continue to renew automatically for additional one-year terms unless
terminated.
The Company has entered into employment agreements
with certain other key employees of the Company. The agreements provide for
certain benefits to the employee as well as severance if the employee is
terminated without cause or due to a constructive termination as defined in
the agreements. The severance amounts depend upon the term of the
agreement and can be up to six months of base salary and bonus.
Bonuses:
On March 27, 2007 the board of directors approved
performance bonuses to officers and employees of the Company in the amount of
$385,000, which amount was recorded as an expense effective that date. Of
that amount, the Company has paid $210,000 during the
year ended December 31, 2007.
Bonuses in the amount of $175,000 were to be paid on or after July 1, 2007
when management determines the Company has sufficient financial resources for
payment. Unpaid bonuses in the amount of $175,000 are reflected as a
liability at December 31, 2007.
Legal
Matters:
Alleged
Breach of Gaming Management Agreement
On July 24, 2007,
the Governor of the Cheyenne and Arapaho Tribes of Oklahoma delivered notice to
Southwest that on July 13, 2007 he had initiated an arbitration proceeding
against Southwest for alleged breach of the Third Amended and Restated Gaming
Management Agreement under which Southwest then managed two casinos for the
Tribes. On November 2, 2007,
Southwest filed a counterclaim in this proceeding alleging a breach of the
Gaming Management Agreement by the tribal Governor. The three-member
arbitration panel for this proceeding was appointed in February 2008. A scheduling conference with the arbitration
panel occurred on March 11, 2008. Preliminary pleading documents are to be
submitted to the arbiters during April 2008.
In the arbitration
demand, the Governor alleged that Southwest breached the management agreement
by interfering with or attempting to influence internal affairs or governmental
decisions of the Tribes in connection with Southwests efforts to extend its
gaming management relationship with the Tribes, which terminated on August 17,
2007. The Governor sought termination of the agreement and $10 million in
damages. Southwest does not believe it
has improperly interfered wiath or attempted to influence internal governmental
decisions of the Tribes and Southwest intends to vigorously defend itself in
this arbitration proceeding. Under its Gaming Management Agreement with the
Tribes, Southwest was permitted to oppose, publicly or privately, any action by
the Tribes that Southwest believes is not in the best interest of the Tribal
gaming operations. Southwest believes that all of the actions it has taken on
behalf of the gaming operations it managed or as part of its efforts to extend
its gaming management relationship with the Tribes are consistent with that
provision.
F-27
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
In its counterclaim,
Southwest alleges that the Governor of the Tribes breached the Management
Agreement by refusing to negotiate in good faith for an extension and expansion
of the gaming management relationship between Southwest and the Tribes. Southwest asserts that the Management
Agreement required the Tribes to negotiate this extension and expansion after
Southwest led the Tribes successful efforts to negotiate and enter into a
compact for expanded gaming with the State of Oklahoma in April 2005.
The Company does not expect any material adverse
consequence from this action. Accordingly, no provision has been made in the
financial statements for any such losses.
Theft and Distribution of Surveillance Video from Lucky Star
Clinton casino
On August 24, 2007,
Southwest Casino and Hotel Corp., as exclusive manager of the Lucky Star
casinos of the Cheyenne and Arapaho Tribes of Oklahoma filed a lawsuit against
Doris Thunderbull, Darrell Flyingman, in his individual capacity, and John Does
No. 1 and 2 alleging theft (conversion) of confidential surveillance video
from the Lucky Star Clinton casino and subsequent copyright infringement and
defamation in connection with the posting of the stolen video on the website
YouTube.com and widespread distribution of DVDs containing the video by
mail. Southwest initially sought an emergency temporary restraining order
barring further distribution of the video. That request was denied on August 27,
2007 and Southwest withdrew its request for restraining order on September 24,
2007. Southwest continues to pursue claims for conversion, copyright
infringement, and tortuous interference with contract, defamation, and
conspiracy against the defendants.
On January 14, 2008,
the Mr. Flyingman, as Governor of the Tribes, filed a declaratory judgment
action in Cheyenne and Arapaho Trial Court asserting that the Tribes, not
Southwest owned the surveillance footage and the copyright in it. Southwest filed an answer to the complaint
asserting the tribal court did not have jurisdiction and a motion to compel
arbitration of the matter on February 15, 2008.
On February 13,
2008, the Federal District Court issued a stay of the proceedings before the
Federal Court pending resolution of the Tribal court proceeding.
Other:
The Company is involved in various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, any losses that may occur from these matters are
adequately covered by insurance or are provided for in our financial
statements, and the ultimate outcome of these other matters will not have a
material effect on our financial position or results of operations.
NOTE 25 MANAGEMENT CONTRACT WITH
OTOE-MISSOURIA TRIBE OF INDIANS
Southwest entered into a Gaming Management Agreement
with the Otoe-Missouria Tribe of Indians under which Southwest was to manage
the Tribes Seven Clans Paradise Casino in Red Rock, Oklahoma, on March 24,
2006. The Otoe-Missouria Tribe submitted the Gaming Management Agreement
to the National Indian Gaming Commission, which must approve it before it can
be effective, on April 10, 2006. In response to comments from
the NIGC, Southwest and the Tribe submitted a revised agreement to the NIGC in August 2006.
The NIGC provided additional comments on and requested additional changes to
the management agreement on September 15, 2006. The Tribe did not
respond to the NIGC or to Southwests efforts to complete a revised management
agreement.
On July 11, 2007, the NIGC delivered a letter to
Southwest and the Chairman of the Tribe requesting that we submit a revised
management agreement or withdraw the request for approval of the current
agreement within 30 days. Southwest met with representatives of the Tribes
Economic Development Authority (OMDA) on August 6, 2007 and discussed
the status of the management agreement. The OMDA told the Company they do
not intend to go forward with the management agreement and as such the Company
has withdrawn the request for NIGC review of this management agreement. The
Company continues to seek reimbursement from the Otoe-Missouria of expenses
incurred by Southwest while working with the Tribe in 2006. In accordance with Statement of Financial
Accounting Standards No. 5
Accounting for
Contingencies
the potential reimbursement if it is received will be
recorded in the period it is received.
NOTE 26 SUBSEQUENT EVENTS
Crown Bank Loan
:
On March 7, 2008, the Company entered into a series of eight
promissory notes with Crown Bank of Minneapolis, Minnesota. Under the Notes, Crown Bank loaned the
Company an aggregate $1.55 million. Each
of the Notes accrues interest at a floating rate of prime plus 1.5 percent,
with a minimum interest rate of 7.0 percent (currently 7.0%). Under the Notes, the Company will make
monthly payments of interest only until January 11, 2009. Beginning February 11, 2009, the Company
will repay the outstanding principal balance and accrued interest in
F-28
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
12 equal monthly installments with the final payment due January 11,
2010. The Company may prepay any
outstanding amounts under the Notes at any time without premium or penalty.
Each
of the Notes is co-signed by a shareholder of the Company. Each of these co-signers is fully obligated
to Crown Bank and individually liable for the principal amount and any accrued
and unpaid interest and costs outstanding under the co-signed note. As a condition to entering into the Notes,
Crown Bank required James Druck, Chief Executive Officer, Thomas Fox, President
and Chief Operating Officer, and Jeffrey Halpern, Vice President of Government
Affairs of the Company to increase their previously existing $150,000 personal
guarantees of the Companys outstanding $450,000 line of credit to $250,000 and
extend those guarantees to cover both the line of credit and the promissory
notes through their respective repayment terms.
The promissory
notes contain customary events of default, including, without limitation,
payment defaults, insolvency or bankruptcy, death or incompetency of a
co-signer, business termination, misrepresentation, monetary judgment defaults
and other material changes.
In
consideration of co-signing the promissory notes or increasing and extending
personal guarantees to cover the promissory notes, the Company issued five-year
fully exercisable warrants to purchase an aggregate of 2,300,000 shares of its
common stock at an exercise price of $0.39 per share to the shareholder
co-signers and Mr. Druck, Mr. Fox and Mr. Halpern. Each co-signer received a warrant to purchase
one share of Southwest Casino Corporation common stock for each $1.00 in
principal amount of the promissory note co-signed by that shareholder. In consideration of the increase in the
amount and extension of the term of their respective guarantees, Mr. Druck,
Mr. Fox and Mr. Halpern each received warrants to purchase one share
of Southwest Casino Corporation common stock for each $1.00 of guarantee, or
250,000 shares. The $0.39 per share
exercise price of these warrants represented the average closing market price
of one share of Southwest Casino Corporations common stock over the 5 trading
days preceding the closing of the loan transaction. Warrant holders also received the right to
have the shares of Southwest Casino Corporation common stock purchasable upon
exercise of their warrants included in any registration statement that
Southwest Casino Corporation may file in the future (piggy-back rights) under
the terms of a separate Registration Rights Agreement dated March 7, 2008.
In further consideration
of co-signing the promissory notes, the Company also entered into a Pledge
Agreement with the co-signers and guarantors under which it pledged its shares
of Southwest Casino and Hotel Corp. to the co-signers and guarantors to secure
any liabilities or obligations they may incur under the promissory notes. The co-signers and guarantors right to
recovery under the Pledge Agreement is limited to the actual costs paid by the
co-signers or guarantors and subject to a prior security interest in the membership
interests of North Metro Harness Initiative, LLC that Southwest Casino &
Hotel owns, as well as the terms of the North Metro Harness Initiative, LLC
Member Control Agreement.
The
Company, the co-signers, and Messrs. Druck, Fox and Halpern also entered
into a Contribution Agreement dated March 7, 2008. Under the Contribution Agreement, the Company
agreed to reimburse to any co-signer or guarantor any amount paid in connection
with the promissory notes for reason other than Southwests inability to
pay. If Southwest is unable to repay the
notes, each of the co-signers and Mr. Druck, Mr. Fox and Mr. Halpern
agreed in the Contribution Agreement to indemnify each other so that any
payments made by co-signers or guarantors will be made in proportion to the
original principal amount of the promissory note co-signed or personal
guarantee given to the total amount of all promissory note and loan guarantees.
The
Company intends to use the proceeds from the loan transaction for general
working capital, including additional membership contributions to North Metro
Harness Initiative, LLC if required under the terms of the construction
financing for that facility or agreed to between the members of North Metro
Harness Initiative. The Company has
reserved from the proceeds of the loan $96,875 to make the estimated
interest-only payments due under the notes through January 11, 2009. The Company will record the transaction in
the first quarter of fiscal year 2008, which will include a valuation of the
warrants given in connection with the debt financing. The Company is in the process of valuing the
warrants.
Other:
During January and February 2008,
the Company pursued a financing alternative to the Crown Bank loan discussed
above. The Company was unable to agree upon the terms with the lender and
the company ultimately chose not to continue negotiations with the lender. The
Company incurred costs in connection with this financing of approximately
$200,000 that will be expensed during the first quarter of fiscal year 2008.
Option grant to employees, directors and consultant
:
On March 20,
2008, the Board of Directors awarded options to purchase an aggregate of
1,192,500 shares of the Companys common stock to executive officers and
employees of the Company. All of the
options were granted under the Companys 2004 Stock Incentive Plan. The options have a 10-year term and an
exercise price $0.48 per share, the closing market price for one share of the
Companys common stock on
F-29
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
the
date of grant. The options were
immediately exercisable with respect to 25% of the shares awarded and become
exercisable with respect to the remaining shares in equal installments on the
last day of each fiscal quarter over a three-year period.
Also
on March 20, 2008, the Board of Directors granted options to purchase
675,000 shares of the Companys common stock to the independent members of the
Board. These options were also granted
under the Companys 2004 Stock Incentive Plan.
The options have a 10-year term and an exercise price $0.48 per share,
the closing market price for one share of the Companys common stock on the
date of grant. The options become
exercisable in equal installments on the last day of each fiscal quarter beginning
on the last day of the fourth quarter of 2008 (the first quarter after the
options granted to our independent directors on January 10, 2006 are fully
vested), over a three-year period.
The
Board of Directors awarded two non-qualified options to purchase 50,000 shares
of Southwest common stock each to a consultant to the company on March 20,
2008. These options are also granted
under the companys 2004 Stock Incentive Plan, have a 10-year term, and an
exercise price of $0.48 per share. These
options become exercisable upon Southwests achievement of certain goals
related to the services provided by the consultant to Southwest.
The
Company is in the process of valuing the options granted March 20, 2008
and will disclose and begin to recognize that value in its financial statements
for the first quarter of 2008.
Crown
Bank Line of Credit:
As a
result of securing the financing described above, the Company repaid the
$450,000 outstanding under the line of credit from Crown Bank on March 25,
2008, see Note 8.
F-30
You
should rely only on the information contained in this prospectus. We have not, and the selling stockholders
have not, authorized anyone to provide you with information different from that
contained in this prospectus. The
selling stockholders are offering to sell securities and seeking offers to buy
securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date on its cover, regardless of the time of
delivery of this prospectus or any sale of the securities.
PROSPECTUS
SOUTHWEST CASINO CORPORATION
12,663,389 SHARES OF
COMMON STOCK
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
24. INDEMNIFICATION OF
OFFICERS AND DIRECTORS
Nevada Law
Section 78.7502 of the General Corporation Law of
the State of Nevada (the NGCL) provides that a Nevada corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an action by or
in the right of the corporation, by reason of the fact that he or she is or was
a director, officer, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation or enterprise,
against expenses, including attorneys fees, judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit, or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful.
Section 78.7502 of the NGCL further provides that
a Nevada corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgments in its
favor by reason of the fact that such person acted in any of the capacities set
forth above, against expenses actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted under similar standards as set forth above. However, no indemnification may be made in
respect of any claim, issue, or matter as to which such person shall have been
adjudged to be liable to the corporation unless, and only to the extent that the
court in which such action or suit was brought shall determine that despite the
adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to be indemnified for such
expenses which the court deems proper.
Sections 78.7502, 78.751, 78.752, of the NGCL
further provide that:
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to the extent a director or officer of a corporation
has been successful on the merits or otherwise in the defense of any action,
suit, or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses actually and reasonably incurred by him or her
in connection therewith;
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·
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indemnification provided for by
Sections 78.751; 78.752, and Chapter 208, L. 97 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and
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·
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the corporation may purchase and maintain insurance
on behalf of such person against any liability asserted against him or her
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the corporation would have the power to indemnify him
or her against such liabilities under such Section 78.751; 78.752, and
Chapter 208, L. 97.
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Section 78.037 of the NGCL provides that a
corporation in its original certificate of incorporation or an amendment
thereto, validly approved by stockholders, may eliminate or limit personal
liability of members of its Board of Directors or governing body for monetary
damages for breach of a directors fiduciary duty. However, no such provision may eliminate or
limit the liability of a director for breaching his or her duty of loyalty,
failing to act in good faith, engaging in intentional misconduct, or knowingly
violating a law, paying a dividend, or approving a stock repurchase or
redemption which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty. The Registrants
Articles of Incorporation, as amended, contain such a provision.
Our Articles of Incorporation, as amended,
specifically provide that our directors will not be liable for monetary damages
for breach of their fiduciary duty as directors to the fullest extend permitted
by Nevada law. Our Articles
II-1
of Incorporation, as amended, also require us to
indemnify our officers and directors against any liability to the fullest
extent permitted by Nevada law.
Indemnification Agreements
Southwest
has entered into written indemnification agreements with its directors and
executive officers under which Southwest has agreed to provide to any person
who is or was a director, officer, employee or agent of Southwest or is or was
serving at the request of Southwest as a director, officer, employee or agent
of the corporation, partnership, joint venture, trust or enterprise, the
indemnity against expenses of a suit, litigation or other proceedings which is
specifically permissible under applicable law.
ITEM 25. OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses, incurred or expected to be
incurred by us in connection with the registration of the securities being
offered by the selling shareholders. Items
marked with an asterisk (*) represent estimated expenses. We have agreed to pay all the costs and
expenses of this registration. Selling
stockholders will not pay any part of these expenses.
SEC Registration Fee
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$
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376.00
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Legal Fees and Expenses
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20,000.00
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Accounting Fees and Expenses
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9,500.00
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Printing
|
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500.00
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Miscellaneous
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1,000.00
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Total
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$
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31,376.00
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ITEM 26. RECENT
SALES OF UNREGISTERED SECURITIES
During
the preceding three years, we completed the following sales of unregistered
securities in reliance upon exemptions from registration under Section 4(2) of
the Securities Act of 1933 as amended (the Act) or, under exemptions from
registration under provided in Regulation D promulgated under the Act. No underwriter participated in, nor did we
pay any commissions or fees to any underwriter in connection with any of these
transactions. None of the transactions involved a public offering. We believe that each person had knowledge and
experience in financial and business matters, which allowed them to evaluate
the merits and risk of the receipt of our securities. We believe that each person was knowledgeable
about our operations and financial condition.
March 2008
Warrant Offering
On March 7, 2008,
Southwest Casino and Hotel Corp. entered into a series of eight promissory
notes with Crown Bank of Minneapolis, Minnesota. Under the promissory
notes, Crown Bank loaned Southwest Casino & Hotel an aggregate $1.55
million. Each of the eight promissory notes is co-signed by a shareholder
of Southwest Casino Corporation. Each of these co-signers is fully
obligated to Crown Bank and individually liable for the principal amount and
any accrued and unpaid interest and costs outstanding under the co-signed
note. As a condition to entering into the Notes, Crown Bank required each
of James Druck, Chief Executive Officer, Thomas Fox, President and Chief
Operating Officer, and Jeffrey Halpern, Vice President of Government Affairs of
Southwest Casino Corporation to increase their previously existing $150,000
personal guarantees of Southwest Casino & Hotels outstanding $450,000
line of credit to $250,000 and extend those guarantees to cover both the line
of credit and the eight promissory notes through their respective repayment
terms.
In consideration of
co-signing the promissory notes, on March 10, 2008 Southwest Casino
Corporation issued five-year fully exercisable warrants to purchase an
aggregate of 2,300,000 shares of its common stock at an exercise price of $0.39
per share to the shareholder co-signers. Each co-signer received a
warrant to purchase one share of Southwest Casino Corporation common stock for
each $1.00 in principal amount of the promissory note co-signed by that
shareholder. In consideration of the increase in the amount and extension
of the term of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase one share of Southwest Casino
II-2
Corporation common stock
for each $1.00 of guarantee, or 250,000 shares. The $0.39 per share
exercise price of these warrants represented the average closing market price
of one share of Southwest Casino Corporations common stock over the 5 trading
days preceding the closing of the loan. Warrant holders also received the
right to have the shares of Southwest Casino Corporation common stock
purchasable upon exercise of their warrants included in any registration
statement that Southwest Casino Corporation may file (piggy-back rights)
under the terms of a separate Registration Rights Agreement.
January 2007
Private Placement
On January 24,
2007, Southwest entered into a Securities Purchase Agreement with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, under
which Southwest sold in a private placement an aggregate of 4,792,391 shares of
its common stock and warrants to purchase an aggregate of 1,916,961 shares of
its common stock, at a purchase price of $0.55 per unit. The warrants are exercisable for a period of
five years, beginning six months after the date of issuance, at an exercise
price of $0.61 per share. The number of
shares issuable upon exercise of the warrants and the exercise price of the
warrants are adjustable in the event of stock splits, combinations and
reclassifications, but not in the event of the issuance by Southwest of
additional securities, unless such issuance is pursuant to a rights offering or
pro rata distribution to all security holders except the investors.
The
securities that were issued in this private placement were not registered under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements of the Securities Act. Pursuant to the terms of a Registration
Rights Agreement dated January 24, 2007 between Southwest and the
investors, Southwest has agreed to register the resale of the shares sold in
the private placement, including shares issuable upon exercise of the warrants,
on a registration statement to be filed by Southwest with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Southwest has
agreed to use its commercially reasonable efforts to file the registration
statement with the SEC within 30 days after the closing of the private
placement, to cause such registration statement to be declared effective by the
SEC within the earlier of 120 days after the closing (or, in the event, of a
review by the SEC, 150 days after closing) or the 5th business day following
the date on which Southwest is notified by the SEC that the SEC will not review
the registration statement or that the SEC has no further comments on the registration
statement and to cause such registration statement to remain effective for the
required registration period. Pursuant
to the Securities Purchase Agreement, Southwest and the investor parties have
made other covenants and representations and warranties regarding matters that
are customarily included in financings of this nature. If certain of its obligations are not met,
Southwest has agreed to make pro-rata cash payments as liquidated damages to
each investor.
On February 26, 2007, we had a second closing of
our January 2007 private placement in which we entered into a Securities
Purchase Agreement with certain institutional and other accredited investors,
as defined in Rule 501 of Regulation D promulgated under the Securities
Act of 1933, as amended, pursuant to which we sold in a private placement an
aggregate of 2,659,342 shares of our common stock and warrants to purchase an
aggregate of 1,063,740 shares of our common stock, at a purchase price of $0.55
per unit. These investors are entitled
to the same registration rights as the January 2007 investors.
The
private placement is expected to result in net proceeds to Southwest of
approximately $4,000,000, after the deduction of estimated offering
expenses. The placement agent agreed to
accept the cash portion of its placement agent commission in common stock and
warrants on the same terms as the investors, which resulted in the placement
agent receiving 503,054 shares of common stock and warrants to purchase an
aggregate of 201,222 shares of common stock.
In addition, the placement agent received a warrant to purchase 276,679
shares of common stock, which is exercisable for a period of five years,
beginning six months after the date of issuance, at an exercise price of $1.00
per share.
The following
officers and directors of Southwest participated in the private placement on
the same terms as the other investors: James B. Druck, Chief Executive Officer
and Director; Thomas E. Fox, President and Chief Operating Officer; Jeffrey S.
Halpern, Vice President of Government Affairs; Gus A. Chafoulias, Director; and
David H. Abramson, Director. Other than
with respect to the Securities Purchase Agreement, there are no material
II-3
relationships
between Southwest, on the one hand, and any of the other investors in the
private placement, on the other hand.
October 2005
Warrant Offering
On October 20,
2005, Southwest Casino Corporation issued warrants to purchase 1,100,000 shares
of common stock at a price of $0.50 per share and 150,000 shares of common
stock at a price of $0.58 per share in connection with a $2.5 million term loan
and $450,000 revolving line of credit provided to Southwest Casino and Hotel
Corp. by Crown Bank. The $2.5 million
term loan is secured, in part, by the guaranties of 12 Southwest Casino
Corporation shareholders. As a condition
to entering into the Loan Agreement, James Druck, Chief Executive Officer,
Thomas Fox, President and Chief Financial Officer, and Jeffrey Halpern, Vice
President of Government Affairs of Southwest Casino Corporation, were required
by Crown Bank to become three of the 12 shareholder guarantors. Mr. Druck, Mr. Fox and Mr. Halpern
each personally guaranteed $100,000 of this borrowing. Under the shareholder guaranties, each
guarantor is individually liable for a portion of the $2.5 million term loan
and the aggregate amount guaranteed by all of the shareholder guarantors equals
$2.5 million. As further required by
Crown Bank, the guaranties of Mr. Druck, Mr. Fox and Mr. Halpern
also apply to the revolving line of credit, while the guaranties of other
shareholders do not.
In
consideration for these shareholder guaranties, Southwest issued five-year
fully exercisable warrants to purchase an aggregate of 1,250,000 shares of its
common stock at an exercise price of $0.50 per share to the non-affiliate
shareholders and $0.58 per share to Mr. Druck, Mr. Fox and Mr. Halpern. Each guarantor received a warrant to purchase
one share of Southwest Casino Corporation common stock for each $2.00 of term
loan guaranteed by that shareholder. In
consideration of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase 50,000 shares of Southwest Casino
Corporation common stock. The $0.58 per
share exercise price of the Warrants held by Mr. Druck, Mr. Fox and Mr. Halpern
represented the average closing market price of one share of Southwest Casino
Corporations common stock over the 10 trading days immediately preceding the
closing of the loan transaction. Warrant
holders also received the right to have the shares of Southwest Casino
Corporation common stock purchasable upon exercise of their warrants included
in any registration statement that Southwest Casino Corporation may file in the
future under the terms of a separate registration rights agreement.
The
warrants were issued by Southwest Casino Corporation in reliance upon
exemptions from the registration requirements under the Securities Act of 1933,
as amended, including Regulation D and Section 4(2), and applicable state
securities laws. With regard to the
reliance upon the exemptions under Regulation D and Section 4(2) under
the Securities Act, Southwest Casino Corporation made certain inquiries of the
shareholder guarantors to establish that the issuance of the warrants qualified
for these exemptions from the registration requirements. No underwriting commissions or discounts were
paid with respect to the issuance of the Warrants.
ITEM 27. EXHIBITS
The exhibits and index required by Item 601 of
Regulation S-B are attached.
ITEM 28. UNDERTAKINGS
The
undersigned registrant hereby undertakes:
The
undersigned registrant hereby undertakes:
1. To file, during any period in which
offers or sales are being made, a post-effective amendment to this registration
statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of this registration statement, or most recent post-effective amendment, which,
individually or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and notwithstanding the
foregoing, any increase or decrease
II-4
in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation From the low or
high end of the estimated maximum offering range may be reflected in the form
of prospects filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the Calculation of
Registration Fee table in the effective registration statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in the registration statement.
2. For the purpose of determining any liability
under the Securities Act, each such post-effective amendment will be deemed to
be a new registration statement relating to the securities offered in that
registration statement, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering of those securities.
3. To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of the offering.
4. For determining liability of the undersigned
small business issuer under the Securities Act to any purchaser in the initial
distribution of the securities, the undersigned small business issuer
undertakes that in a primary offering of securities of the undersigned small
business issuer pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to he purchaser, if the
securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned small business issuer will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(a)
Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424
(Sec. 230. 424);
(b)
Any free writing prospectus relating to the offering prepared by or on behalf
of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(c)
The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business issuer;
and
(d)
Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
Request for Acceleration of Effective Date:
Undertaking pursuant to Item 512(e) of Regulation
S-B
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to
a purchaser with a time of contract of sale prior to such first use, supersede
or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
For Purposes of Determining Liability under the
Securities Act:
Undertaking pursuant to Item 512(g) of Regulation
S-B
The
undersigned registrant hereby undertakes that, for the purpose of determining
liability under the Securities Act to any purchaser:
II-5
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
provisions above, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by us of expenses incurred or
paid by one of our directors, officers, or controlling persons in the
successful defense of any action, suit or proceeding, is asserted by one of our
directors, officers, or controlling persons in connection with the securities
being registered, we will, unless in the opinion of our counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Securities Act, and we will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form S-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Minneapolis, State of Minnesota on March 31,
2008.
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Southwest Casino Corporation
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By
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/s/ JAMES B. DRUCK
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James B. Druck
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Chief Executive Officer (Principal Executive
Officer)
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Pursuant to the requirements of the Securities Act of
1933, this registration statement has been signed by the following persons in
the capacities indicated, on March 31, 2008.
Name and Signature
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Title
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Director and Chief Executive Officer (Principal
Executive
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/s/ JAMES B. DRUCK
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Officer)
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James B. Druck
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President and Chief Operating Officer (Principal
Financial
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/s/ THOMAS E. FOX
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and Accounting Officer)
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Thomas E. Fox
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*
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Director
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David H.
Abramson
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*
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Director
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Gus A Chafoulias
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*
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Director
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Jim Holmes
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*
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Director
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Gregg P.
Schatzman
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*By:
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/s/ JAMES B.
DRUCK
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James B. Druck
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As
Attorney-in-Fact
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II-7
SOUTHWEST
CASINO CORPORATION
EXHIBIT INDEX
TO REGISTRATION STATEMENT ON FORM S-1
Exhibit
No.
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Exhibit*
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Method of Filing
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2.1
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Agreement and Plan of
Reorganization, dated July 14, 2004, by and among Lone Moose Adventures, Inc.,
Lone Moose Acquisition Corporation. Southwest Casino and Hotel Corp. certain
of the shareholders of Lone Moose.
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Incorporated by
reference to Exhibit 2.1 in the Current Report on Form 8-K filed August 6,
2004.
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2.2
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Asset Purchase
Agreement, dated July 14, 2004, by and among Lone Moose Adventures, Inc.,
Christopher B. Glover and Michael C. Brown
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Incorporated by
reference to Exhibit 2.2 in the Current Report on Form 8-K filed August 6,
2004
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3.1
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Articles of
Incorporation of Southwest Casino Corporation, as amended
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Incorporated by
reference to Exhibit 3.1 in the Quarterly Report on Form 10-QSB
filed November 14, 2005.
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3.2
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Bylaws of Lone Moose
Adventures, Inc. (now Southwest Casino Corporation)
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Incorporated by
reference to Exhibit 3.2 contained in Lone Mooses Registration
Statement on Form SB-2 (File No.333-88810)
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4.1
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Assumption Agreement,
dated July 22, 2004, by and between Southwest Casino Corporation (f/k/a
Lone Moose Adventures, Inc.) and Southwest Casino and Hotel Corp.
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Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K filed August 6,
2004.
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4.2
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Registration Rights
Agreement, dated June 29, 2004, by and among Lone Moose Adventures, Inc.,
David C. Merrell and Jenson Service, Inc.
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Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K filed August 6,
2004.
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4.3
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Warrant, dated July 22,
2004, between Southwest Casino Corporation and MBC
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Incorporated by
reference to Exhibit 4.3 to the Annual Report on Form 10-KSB filed March 31,
2006.
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4.4
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Registration Rights
Agreement, dated June 29, 2004, by and among Southwest Casino and Hotel
Corp. and the 8% convertible demand note holders
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Incorporated by
reference to Exhibit 4.5 to the Current Report on Form 8-K filed August 6,
2004.
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4.5
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Form of Warrant,
dated October 20, 2005, between Southwest Casino Corporation and
non-affiliate guarantors
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Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K filed October 26,
2005.
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4.6
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Form of Warrant,
dated October 20, 2005, between Southwest Casino Corporation and James
B. Druck, Thomas E. Fox, and Jeffrey S. Halpern as loan guarantors
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Incorporated by
reference to Exhibit 4.6 to the Annual Report on Form 10-KSB filed March 31,
2006.
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4.7
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Form of
Registration Rights Agreement, dated October 20, 2005, between Southwest
Casino Corporation and warrantholders.
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Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K filed October 26,
2005.
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E-1
Exhibit
No.
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Exhibit*
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Method of Filing
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4.8
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Form of
Option Agreement, dated January 10, 2006, between Southwest Casino
Corporation and each of David Abramson, Gus Chafoulias, Jim Holmes and Gregg
Schatzman, independent members of Southwests Board of Directors
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Incorporated by
reference to Exhibit 4.8 to the Annual Report on Form 10-KSB filed March 31,
2006.
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4.9
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Option Agreement dated January 10,
2006 between Southwest and David H. Abramson, Chairman of the Audit Committee
of the Board of Directors
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Incorporated by
reference to Exhibit 4.9 to the Annual Report on Form 10-KSB filed March 31,
2006.
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4.10
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Form of Series A Common Stock Warrant dated as of January
24, 2007 issued by Southwest Casino Corporation to each of the purchasers
party to the Securities Purchase Agreement
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Incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed January 30, 2007.
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4.11
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Form of Registration Rights Agreement dated as of
January 24, 2007 by and among Southwest Casino Corporation and the purchasers
named therein
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Incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed January 30, 2007.
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4.12
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Form of Series A Common Stock Warrant dated as of
February 26, 2007 issued by Southwest Casino Corporation to each of the
purchasers party to the Securities Purchase Agreement
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Incorporated by reference to Exhibit 10.47 to the
Registration on Form SB-2 filed February 28, 2007.
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4.13
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Form of Registration Rights Agreement dated as of
February 26, 2007 by and among Southwest Casino Corporation and the
purchasers named therein
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Incorporated by reference to Exhibit 10.48 to the
Registration on Form SB-2 filed February 28, 2007.
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4.14
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Form of Warrant issued March 10, 2008 by Southwest
Casino Corporation
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Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed March 13, 2008.
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4.15
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Form of Registration Rights Agreement, dated March
10, 2008, between Southwest Casino Corporation and non-affiliate guarantors
and James B. Druck, Thomas E. Fox, Jeffrey S. Halpern and Gus A Chafoulias
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Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K filed March 13, 2008.
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5.1
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Opinion of Oppenheimer,
Wolff & Donnelly LLP
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Previously filed
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10.1
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2004 Stock Incentive
Plan
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Incorporated by
reference to Exhibit 10.1 to the Current Report to Form 8-K filed August 6,
2004.
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10.2
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Option Agreement dated July 1,
2004, between Southwest Casino and James B. Druck
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Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed August 6,
2004.
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10.3
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Option Agreement dated July 1,
2004, between Southwest Casino and Jeffrey S. Halpern
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Incorporated by
reference to Exhibit 10.3 to the Current Report on Form 8-K filed August 6,
2004.
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10.4
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Option Agreement dated July 1,
2004, between Southwest Casino and Thomas E. Fox
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Incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K filed August 6,
2004.
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10.5
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Third Amended and
Restated Gaming Management Agreement dated June 16, 1995 between The
Cheyenne and Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.
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Incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed August 6,
2004.
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10.6
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Amendment No. 2 to
Third Amended and Restated Gaming Management Agreement dated June 5,
1999 between The Cheyenne and Arapaho Tribes of Oklahoma and Southwest Casino
and Hotel Corp.
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Incorporated by
reference to Exhibit 10.6 to the Current Report on Form 8-K filed August 6,
2004.
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10.7
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Amendment No. 3 to
Third Amended and Restated Gaming Management Agreement dated November 13,
2000 between The Cheyenne and Arapaho Tribes of Oklahoma and Southwest Casino
and Hotel Corp.
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Incorporated by
reference to Exhibit 10.7 to the Current Report on Form 8-K filed August 6,
2004.
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10.8
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Amendment No. 7 to
Third Amended and Restated Gaming Management Agreement dated September 4,
2003 between
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Incorporated by
reference to Exhibit 10.8 to the Current Report on Form 8-K filed
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E-2
Exhibit
No.
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Exhibit*
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Method of Filing
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The Cheyenne and
Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.
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August 6, 2004.
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10.9
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Member Control
Agreement of North Metro Harness Initiative, LLC, dated June 8, 2004
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Incorporated by
reference to Exhibit 10.10 to the Current Report on Form 8-K filed August 6,
2004.
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10.10
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BLN Office Park
Lease, dated August 10, 2004, between Southwest Casino and Hotel Corp.
and BLN Office Park Associates.
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Previously filed
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10.11
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Lease dated March 1999,
by and between Cripple Creek Development Corp. d/b/a Gold Rush Hotel &
Casino, Blue Building Development, Inc. d/b/a Gold Diggers Casino, Mark
Brockley, Annesse Brockley, Gold Rush I, LLC and Southwest Casino and Hotel
Corp., as amended
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Incorporated by
reference to Exhibit 10.11 to the Current Report on Form 8-K filed August 6,
2004.
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10.12
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Employment Agreement,
dated effective July 1, 2004, between Southwest Casino and Hotel Corp.
and James B. Druck
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Incorporated by
Reference to Exhibit 10.13 to the Current Report on Form 8-K filed August 6,
2004.
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10.13
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Employment Agreement,
dated effective July 1, 2004, between Southwest Casino and Hotel Corp.
and Jeffrey S. Halpern
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Incorporated by
Reference to Exhibit 10.14 to the Current Report on Form 8-K filed August 6,
2004.
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10.14
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Employment Agreement,
dated effective July 1, 2004, between Southwest Casino and Hotel Corp.
and Thomas E. Fox
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Incorporated by
reference to Exhibit 10.15 to the Current Report on Form 8-K filed August 6,
2004.
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10.15
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Form of Indemnification
Agreements by and between Southwest Casino and Hotel Corp. and each of James
B. Druck, Jeffery S. Halpern, Thomas E. Fox and Brian L. Foster
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Incorporated by
reference to Exhibit 10.17 to the Current Report on Form 8-K/A
filed October 5, 2004.
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10.16
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Indemnification
Agreement, dated June 29, 2004, by and between Lone Moose Adventures, Inc.
and David C. Merrell
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Incorporated by
reference to Exhibit 10.18 to the Current Report on Form 8-K filed August 6,
2004.
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10.17
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Introduction Agreement,
dated June 29, 2004, by and between Lone Moose Adventures, Inc. and
Jenson Services, Inc.
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Incorporated by
reference to Exhibit 10.19 to the Current Report on Form 8-K filed August 6,
2004.
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10.18
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Lease, dated May 1,
1998, by and between Lois L. Woods and Southwest Casino and Hotel Corp., as
amended
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Previously filed
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10.19
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Commitment Letter,
dated October 14, 2003, by and between Southwest Casino and Hotel Corp.
and Oppenheimer & Co. Inc.
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Incorporated by
reference to Exhibit Incorporated by reference to Exhibit 10.21 to
the Current Report on Form 8-K filed August 6, 2004.
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10.20
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Member Control
Agreement, dated June 14, 2004, by and between SW Missouri, LLC and
Southwest Casino and Hotel Corp.
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Incorporated by
reference to Exhibit 10.22 to the Current Report on Form 8-K filed August 6,
2004.
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10.21
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Operating Agreement of
Southwest Missouri Gaming, LLC
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Incorporated by
reference to Exhibit 10.23
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E-3
Exhibit
No.
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Exhibit*
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Method of Filing
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dated June 16,
2004.
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to the Current Report
on Form 8-K filed August 6, 2004.
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10.22
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Management Agreement
dated June 16, 2004 by and among Southwest Missouri Gaming, LLC, Robert
E. Low and W Missouri, LLC.
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Incorporated by
reference to Exhibit 10.24 to the Current Report on Form 8-K filed August 6,
2004.
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10.23
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Stipulation and
Agreement, dated June 17, 2004, by and among Southwest Casino and Hotel
Corp., and the Colorado Division of Gaming
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Incorporated by
reference to Exhibit 10.25 to the Current Report on Form 8-K filed August 6,
2004.
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10.24
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Revolving Credit and
Term Loan Agreement, dated October 20, 2005, between Southwest Casino
and Hotel Corp. and Crown Bank
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Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed October 26,
2005.
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10.25
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Guaranty by
Corporation, dated October 20, 2005, by Southwest Casino and Hotel Corp.
for the benefit of Crown Bank
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Incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K filed October 26,
2005.
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10.26
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Security Agreement,
dated October 20, 2005, between Southwest Casino Corporation and Crown
Bank
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Incorporated by
reference to Exhibit 10.3 to the Current Report on Form 8-K filed October 26,
2005.
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10.27
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Stock Pledge Agreement,
dated October 20, 2005, between Southwest Casino Corporation and Crown
Bank
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Incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K filed October 26,
2005.
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10.28
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Security Agreement,
dated October 20, 2005, between Southwest Casino and Hotel Corp. and
Crown Bank
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Incorporated by
reference to Exhibit 10.5 to the Current Report on Form 8-K filed October 26,
2005.
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10.29
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Membership Interest
Pledge Agreement, dated October 20, 2005 between Southwest Casino and
Hotel Corp. and Crown Bank (50% North Metro Harness Initiative, LLC)
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Incorporated by
reference to Exhibit 10.6 to the Current Report on Form 8-K filed October 26,
2005.
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10.30
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Membership Interest
Pledge Agreement, dated October 20, 2005 between Southwest Casino and
Hotel Corp. and Crown Bank (Gold Rush I, LLC, Southwest Casino Deadwood, LLC
and SW Missouri, LLC)
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Incorporated by
reference to Exhibit 10.7 to the Current Report on Form 8-K filed October 26,
2005.
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10.31
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Stock Pledge Agreement,
dated October 20, 2005, between Southwest Casino and Hotel Corp. and
Crown Bank (Southwest Entertainment, Inc.)
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Incorporated by
reference to Exhibit 10.8 to the Current Report on Form 8-K filed October 26,
2005.
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10.32
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Form of Personal
Guaranty by James Druck, Thomas Fox and Jeffrey Halpern, officers of
Southwest Casino Corporation, dated October 20, 2005, for the benefit of
Crown Bank
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Incorporated by
reference to Exhibit 10.9 to the Current Report on Form 8-K filed October 26,
2005.
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10.33
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Form of Personal
Guaranty by non-affiliates dated October 20, 2005 for the benefit of
Crown Bank
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Incorporated by
reference to Exhibit 10.10 to the Current Report on Form 8-K filed October 26,
2005.
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10.34
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Form of Personal
Guaranty by Trust dated October 20, 2005 for the benefit of Crown Bank
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Incorporated by
reference to Exhibit 10.11 to the Current Report on Form 8-K filed
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E-4
Exhibit
No.
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Exhibit*
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Method of Filing
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October 26,
2005.
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10.35
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Form of
Indemnification Agreements by and between Southwest Casino Corporation and
each of David H. Abramson, Gus A. Chafoulias, Jim Holmes and Gregg P.
Schatzman, independent members of Southwests Board of Directors
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Incorporated by
reference to Exhibit 10.35 to the Annual Report on Form 10-KSB
filed March 31, 2006.
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10.36
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Gaming Management
Agreement, dated March 24, 2006, between Southwest Casino and Hotel
Corp. and the Otoe-Missouria Tribe of Indians (not effective until approved
by the National Indian Gaming Commission)
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Incorporated by
reference to Exhibit 10.36 to the Annual Report on Form 10-KSB
filed March 31, 2006.
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10.37
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Employment Agreement
between Southwest and Tracie L. Wilson dated June 29, 2006
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Incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB
filed August 14, 2006.
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10.38
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Stock Option Agreement
between Southwest and Tracie L. Wilson dated June 29, 2006
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Incorporated by
reference to Exhibit 10.2 to the Quarterly Report on Form 10-QSB
filed August 14, 2006.
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10.39
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Asset Purchase
Agreement dated December 18, 2006 by and among Southwest Eagle, LLC,
Richard F. Fabiano, Frank R. Spadafore, Dorian N. Lange and Pinnacle Casinos
and Resorts, LLC, and Colorado Casino Resorts, Inc., Double Eagle
Resorts, Inc. and Gold Creek Ventures, LLC
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Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 21,
2006.
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10.40
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Lease dated December 20,
2006 by and between Pinnacle Casinos and Resorts, LLC, Colorado Casino
Resorts, Inc. and Southwest Eagle, LLC
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Incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed December 21,
2006.
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10.41
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Form of Securities
Purchase Agreement dated as of January 24, 2007 by and among Southwest
Casino Corporation and the purchasers named therein
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Incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K filed January 30,
2007.
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10.42
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Amended and Restated Lease dated January 31, 2007 by
and between Pinnacle Casinos and Resorts, LLC, Colorado Casino Resorts, Inc.
and Southwest Eagle, LLC
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Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed January 31, 2007.
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10.43
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Right of Access and Use Agreement dated January 31,
2007 by and between Pinnacle Casinos and Resorts, LLC, Colorado Casino
Resorts, Inc. and Southwest Eagle, LLC
|
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Incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed January 31, 2007.
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10.44
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Form of Securities Purchase Agreement dated as of
February 26, 2007 by and among Southwest Casino Corporation and the
purchasers named therein
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Incorporated by reference to Exhibit 10.46 to the Registration
on Form SB-2 filed February 28, 2007.
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10.45
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Credit Agreement Dated April 20, 2007 by and among
North Metro Harness Initiative, LLC and the other persons party hereto
designated as loan parties and Black Diamond Commercial Finance, L.L.C. and
the other financial institutions party hereto as Lenders
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Incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K filed April 24, 2007.
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10.46
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Pledge Agreement dated April 20, 2007 between
Southwest Casino and Hotel Corp. and Black Diamond Commercial Finance, L.L.C.
|
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Incorporated by reference to Exhibit 10.2 to Current
Report on Form 8-K filed April 24, 2007.
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10.47
|
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Sponsor Support Agreement dated April 20, 2007 by
and among Southwest Casino and Hotel Corp., Southwest Casino Corporation and
Black Diamond Commercial Finance, L.L.C.
|
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Incorporated by reference to Exhibit 10.3 to Current
Report on Form 8-K filed April 24, 2007.
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10.48
|
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Subordination Agreement dated April 20, 2007 by and
among Southwest Casino and Hotel Corp., North Metro Harness Initiative, LLC
and Black Diamond Commercial Finance, L.L.C.
|
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Incorporated by reference to Exhibit 10.4 to Current
Report on Form 8-K filed April 24, 2007.
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10.49
|
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Form of Promissory Note among Southwest Casino &
Hotel Corp., Crown Bank N.A. and co-signers entered into March 7, 2008.
|
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Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed March 13, 2008
|
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10.50
|
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Contribution Agreement among Southwest Casino &
Hotel Corp., co-signers and guarantors dated March 7, 2008
|
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Incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed March 13, 2008
|
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10.51
|
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Stock Pledge Agreement dated March 7, 2008 among
Southwest Casino Corporation, co-signers and guarantors.
|
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Incorporated by reference to Exhibit 10.3 to the
Current Report on Form 8-K filed March 13, 2008
|
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10.52
|
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Form of Amended and Restated Personal Guaranty by
James Druck, Thomas Fox and Jeffrey Halpern, officers of Southwest Casino
Corporation, dated March 7, 2008, for the benefit of Crown Bank
|
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Incorporated by reference to Exhibit 10.4 to the
Current Report on Form 8-K filed March 13, 2008
|
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10.53
|
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Stock Option Agreement between Southwest and James
B. Druck dated March 20, 2008.
|
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Incorporated by reference to Exhibit 10.53 to the
Annual Report on Form 10-KSB filed March 31, 2008
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10.54
|
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Stock Option Agreement between Southwest and Thomas
E. Fox dated March 20, 2008.
|
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Incorporated by reference to Exhibit 10.54 to the
Annual Report on Form 10-KSB filed March 31, 2008
|
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10.55
|
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Stock Option Agreement between Southwest and Jeffrey
S. Halpern dated March 20, 2008.
|
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Incorporated by reference to Exhibit 10.55 to the
Annual Report on Form 10-KSB filed March 31, 2008
|
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10.56
|
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Stock Option Agreement between Southwest and Tracie
L. Wilson dated March 20, 2008.
|
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Incorporated by reference to Exhibit 10.56 to the
Annual Report on Form 10-KSB filed March 31, 2008
|
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10.57
|
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Form of Option Agreement dated March 20, 2008
between Southwest and each of the independent members of our Board of
Directors.
|
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Incorporated by reference to Exhibit 10.57 to the
Annual Report on Form 10-KSB filed March 31, 2008
|
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10.58
|
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Stock Option Agreement dated January 10, 2006
between Southwest and David H. Abramson, Chairman of the Audit Committee of
the Board of Directors.
|
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Incorporated by reference to Exhibit 10.58 to the
Annual Report on Form 10-KSB filed March 31, 2008
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E-5
Exhibit
No.
|
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Exhibit*
|
|
Method of Filing
|
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14.1
|
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Code of Conduct
|
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Incorporated by reference to Exhibit 14 to the
Annual Report on Form 10-KSB filed June 29, 2004.
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14.2
|
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Southwest Casino Corporation Code of Conduct and
Ethics effective December 20, 2007
|
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Incorporated by reference to Exhibit 14.1 to the
Current Report on Form 8-K filed December 24, 2007.
|
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16.1
|
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Letter on change in
certifying public accountant
|
|
Incorporated by
reference to Exhibit 16.1 to the Current Report on Form 8-K filed September 13,
2004.
|
E-6
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
21.1
|
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List of Subsidiaries of
Southwest Casino Corporation
|
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Incorporated by
reference to Exhibit 21.1 to the Annual Report on Form 10-KSB filed
March 31, 2006.
|
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23.1
|
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Consent of Independent
Auditors
|
|
Filed herewith.
|
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23.2
|
|
Consent of Oppenheimer,
Wolff & Donnelly (included in Exhibit 5.1)
|
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Previously filed.
|
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24.1
|
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Power of Attorney
|
|
Previously filed.
|
*Pursuant to Item 601(b)(2) of
Regulation S-B, the registrant agrees to furnish, supplementally, a copy of any
exhibit or schedule omitted from any filed exhibit to this
report to the Securities and Exchange Commission upon request.
E-7
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