UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For
the quarterly period ended March 31, 2008
|
|
|
o
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
|
For the
Transition Period
From To
Commission
file number 000-50572
SOUTHWEST
CASINO CORPORATION
(Exact name of small business issuer as
specified in its charter)
Nevada
|
|
87-0686721
|
(State or other
jurisdiction of incorporation or
organization)
|
|
(IRS Employer
Identification No.)
|
2001
Killebrew Drive, Suite 350, Minneapolis, Minnesota 55425
(Address of principal executive offices)
(952)
853-9990
(Issuers telephone number)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES
x
NO
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
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
o
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|
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|
Non-accelerated filer
o
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|
Smaller reporting
company
x
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(Do not check if a
smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act)
YES
o
NO
x
State
the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date: 27,460,953 as of April 25,
2008.
SOUTHWEST
CASINO CORPORATION
FORM 10-Q
March 31,
2008
TABLE
OF CONTENTS
In this Form 10-Q, references to Southwest, the
company, we, our or us, unless the context otherwise requires, refer to
Southwest Casino Corporation and its consolidated subsidiaries.
i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
1
SOUTHWEST
CASINO CORPORATION
Consolidated
Balance Sheets
March 31, 2008 (Unaudited)
and December 31, 2007
|
|
2008
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|
2007
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|
ASSETS
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|
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CURRENT ASSETS
|
|
|
|
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Cash and Cash Equivalents
|
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$
|
1,630,104
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$
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1,892,401
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Accounts Receivable
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34,529
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54,582
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Accounts Receivable - Related Parties
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21,671
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41,572
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Inventories
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133,705
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141,041
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Prepaid Expenses and Other Current Assets
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959,910
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679,583
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Total Current Assets
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$
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2,779,919
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$
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2,809,179
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|
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PROPERTY AND EQUIPMENT
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|
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|
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Leasehold Improvements
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15,423,385
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15,389,750
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Furniture and Equipment
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5,301,053
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5,280,282
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|
Accumulated Depreciation
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|
(11,191,638
|
)
|
(10,835,938
|
)
|
Net Property and Equipment
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$
|
9,532,800
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$
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9,834,094
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OTHER ASSETS
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Other Assets
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379,283
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33,374
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Investment in Unconsolidated Subsidiary
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6,946,289
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|
7,218,720
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|
Total Other Assets
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$
|
7,325,572
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|
$
|
7,252,094
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|
|
|
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|
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TOTAL ASSETS
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|
$
|
19,638,291
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|
$
|
19,895,367
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|
|
|
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LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
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|
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CURRENT LIABILITIES
|
|
|
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Accounts Payable
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$
|
557,848
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$
|
659,284
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Accounts Payable - Related Parties
|
|
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25,000
|
|
Accrued Expenses
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963,206
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|
1,085,797
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|
Accrued Liabilities - Related Parties
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122,467
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122,467
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Notes Payable
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450,000
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Current Portion of Long-Term Liabilities
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1,269,849
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1,005,940
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Accrued Interest Payable
|
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61,664
|
|
55,465
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Total Current Liabilities
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|
$
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2,975,034
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$
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3,403,953
|
|
|
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LONG-TERM LIABILITIES
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Long-Term Liabilities Net of Current Portion
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$
|
7,515,568
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$
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6,486,365
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COMMITMENTS AND
CONTINGENCIES
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STOCKHOLDERS EQUITY
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Preferred Stock, $.001 Par Value; 30,000,000 Shares Authorized
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$
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$
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|
Common Stock, $.001 Par Value 75,000,000 Shares Authorized,
27,817,953 and 27,460,953 Shares Issued and Outstanding at March 31,
2008 and December 31, 2007
|
|
27,819
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|
27,819
|
|
Additional Paid-in Capital
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|
22,015,813
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|
21,496,064
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|
Accumulated Deficit
|
|
(12,573,643
|
)
|
(11,196,534
|
)
|
|
|
9,469,989
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10,327,349
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|
Less Treasury Stock (357,000 shares redeemed)
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|
(322,300
|
)
|
(322,300
|
)
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Total Stockholders Equity
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|
9,147,689
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|
10,005,049
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|
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|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
19,638,291
|
|
$
|
19,895,367
|
|
See Notes to Unaudited Consolidated Financial Statements
2
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Operations
(Unaudited)
For
the Three Months Ended March 31, 2008 and 2007
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|
For the three months
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For the three months
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|
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|
ended March 31, 2008
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ended March 31, 2007
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NET REVENUES
|
|
|
|
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Casino
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$
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3,501,331
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$
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3,381,392
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Food & Beverage/Hotel
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89,883
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99,455
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Management and Consulting
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150,000
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1,629,823
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Other
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36,530
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31,559
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3,777,744
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5,142,229
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EXPENSES
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|
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Casino
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$
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2,787,730
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|
$
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2,852,643
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Food & Beverage/Hotel
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325,965
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|
309,700
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|
Corporate Expense
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906,968
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1,303,585
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Project Development Costs
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168,276
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|
Entertainment
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8,207
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15,405
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Depreciation and Amortization
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365,314
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540,633
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|
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4,394,184
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5,190,242
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|
|
|
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LOSS FROM OPERATIONS
|
|
$
|
(616,440
|
)
|
$
|
(48,013
|
)
|
|
|
|
|
|
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OTHER INCOME (EXPENSE)
|
|
|
|
|
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Interest Income
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|
$
|
218
|
|
$
|
2,569
|
|
Interest Expense
|
|
(202,516
|
)
|
(249,449
|
)
|
Gain (Loss) on Disposition of Property and Equipment
|
|
1,250
|
|
|
|
Write-off of Financing Costs
|
|
(217,329
|
)
|
|
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Other
|
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(3,861
|
)
|
|
|
|
|
(422,238
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)
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(246,880
|
)
|
|
|
|
|
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Loss before income taxes, loss
in earnings of unconsolidated subsidiaries
|
|
(1,038,678
|
)
|
(294,893
|
)
|
|
|
|
|
|
|
Income taxes
|
|
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|
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Loss of Unconsolidated Subsidiaries, Net of Tax Benefit
|
|
(338,431
|
)
|
(120,171
|
)
|
|
|
|
|
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Loss from Continuing Operations
|
|
(1,377,109
|
)
|
(415,064
|
)
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(1,377,109
|
)
|
$
|
(415,064
|
)
|
|
|
|
|
|
|
Income (loss) per share - basic
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
Income (loss) per share -
diluted
|
|
|
|
$
|
|
|
Weighted average common shares
outstanding - basic
|
|
27,460,943
|
|
24,478,519
|
|
Weighted average common shares
outstanding - diluted
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
3
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
For
the Three Months Ended March 31, 2008 and 2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(1,377,109
|
)
|
$
|
(415,064
|
)
|
Adjustments to Reconcile Net Income (Loss) to
|
|
|
|
|
|
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
Depreciation and Amortization
|
|
365,314
|
|
540,633
|
|
Amortization of Loan Costs
|
|
16,575
|
|
43,101
|
|
Write-off of Acquisition and Financing Costs
|
|
217,329
|
|
|
|
(Gain) Loss on Disposition of Property and Equipment
|
|
(1,250
|
)
|
|
|
Stock Based Compensation Expense
|
|
164,399
|
|
67,221
|
|
Loss of Unconsolidated Subsidiary
|
|
338,431
|
|
120,171
|
|
Change in Current Assets and Liabilities,
|
|
|
|
|
|
(Increase) Decrease in Receivables
|
|
20,053
|
|
(632,377
|
)
|
(Increase) Decrease in Receivables - Related Parties
|
|
19,901
|
|
|
|
(Increase) Decrease in Inventories
|
|
7,336
|
|
30,366
|
|
(Increase) Decrease in Prepaid Expenses and Other Current Assets
|
|
(250,326
|
)
|
24,505
|
|
Increase (Decrease) in Accounts Payable
|
|
(88,440
|
)
|
245,108
|
|
Increase (Decrease) in Accrued Expenses
|
|
(122,591
|
)
|
95,987
|
|
Increase (Decrease) in Accrued Interest Payable
|
|
6,199
|
|
(3,556
|
)
|
Net Cash Provided By Operating Activities
|
|
$
|
(684,179
|
)
|
$
|
116,095
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
(147,401
|
)
|
(146,016
|
)
|
Proceeds from Sale of Property and Equipment
|
|
25,000
|
|
|
|
Receipt (Payment) of Deposit
|
|
|
|
(10,213
|
)
|
Investment in Unconsolidated Subsidiary
|
|
(66,000
|
)
|
(1,100,000
|
)
|
Net Cash Used in Investing Activities
|
|
$
|
(188,401
|
)
|
$
|
(1,256,229
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
Payments on Short-Term Notes Payable
|
|
$
|
(450,000
|
)
|
$
|
(446,292
|
)
|
Proceeds from Long-Term Borrowings
|
|
1,534,500
|
|
|
|
Principal Payments on Long-Term Borrowings
|
|
(256,888
|
)
|
(684,766
|
)
|
Proceeds from Issuance of Common Stock and Warrants
|
|
|
|
4,065,287
|
|
Redemption of Common Stock
|
|
|
|
(322,300
|
)
|
Payment of Financing Costs
|
|
|
|
(446,758
|
)
|
Payment of Financing Costs Written-Off
|
|
(217,329
|
)
|
|
|
Net Cash Provided (Used) by Financing Activities
|
|
$
|
610,283
|
|
$
|
2,165,171
|
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
(262,297
|
)
|
1,025,037
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Beginning of Period
|
|
1,892,401
|
|
1,531,260
|
|
End of Period
|
|
$
|
1,630,104
|
|
$
|
2,556,297
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
|
|
|
|
|
|
Interest Paid
|
|
$
|
178,707
|
|
$
|
209,904
|
|
Income Taxes Paid
|
|
$
|
1,000
|
|
$
|
37,000
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Capital assets acquired with acounts payable
|
|
$
|
92,497
|
|
$
|
12,703
|
|
Financing costs included in accounts payable
|
|
$
|
13,606
|
|
$
|
78,695
|
|
Costs associated with issuing common stock included in accounts
payable
|
|
$
|
|
|
$
|
48,462
|
|
Value of warrants issued in connection with debt issuance
|
|
$
|
355,350
|
|
$
|
|
|
Financing costs netted from long-term borrowings
|
|
$
|
15,500
|
|
|
|
|
Fees included in accounts payable and prepaid expenses and other
current assets
|
|
$
|
30,000
|
|
|
|
|
See
Notes to Unaudited Consolidated Financial Statements
4
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Changes in
Stockholders Equity (Unaudited)
For
the Three Months Ended March 31, 2008
|
|
Treasury Stock
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Retained
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
(357,000
|
)
|
$
|
(322,300
|
)
|
27,817,953
|
|
$
|
27,819
|
|
$
|
21,496,064
|
|
$
|
(11,196,534
|
)
|
$
|
10,005,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based Compensation Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
164,399
|
|
|
|
164,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Warrants in Connection With Debt Issuance
|
|
|
|
|
|
|
|
|
|
355,350
|
|
|
|
355,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,377,109
|
)
|
(1,377,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2008
|
|
(357,000
|
)
|
(322,300
|
)
|
27,817,953
|
|
27,819
|
|
22,015,813
|
|
(12,573,643
|
)
|
9,147,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
5
SOUTHWEST
CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH
31,2008
NOTE 1 BASIS OF PRESENTATION
The unaudited consolidated financial statements of
Southwest Casino Corporation, a Nevada corporation (the Company or Southwest),
have been prepared pursuant to the rules and regulations of the United
States Securities and Exchange Commission (SEC) applicable to interim
financial information. Accordingly,
certain information normally included in the annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States has been condensed or omitted. For further information, please
refer to the annual audited consolidated financial statements of the Company,
and the related notes included within the Companys Annual Report on Form 10-KSB
for the year ended December 31, 2007, filed with the SEC on March 31,
2008.
In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, consisting
only of normal recurring adjustments. The results for the current interim
period are not necessarily indicative of the results to be expected for the
full year.
NOTE 2 MANAGEMENT FINANCIAL PLANS
The Company completed a debt financing for $1.55 million
in March 2008, see Note 8. The
Company will be required to seek additional debt or equity financing during mid-2008
to fund operations as well as repay debt.
NOTE 3 STOCK OPTIONS AND AWARDS
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 by
shareholder approval in June 2007 which increased the number of shares of
Southwest Casino Corporation common stock reserved for issuance under the plan
from 1,500,000 to 3,000,000.
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 price of $.62 per share.
Valuation and Expense
Information under SFAS 123(R)
Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment
(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.
The effect of stock
options issued to employees, directors and consultants was to increase the net
loss for the three months ended March 31, 2008 and 2007 by $136,899 and
$44,304, respectively and basic loss per share by $0.005 and $0.002,
respectively.
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
6
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31,2008
expense over the period
the option vests. The Company has estimated fair value of all stock options as
of the date of grant by 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 three months ended March 31, 2008 were:
|
|
Three months ended
March 31, 2008
|
|
Expected price volatility
|
|
64%
- 66
|
%
|
Risk free interest rate
|
|
2.35%
- 2.76
|
%
|
Weighted average expected
life in years
|
|
5.0
6.76 years
|
|
Dividend yield
|
|
0
|
%
|
Pre-vesting forfeiture
rate
|
|
0
|
%
|
Weighted average fair
value
|
|
$
|
0.28
|
|
|
|
|
|
|
The Company estimated the expected price volatility
using a pro-rata percentage of both historical information for a peer group as
well as historical information for the Company from January 4, 2007
through March 20, 2008. The Companys
securities began trading publicly in July 2004, however the volume and
trading activity was minimal until 2007.
As a result the Company used the average volatility for the look back
period (which is the expected term of the options) for the companies considered
in the peer group and history for the Company from 2007 to March 20, 2008
(the date of grant). The Company
weighted the volatility using 80% of the peer group and 20% of the Companys
calculated volatility. The Company
applied the simplified formula for computing the expected term assumptions for
employee and director options in accordance with Staff Accounting Bulletin (SAB)
No. 107 and as modified in SAB No. 110. The Company applied 0% to the dividend yield
as the Company has not approved or issued dividends in the past and there are
no plans to do so. 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 three months ended March 31,
2008 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 during the three months ended March 31, 2008
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Balance at December 31, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
Granted
|
|
1,867,500
|
|
$
|
0.48
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
0
|
|
|
|
|
|
|
|
Exercised
|
|
0
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
4,367,500
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at March 31, 2008
|
|
4,367,500
|
|
$
|
0.58
|
|
7.0
years
|
|
$
|
|
|
Options exercisable at March 31, 2008
|
|
2,712,240
|
|
$
|
0.63
|
|
4.7
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 $0.50 on March 31, 2008, that the
option holders would have received had all option holders exercised their
options as of that date. As of March 31,
2008, the Companys unrecognized share-based compensation related to stock
options issued to employees and directors was approximately $525,981. This cost is expected to be expensed over a
weighted average period of three years.
Included in the Status of options table above are:
·
On March 20, 2008, the Board of
Directors awarded options to purchase an aggregate of 1,092,500 shares of the
Companys common stock to executive officers and employees of the
Company. All of the options were
7
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
granted under the Companys
2004 Stock Incentive Plan. The options have a 10-year term and an
exercise price of $0.48 per share, the closing market price for one share of
the Companys common stock on
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 of $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.
·
Consulting option grant
:
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 were also
granted under the companys 2004 Stock Incentive Plan, have a 10-year term, and
an exercise price of $0.48 per share, the closing market price for one share of
the Companys common stock on
the date of grant. These options become
exercisable upon Southwests achievement of certain goals related to the
services provided by the consultant to Southwest.
In accordance with SFAS
123(R) paragraph 7, the Company evaluated the services being provided and
determined the fair value of the equity award issued was the more reliable
measure of fair value.
The Company has estimated
the fair value of these options as of the date of grant by 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 were:
Expected price volatility
|
|
71
|
%
|
Risk free interest rate
|
|
3.31
|
%
|
Contractual life in years
|
|
10
years
|
|
Dividend yield
|
|
0
|
%
|
Pre-vesting forfeiture
rate
|
|
0
|
%
|
Weighted average fair
value
|
|
$
|
0.37
|
|
|
|
|
|
|
The Company estimated the expected price volatility
using a pro-rata percentage of both historical information for a peer group as
well as historical information for the Company from January 4, 2007
through March 20, 2008. The Companys
securities began trading publicly in July 2004, however the volume and
trading activity was minimal until 2007.
As a result the Company used the average volatility for the look back
period (which is the contractual term of the options) for the companies
considered in the peer group and history for the Company from 2007 to March 20,
2008 (the date of grant). The Company
weighted the volatility using 80% of the peer group and 20% of the Companys
calculated volatility. The Company
applied 0% to the dividend yield as the Company has not approved or issued
dividends. The risk-free interest rate was selected based upon yields of U.S.
Treasury issues with a term equal to the contractual life of the option being
valued. These options are not forfeitable once vested as such the
contractual life is used.
The Company is expensing the compensation cost of
these options over the expected vesting period based upon the performance
conditions and will reassess the likelihood of performance at each reporting
date. The Company expensed approximately
$3,000 during the three months ended March 31, 2008.
No tax benefit has been
recorded on share based compensation expense for the three month periods ended March 31,
2008 and 2007.
8
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31,2008
NOTE 4
WARRANTS
Status
of warrants:
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding as of
December 31, 2007
|
|
5,946,102
|
|
$
|
0.63
|
|
Granted
|
|
2,300,000
|
|
$
|
0.39
|
|
Exercised
|
|
0
|
|
|
|
Cancelled
|
|
0
|
|
|
|
Warrants outstanding as of
March 31, 2008
|
|
8,246,102
|
|
$
|
0.56
|
|
Issuance of Debt
The Company secured debt financing in March 2008,
see Note 8. 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 including Mr. Druck, Mr. Fox and Mr. Halpern
(officers of the Company and guarantors of the debt). 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 10,
2008.
The Company accounts for transactions in which
services are received in exchange for equity instruments issued based on the
fair value of such services received from non-employees or of the equity
instruments issued, whichever is more reliably measured, in accordance with
SFAS No. 123R and Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Additionally, the company has accounted for
this transaction in accordance with EITF Issue No. 00 18 Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees. The Company has
estimated the fair value of the warrants as of the date of grant by applying
the Black-Scholes pricing valuation model.
The application of this valuation model involves assumptions that are
judgmental and sensitive in the determination of expense. The key assumptions used in determining the
fair value of the warrants granted on March 10, 2008 were as follows:
Grant date stock price
(unregistered common share estimate)
|
|
$
|
0.31
|
|
Exercise price of warrant
|
|
$
|
0.39
|
|
Expected price volatility
|
|
64
|
%
|
Risk free interest rate
|
|
2.36
|
%
|
Contractual term
|
|
5
years
|
|
Dividend yield
|
|
0
|
%
|
Weighted average fair
value
|
|
$
|
0.1545
|
|
The Company estimated the expected price volatility
using a pro-rata percentage of both historical information for a peer group as
well as historical information for the Company from January 4, 2007
through March 20, 2008. The Company
became public in July 2004, however the volume and trading activity was
minimal until 2007. As a result the
Company used the average volatility for the look back period (which is the
contractual term of the warrant) for the companies considered in the peer group
and history for the Company from 2007 to March 10, 2008 (the date of
grant). The Company weighted the
volatility using 80% of the peer group and 20% of the Companys calculated
volatility. The Company applied 0% to
the dividend yield as the Company has not approved or issued dividends. The
exercise price of the warrants was based upon the market value of the Companys
common stock as reported on the Over the Counter Bulletin Board for
SWCC.OB. As the Company has not
registered the underlying shares of common stock the Company has applied a 20%
discount to the market price of a freely traded share due to the
9
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
restrictive nature of the award. The risk-free interest rate was selected
based upon yields of U.S. Treasury issues with a term equal to the contractual
life of the warrants being valued.
The fair value of the
warrants in the amount of $355,350 was credited to additional paid in capital
and the debit is recorded on the consolidated balance sheet as a deferred
financing cost included in Other Assets.
The deferred financing cost is being amortized to interest expense over
the term of the loan using the effective interest method (properly matching the
debt financing cost over the term of the loan).
NOTE
5
PROMOTIONAL ALLOWANCES
Revenue does not include
the retail amount of rooms, food, and beverages provided gratuitously to
customers, which was $297,000 and $273,000 for the three months ended March 31,
2008 and 2007, respectively.
NOTE 6 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 in Columbus,
Minnesota on the north side of the Twin Cities metropolitan area. On June 8,
2004, Southwest Casino and Hotel Corp. (Southwest) sold a 50% interest in
North Metro 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. Amounts
contributed in excess of the amounts stated in 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 March 31, 2008,
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
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.
10
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
North Metro is doing 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 March 31, 2008, 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 March 31, 2008
was $6,946,289, which is recorded on the Companys consolidated balance sheet.
As of March 31, 2008, the Company has contributed
$7,386,974 in consideration of its membership interests in North Metro.
The Company will receive pro-rata distributions of cash from North Metro upon
successful operations in accordance with the North Metro Member Control
Agreement after satisfying all conditions of senior credit agreements, payment
of member taxes and payment of the $1.6 million advance discussed below. 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. The $1,656,051 advance, together with interest, will only be paid
back to the Company out of first available cash from operations (and then after
certain distributions to the members for income tax purposes), see Subordination
Agreement described below under North Metro Financing Agreement. 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.
For the three months ended March 31, 2008 and
2007, the Company has recorded a loss from this unconsolidated subsidiary, net
of tax benefit of $338,431 and $120,171.
|
|
March 31, 2008
|
|
December 31, 2007
|
|
North Metro:
|
|
|
|
|
|
Total Assets
|
|
$
|
57,380,294
|
|
$
|
51,556,814
|
|
Total Liabilities
|
|
$
|
39,419,678
|
|
$
|
33,051,334
|
|
|
|
Three months
ended
March 31,
2008
|
|
Three months
ended
March 31,
2007
|
|
North Metro:
|
|
|
|
|
|
Revenues
|
|
$
|
15,286
|
|
$
|
25,302
|
|
Lobbying expenses
|
|
$
|
24,000
|
|
$
|
54,012
|
|
License fees Minnesota Racing Commission
|
|
67,680
|
|
61,411
|
|
Other expense
|
|
600,468
|
|
150,220
|
|
Total expenses
|
|
$
|
692,148
|
|
$
|
265,643
|
|
Net (loss)
|
|
$
|
(676,862
|
)
|
$
|
(240,341
|
)
|
Southwest Casino
Corporation:
|
|
|
|
|
|
50% share of net (loss)
|
|
(338,431
|
)
|
(120,171
|
)
|
Net tax benefit
|
|
|
|
|
|
(Loss) of unconsolidated subsidiary net of tax benefit
|
|
$
|
(338,431
|
)
|
$
|
(120,171
|
)
|
11
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31,2008
In
2006, North Metro formed a wholly-owned subsidiary that acquired a nearby motel
in December 2006 for a total cost of approximately $545,000 that North Metro
continues to operate in 2008 and will be used to house personnel involved in
the care of horses at the track during the live racing season. The motel has 15
rooms available to rent.
Southwest did not record a tax benefit related to
North Metros losses during the three months ended March 31, 2008 and
2007, see Note 10.
At March 31, 2008, 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.
On April 11, 2008, Running Aces Harness Park
opened for live harness racing. Other
expense includes start-up costs necessary for the opening of Running Aces
consisting primarily of salary, benefits, marketing, real estate taxes and
supplies.
North Metro Financing
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 March 31,
2008, Southwest contributed $9.0 million of the total amount of $21.4 million
contributed by the members.
Certain amounts included in the total of $21.4 million
contributed by the members relate to non-construction costs and continue to be
funded by the members. The Company
contributed $316,000 subsequent to the loan closing from April 20, 2007,
thru the end of March 31, 2008. In addition, the Company contributed
an additional $317,500 subsequent to March 31, 2008 thru May 15,
2008. The Company expects to continue to
make contributions of this nature. These
amounts are not considered to be material to the total cost of the North Metro
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 (as defined in the
agreement), 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 the first full
quarter after the project opening, as defined in the agreement (projected principal
payments beginning on September 30, 2008). 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 audited financial statements.
12
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
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 and to be secured by North Metro will be sufficient to
construct and open the facility.
Amendment to Credit Agreement:
Effective April 3, 2008, North Metro entered into
Limited Waiver and Amendment No. 1 to the Credit Agreement. The Limited Waiver extends the time period
for obtaining an audit (made necessary by a change to an audit firm identified
by the lender) for the fiscal year ended December 31, 2007 from March 31,
2008 to May 30, 2008. The failure
to deliver the audit on May 30, 2008 would be an immediate event of
default, as defined in the agreement.
The amendment to the credit agreement also allows for the
following: (1) Black Diamond will
subordinate its liens on assets up to $2.1 million related to equipment
financing with an unrelated third party and (2) North Metro is allowed to
issue letters of credit to replace certain cash deposits totaling approximately
$1.3 million. As consideration, North
Metro paid an amendment fee of $104,250.
NOTE 7 - LINE OF CREDIT
On April 16, 2007, the Company entered into the
Third Amendment to the Revolving Credit and Term Loan Agreement with Crown
Bank. The amendment extended 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.
In connection with a new loan with Crown Bank, each of the three principal
officers agreed to increase their $150,000 personal guarantees to $250,000, see
Note 8. As of March 31, 2008, no
amounts are outstanding under the Revolving Credit facility, see Note 17. As of April 30, 2008, the Company extended
the $450,000 line of credit to June 30, 2008.
The interest rate is Prime +1%, and not less than
7.5%. As of March 31, 2008 the interest rate is 7.5%.
NOTE 8 LONG TERM DEBT
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. The Company paid a 1% origination fee of $15,500 that
resulted in net proceeds of $1,534,500 to the Company. Each of the Notes
13
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
accrues interest at a floating rate of prime plus 1.5
percent, with a minimum interest rate of 7.0 percent (currently 7.0%). The effective interest rate on this loan,
after giving effect to the warrant consideration discussed below and in Note 4,
is approximately 24.5 percent. 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
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.
Future minimum principal payments required as of March 31,
2008 are:
April 1, 2008
March 31, 2009
|
|
$
|
258,333
|
|
April 1,
2009 January 11, 2010
|
|
$
|
1,291,667
|
|
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 each. 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 10, 2008. The Company valued the warrants in connection
with the financing transaction, see Note 4.
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 10,
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.
14
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
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.
NOTE 9
EARNINGS (LOSS) 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 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 three months ended March 31, 2008 and 2007;
therefore a calculation of loss per share on a fully diluted basis would be
anti-dilutive, thus stock options and warrants to purchase 12,613,602 and
8,596,102 common shares were not included in the calculation of loss per share
for 2008 and 2007, but were outstanding at March 31, 2008 and 2007, see
Notes 3 and 4.
NOTE 10
INCOME TAXES
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 as interest expense in the Statement of Operations.
The Company does not have
any unrecorded tax benefits as of March 31, 2008.
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 during the three months ended March 31,
2008 and 2007 based upon the uncertainty and ultimate termination of the
Companys management contract with the Cheyenne and Arapaho Tribes on August 17,
2007. As a result of this evaluation, a
tax benefit during the three months ended March 31, 2008 and 2007 was not recognized. As of March 31, 2008, the Companys
deferred tax asset is zero.
NOTE 11 RELATED PARTY TRANSACTIONS
In addition to $140,000 of unpaid bonuses to officers,
see Note 15, the Company has a liability to certain officers and stockholders
for unpaid compensation and expenses of $122,467 as of March 31, 2008,
relating to periods prior to December 31, 2003.
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.
15
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
James B. Druck, Chief Executive Officer and Director;
Thomas E. Fox, President and Chief Operating Officer; Jeffrey S. Halpern, Vice
President of Government Affairs; and Gus A. Chafoulias, Director each
participated in our Crown Bank financing transaction in March 2008 and
received warrants, see Note 8.
During the three months ended March 31, 2007, the
Company paid Berc & Fox Limited $2,000 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 during fiscal year 2007 and
was paid to Berc & Fox in March 2008. During February 2008
this furniture and equipment was sold to North Metro for $25,000 and the Company
received payment from North Metro in February 2008.
Virginia Skruppy is a
part-time employee of North Metro. Ms. Skruppy is the wife of Tom Fox, our
President. We anticipate that her earnings in 2008 will not exceed $20,000.
As of March 31, 2008 the Company has a receivable
due from North Metro of approximately $22,000 for reimbursement of salary,
benefits and travel. During the three months ended March 31, 2008
the Company received reimbursement from North Metro of salary, benefit and
travel costs of $41,363.
NOTE 12 PROJECT DEVELOPMENT COSTS
The Company continues to pursue additional gaming
opportunities and as a result continues to incur project development
expenses. For the three months ended March 31,
2008 and 2007, development expenses were $0 and $168,276, respectively.
NOTE 13 SEGMENT INFORMATION
Segment
information related to the three months ended March 31, 2008 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
3,627,744
|
|
$
|
150,000
|
|
$
|
|
|
$
|
3,777,744
|
|
Segmented profit (loss)
before income taxes
|
|
(20,608
|
)
|
(1,018,070
|
)
|
(338,431
|
)
|
(1,377,109
|
)
|
Segmented assets
|
|
11,639,255
|
|
1,049,747
|
|
6,949,289
|
|
19,638,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
information related to the three months ended March 31, 2007 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
3,512,406
|
|
$
|
1,629,823
|
|
$
|
|
|
$
|
5,142,229
|
|
Segmented profit (loss)
before income taxes
|
|
(266,183
|
)
|
139,566
|
|
(288,447
|
)
|
(415,064
|
)
|
Segmented assets
|
|
12,833,030
|
|
2,603,394
|
|
6,043,848
|
|
21,480,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008 and
2007 the Company recognized revenues of $0 and $1,629,823, 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.
NOTE 14 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.
16
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
NOTE 15 - 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 5.25% at March 31, 2008. 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 March 31, 2008.
Financial consulting services:
The Company will be required to pay an additional
consulting fee to the Companys investor relations advisor of $100,000 or
$200,000 if Strategic Growth International (SGI) assists the Company in
completing an equity or debt financing 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 if warrants are issued to the lender, on the same terms as
the warrants issued to the lender.
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. After a scheduling conference with the
arbitration panel on March 11, 2008, Southwest submitted its formal
Cross-Complaint to the arbitration panel on April 22, 2008 and the Tribes
submitted its formal complaint on April 23, 2008. Southwest is now proceeding with discovery in
this matter.
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.
17
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
The
Governor sought termination of the agreement and $10 million in damages. Southwest does not believe it improperly
interfered with or attempted to influence internal governmental decisions of
the Tribes and Southwest is vigorously defending 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.
In
its Cross-Complaint, 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 the restraining order on September 24,
2007. Southwests claims on behalf of the Tribes or Southwest for conversion,
copyright infringement, tortious interference with contract, defamation, and
conspiracy against the defendants remain pending in the Federal District Court
for the District of Oklahoma.
On
January 14, 2008, the Mr. Flyingman, as Governor of the Tribes and
not in his individual capacity, 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, an assertion that Southwest does
not contest. On February 13, 2008, the Federal District Court issued a
stay of the proceedings before it pending resolution of the Tribal court
proceeding. After briefing, oral argument in this matter was held on April 4,
2008 and, on April 10, 2008, the Trial Court judge ruled in favor of the
Tribes. Southwest did not appeal this decision. The effect of this decision on
the pending federal court litigation is not known at this time.
Other Litigation Matters
In
addition to the matters described above, we are involved in 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 ultimate outcome of these other matters will not have a material effect
on our financial position or results of operations.
NOTE 16 - NEW ACCOUNTING
PRONOUNCEMENTS
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 10.
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. The statement did not have an impact on the
Companys consolidated financial
18
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31,2008
statement disclosures during the three months ended March 31,
2008. 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. We are evaluating the potential impact of FSP
FAS 157 2.
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 statement did not have an impact on the Companys
consolidated financial statements during the three months ended March 31,
2008.
In December 2007 the Securities and Exchange
Commission issued Staff Accounting Bulleting (SAB) No. 110 which
continues to allow companies to use the simplified method, as discussed in
SAB No. 107 in developing an estimate of expected term of plain vanilla
share options in accordance with Statement of Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payment
.
In May 2008, the FASB released SFAS No. 162,
The Hierarchy of Generally Accepted Accounting
Principles
. This statement
will be effective 60 days after the United States Securities and Exchange
Commission approves amendments to AU Section 411,
The Meaning
of Present Fairly in Conformity with Generally Accepted Accounting Principles
. The Company does not anticipate any
significant change in financial reporting to result from issuance of this
statement.
NOTE 17
SUBSEQUENT EVENTS
Extension
of Crown Bank Line of Credit
On April 16, 2007,
the Company entered into the Third Amendment to the Revolving Credit and Term
Loan Agreement with Crown Bank. The amendment extended the maturity date
of the $450,000 revolving line of credit to April 30, 2008. 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. In connection with a new loan with Crown Bank entered into in March 2008
(see Note 8) each of the three principal officers agreed to increase their
$150,000 personal guarantees to $250,000.
As of March 31, 2008, no amounts are outstanding under the
Revolving Credit facility. As of April 30,
2008, the Company extended the maturity date of the $450,000 line of credit to
June 30, 2008 and has drawn $450,000 under the line of credit.
Related Party Transaction
On April 24, 2008, Gus Chafoulias, a member of the Companys Board
of Directors, obtained two letters of credit in the aggregate amount of
$473,742.50 to release 50% of cash deposits made by North Metro in connection
with the development of its racetrack and card room. Southwest has agreed to
reimburse Mr. Chafoulias for all costs incurred in connection with obtaining
these letters of credit and to provide him additional compensation to be
determined, but that will not exceed compensation that would be paid in a
similar transaction with an unrelated third party.
19
Item 2. 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, Southwest,
the Company, we, our and us) for the three months ended March 31,
2008 and 2007.
Summary of
Consolidated Operating Results:
For the quarter ended March 31, 2008, we had a
net loss of $1,377,109 on revenues of $3,777,744 compared to a net loss of
$415,064 on revenues of $5,142,229 for the same period in 2007. This amounts to a basic loss of $0.05 and
$0.02 per outstanding share during the three months ended March 31, 2008
and 2007, respectively.
The increase in the net
loss of approximately $962,000
was
due primarily to a decrease in revenues of approximately $1,364,000, offset by
a decrease in operating expenses of approximately $796,000, the write-off of
financing costs of approximately $217,000 and an increase in the loss from our
unconsolidated subsidiary (North Metro) of $218,000.
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. We also
operated Uncle Sams Casino in Cripple Creek, Colorado until June 2008.
Until August 17, 2007 we managed two Native American gaming operations for
the Cheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star
- Clinton. We own a 50% membership interest in North Metro Harness
Initiative, LLC (North Metro). North Metro opened its harness racetrack
at its Running Aces Harness Park in Columbus, Minnesota on the north side of
the Minneapolis St. Paul Metropolitan area on April 11, 2008. A
50-table card room that is part of Running Aces will open after Running Aces
completes 50 days of live racing (as required by Minnesota statue). Under
the live racing schedule approved by the Minnesota Racing Commission, the 50
th
day of live races is scheduled for June 30, 2008.
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. We consult with 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 early 2009.
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. The Company will need to raise additional
debt or equity financing in mid-2008 for operations and debt service.
We continually evaluate other management, consulting,
development and acquisition opportunities related to gaming that have the
potential to generate new revenue streams for us.
20
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, see above
discussion under overview.
Lucky Star - Concho
We earned management fees of $0 and $916,605 from
Lucky Star - Concho during the three months ended March 31, 2008 and 2007,
respectively.
Lucky Star - Clinton
We earned management fees of $0 and $713,218 from
Lucky Star - Clinton during the three months ended March 31, 2008 and
2007, respectively.
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 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 early 2009. 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 three months ended March 31,
2008.
Casino operations
:
Gold Rush/Gold Diggers Casino (GR/GD)
Results
|
|
Three Months
Ended
March 31, 2008
|
|
Three Months
Ended
March 31, 2007
|
|
Percentage Change
Favorable
(Unfavorable)
|
|
Casino revenues
|
|
$
|
3,501,331
|
|
$
|
3,172,513
|
|
10.4
|
%
|
Total revenues
|
|
3,627,744
|
|
3,298,429
|
|
10.0
|
%
|
Loss before income taxes+
|
|
9,594
|
|
116,940
|
|
92.0
|
%
|
Loss margin*
|
|
(0.3
|
)%
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
+
Loss before income taxes is determined by reducing
total revenues by, among other things, interest expense on our capital lease at
the Gold Rush and depreciation and amortization expenses. The capital
lease was carried on
21
our Consolidated Balance
Sheet in the amount of approximately $7.0 million as of March 31,
2008. Interest expense was $170,000 and $191,000 for the three months
ended March 31, 2008 and 2007, respectively. Depreciation and
amortization expense was $350,000 and $383,000 for the three months ended March 31,
2008 and 2007, respectively.
*
The loss margin is calculated by dividing loss before
income taxes by total revenues.
For the three months ended March 31, 2008, GR/GDs
total casino revenues increased by 10.4% over the same period in the prior
year, despite the Cripple Creek market declining by 12.7% during this same time
period. Our margin improved over the previous year as a result of the
increased revenues. We believe the
smoking ban that came into effect on January 1, 2008 is having a
significant negative effect on the market.
We are pleased that we have been able to counter the negative impacts of
the smoking ban to date by addressing needs of our customers in innovative ways
that have helped us increase revenues year over year in a declining
market. Additionally, during the three
months ended March 31, 2007 we were impacted by bad weather in January and
February 2007 which we did not experience in the current year. During March 2008 the Cripple Creek
market reported a total of 4,458 gaming devices compared to 4,711 in the same
period in the prior year, a decrease of 5.4%.
We are aware of a new casino that is being built in Cripple Creek that is
projected to open in the summer of 2008 and projected to offer approximately
700 gaming devices, or ~14% of the market in terms of gaming devices (based
upon March Cripple Creek reported gaming device totals). We are continuing to analyze our customers
patronage patterns and will continue to take steps to mitigate the impact of
the smoking ban and the new casino but we can make no assurances on the impact
for the remainder of 2008.
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. Additionally we offered incentives to
the players/customers who played at Uncle Sams to migrate their play to the
Gold Rush and Gold Diggers casinos. We estimated that we
retained approximately 40% - 70% of the revenues from former Uncle Sams
customers who now play 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. We no longer use the Uncle Sams brand name 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
:
|
|
Three Months
Ended
March 31, 2007
|
|
Total revenues
|
|
213,977
|
|
Loss before income taxes
|
|
130,883
|
|
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. 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.
Project Development
costs for the three months ended March 31,
2008 and 2007 were $0 and $168,276, respectively. The 2007 amounts
related primarily to costs associated with the management contract with the
Cheyenne and Arapaho Tribes, see above discussion under Casino
Management. We expect to incur project
development costs in the remainder of 2008 similar to the levels incurred in
prior years but this will vary depending on opportunities and availability of
funds.
22
Corporate expenses
were $906,968 and $1,303,585 during the
three months ended March 31, 2008 and 2007, respectively, a decrease of
$396,617.
The decrease in our corporate expenses during the
three months ended March 31, 2008 over the same period in the prior year
is primarily due to decreased salary and benefit expense of approximately
$300,000. During March 2007 the
board of directors approved discretionary performance bonuses of approximately
$385,000. During March 2008 the
board of directors approved the issuance of 1,867,500 stock options to
officers, employees, independent directors and a consultant. We recognized stock option compensation
expense of approximately $137,000 and $44,000 during the three months ended March 31,
2008 and 2007, respectively (see Part I Note 3 to our Financial Statements
in Item 1 within this Form 10-Q).
In addition to the $300,000 decrease in salary and benefits we did not
incur license costs of approximately $56,000 with the National Indian Gaming
Association during the three months ended March 31, 2008 and we did not
incur consulting expense of $15,000 during the three months ended March 31,
2008 as we had during the three months ended March 31, 2007. The performance bonus approved and recorded
in March 2007 consisted 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 March 31, 2008.
We incurred management fee expenses related to our
Punta Cana consulting contract of approximately $40,000 during the first
quarter of 2008.
Interest Expense
was $202,516 and $249,449 for the three
months ended March 31, 2008 and 2007, respectively, a decrease of
approximately $46,933. The decrease is primarily due to lower interest
from our $2.5 million term loan as the loan was fully paid in April 2007.
Write off of
acquisition and financing costs
of $217,329 during the three months ended March 31,
2008 relate to the write-off of costs associated with a financing alternative
to the bank loan we secured in March 2008. We were unable to agree
upon the terms with the lender and we ultimately chose not to continue
negotiations with the lender.
Loss of
unconsolidated subsidiary, net of tax benefit
represents our share of the losses of
North Metro, which were $338,431 and 120,171 for the three months ended March 31,
2008 and 2007, respectively. The
increase during the three months ended March 31, 2008 compared to the same
period in the prior year is due to the increased start-up expenses primarily
related to salaries, benefits and marketing expenses necessary to open Running
Aces Harness Park on April 11, 2008.
Effective tax rate.
For
the three months ended March 31, 2008 and 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. We
recorded a 100% valuation allowance against the deferred tax assets at March 31,
2008 and December 31, 2007 because of the termination of our management
agreement with the Cheyenne and Arapaho Tribes, effective August 17, 2007
and net losses since the termination. As of March 31, 2008 and December 31,
2007, our deferred tax asset is zero.
Liquidity and
Capital Resources:
We continue to generate cash flow from our casino
operations in Colorado and our consulting agreement with Palace Resorts.
We use the cash flows generated to pay off debt in accordance with our
agreements, fund reinvestment in our Colorado properties for both refurbishment
and replacement of assets, and to pursue additional growth opportunities.
As the existing cash flows were inadequate to fund our cash requirements, we
secured additional debt financing in March 2008, described below. We will need to raise additional debt or
equity financing in mid-2008.
Due to the loss of revenue resulting from the
termination of our management contract with the Cheyenne and Arapaho Tribes of
Oklahoma (see above discussion under the operating segment Casino Management)
we secured additional debt financing to fund our current 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%. The effective interest rate on this loan, after
giving effect to the warrant consideration issued in connection
23
with it, is approximately 24.5 percent (see Part I
Note 4 to our Financial Statements in Item 1 within this Form 10-Q). We are required to make interest only
payments through January 2009 after which we will repay the outstanding
principal balance and accrued interest in 12 equal monthly installments.
Eight shareholders of the Company, including a member of our board of
directors, cosigned portions of the loan. Our three principal executive
officers guaranteed portions of this loan as well as our $450,000 operating
line of credit. 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 to each co-signer and guarantor. The warrants have a
five-year term.
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 $217,000 that were expensed during the three months
ended March 31, 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.
Net cash used in operating activities during the three
months ended March 31, 2008 was $684,179 compared to net cash provided by
operating activities of $116,095 during the three months ended March 31,
2007. The change in cash from operations
was approximately $800,000 and is primarily due to an increase in our net loss
of $962,000 with offsetting other noncash expenses and changes in current
assets and current liabilities.
Net cash used in investing activities for the three
months ended March 31, 2008 and 2007 was $188,401 and $1,256,229,
respectively, a decrease of approximately $1.1 million. The decrease in
use of cash between the periods was due primarily to a decrease in our
investment in North Metro of approximately $1.0 million. North Metro closed its construction financing
in April 2007, resulting in less required funding from the members of
North Metro. We contributed $66,000 and
$1,100,000 during the three months ended March 31, 2008 and 2007,
respectively.
Net cash provided by financing activities for the
three months ended March 31, 2008 and 2007 was $610,283 and $2,165,171,
respectively. During the three months
ended March 31, 2008 and 2007 we had the following financing activities:
·
In January and February 2007 we completed an equity financing
resulting in proceeds of approximately $4.0 million.
·
We made payments of approximately $0.3 million on long-term borrowings
compared to approximately $0.7 million during the three months ended March 31,
2008 and 2007, respectively. The
decrease was due to full repayment of a $2.5 million term loan with Crown Bank
on April 30, 2007.
·
During the three months ended March 31, 2007 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 March 31, 2008.
·
We made payments of approximately $217,000 and $447,000 related to
financing and acquisition costs during the three months ended March 31,
2008 and 2007, respectively. The
financing costs incurred in 2008 are discussed above and the financing and acquisition
costs incurred in 2007 related to an acquisition that ultimately did not close.
·
We made payments of approximately $450,000 and $446,000 during the
three months ended March 31, 2008 and 2007 related to our line of credit.
24
Line of Credit.
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. 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. In connection with a new loan with
Crown Bank entered into in March 2008 (see Term Note below) each of the
three principal officers agreed to increase their previously existing $150,000
personal guarantees to $250,000. As of March 31,
2008, no amounts are outstanding under the Revolving Credit facility. As of April 30, 2008, we extended the
$450,000 line of credit to June 30, 2008 and have drawn $450,000 under the
line of credit.
Term Note
. In March 2008, we entered
into a $1.55 million term loan that is described above under
Liquidity and Capital
Resources
.
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 5.25% as of March 31, 2008. The
outstanding balance as of March 31, 2008 was approximately $210,000.
Seasonality:
We believe that the operations of all casinos owned by
us is affected by seasonal factors, including holidays, weather and travel
conditions.
Effects of Current
Economic and Political Conditions:
General Economic Conditions:
Consumer demand for the gaming products and related
amenities we offer may be particularly sensitive to downturns in the
economy. Almost all gaming jurisdictions
in the United States have reported overall declining casino and related
revenues in recent months. Changes in
consumer preferences or discretionary consumer spending brought about by
factors such as general economic conditions, real or perceived reduction in
disposable consumer income, fears of recession and changes in consumer
confidence in the economy could reduce customer demand for our product, thus
harming our operations.
Competitive Pressures:
Many casino operators are either entering or expanding
in our markets, including a major new casino expected to open in the Summer of
2008 in the Cripple Creek, Colorado market, 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 properties, the
magnitude of which we cannot predict at this time.
25
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 Managements Discussion and Analysis or Plan of
Operation and Notes to Consolidated Financial Statements presented in the 2007
Financial Statements included in our Annual Report on Form 10-KSB.
New Accounting Pronouncement
:
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. This Statement did not effect our
consolidated financial statements as of March 31, 2008. 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. We are evaluating the potential impact of FSP
FAS 157 2.
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. This
Statement did not effect our consolidated financial statements as of March 31,
2008.
In December 2007 the
Securities and Exchange Commission issued Staff Accounting Bulleting (SAB) No. 110
which continues to allow companies to use the simplified method, as discussed
in SAB No. 107 in developing an estimate of expected term of plain
vanilla share options in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004),
Share-Based
Payment
.
26
In May 2008, the FASB
released SFAS No. 162,
The Hierarchy of Generally
Accepted Accounting Principles
.
This statement will be effective 60 days after the United States
Securities and Exchange Commission approves amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles
. We do
not anticipate any significant change in our financial reporting to result from
issuance of this statement.
Forward-Looking Statements:
This Quarterly Report on Form 10-Q
contains forward-looking statements intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of
1995. 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:
·
short-term
access to debt or equity financing;
·
cost of available and feasible debt or equity
financing;
·
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;
·
the effect of economic, credit and capital
market conditions on the economy in general, and on gaming companies in
particular; 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;
·
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.
·
our international consulting agreement and
any future international operations will require us to understand and comply
with the gaming regulations and operate in economic environments that are new
to us and may differ significantly from the regulatory and economic models in
which we currently operate.
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.
27
Risk Factors
In reviewing this quarterly
report on Form 10-Q, you should carefully consider the matters concerning
Southwest Casino Corporation described under the heading Risk Factors in the
annual report on Form 10-KSB filed by the Corporation on March 31,
2008, which are incorporated in this document by reference.
28
Item
4t. Controls and Procedures
Disclosure Controls
and Procedures.
Our management is responsible for
establishing disclosure controls and procedures, as defined in Rule 13a-15(e) of
the Securities Exchange Act of 1934, designed to ensure that information
required to be disclosed in the reports we file or submit under the Act is
recorded, processed, summarized and reported within the time periods specified
in the Commissions rules and forms.
These disclosure controls and procedures include controls and procedures
designed to ensure that information we are required to disclose in the reports
we file or submit under the Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive
Officer, who serves as our principal executive officer, and our President and
Chief Operating Officer, who serves as our principal financial officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of March 31, 2008 and concluded that those controls and procedures
were effective as of that date.
Managements
Report on Internal Control over Financial Reporting
.
Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Our internal control system was designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial reporting and the preparation of financial statements
for external purposes, in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Our management, including
our Chief Executive Officer, who serves as our principal executive officer, and
our President and Chief Operating Officer, who serves as our principal
financial officer, conducted an evaluation of the effectiveness of internal
control over financial reporting using the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in Internal Control
Integrated Framework. Based on its
evaluation, our management concluded that our internal control over financial
reporting was effective as of March 31, 2008.
There have not been any
changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act) that occurred during the
fiscal quarter ended March 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
This report shall not be
deemed to be filed for purposes of Section 18 of the Securities Exchange
Act of 1934, or otherwise subject to the liabilities of that section, and is not
incorporated by reference into any filing of the Company, whether made before
or after the date hereof, regardless of any general incorporation language in
such filing.
29
PART II
- OTHER INFORMATION
Item
1. 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. After an initial scheduling conference with
the arbitration panel on March 11, 2008 we submitted our formal
Cross-Complaint to the arbitration panel on April 22, 2008 and the Tribes
submitted their formal complaint on April 23, 2008.
In the Complaint, 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 Southwest is vigorously defending itself in this arbitration proceeding.
Under our Gaming Management Agreement with the Tribes, we were permitted to oppose,
publicly or privately, any action by the Tribes that we believed was not in the
best interest of the Tribal gaming operations. We believe that all of the
actions we took on behalf of the gaming operations we managed or as part of our
efforts to extend our gaming management relationship with the Tribes were
consistent with that provision.
In our Cross-Complaint, 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 we led the Tribes successful efforts to
negotiate and enter into a compact for expanded gaming with the State of
Oklahoma in April 2005. We are now
proceeding with discovery in this case.
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. 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 the restraining order on September 24, 2007. Our claims on
behalf of the Tribes or Southwest for conversion, copyright infringement,
tortious interference with contract, defamation, and conspiracy against the
defendants remain pending in Federal district court.
On January 14, 2008, the Mr. Flyingman,
as Governor of the Tribes and not in his individual capacity, 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, an assertion that we did not contest. On February 13, 2008, the
Federal District Court issued a stay of the proceedings before it pending
resolution of the Tribal court proceeding. After briefing, oral argument in
this matter was held on April 4, 2008 and, on April 10, 2008, the
Trial Court judge ruled in favor of the Tribes. We did not appeal this
decision. The effect of this decision on the pending federal court litigation
is not known at this time.
30
Other Litigation Matters
In addition to the matters described above, we
are involved in 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 ultimate outcome of these
other matters will not have a material effect on our financial position or
results of operations.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
On March 10, 2008
Southwest Casino Corporation issued five-year fully exercisable warrants to
purchase an aggregate of 1,550,000 shares of its common stock at an exercise
price of $0.39 per share to eight shareholders who co-signed promissory notes
with Southwest Casino & Hotel Corp. in the original principal amount
of $1.55 million. Each co-signer
received a warrant to purchase one share of our common stock for each $1.00 in
principal amount of the promissory note co-signed by that shareholder. We issued identical warrants to purchase an
additional $750,000 to James Druck, our CEO, Thomas Fox, our President and COO,
and Jeffrey Halpern, our Vice President of Government Affairs, in consideration
of their increase in the amount and extension of the term of their respective
guarantees of our outstanding line of credit and the promissory notes described
above. 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 10, 2008.
We are using 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. We
reserved from the proceeds of the loan $97,000, which Southwest
estimates based on the current interest rate is the amount of the interest-only
payments due under the notes through January 11, 2009.
The
warrants issued to the shareholders who co-signed the promissory notes totaling
$1.55 million described above under Item 1.01 of this Current Report on Form 8-K
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 6. Exhibits
The following exhibits
are attached to this Quarterly Report on Form 10-Q:
31.1
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Certification of Chief Executive Officer
Pursuant to SEC Rule 13a-14.
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31.2
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Certification of Principal Financial and
Accounting Officer Pursuant to SEC Rule 13a-14
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32.1
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Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Principal Financial and
Accounting Officer Pursuant to 18.U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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31
SIGNATURES
In accordance with the requirements of
the Securities and Exchange Act of 1934, as amended, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
May 15, 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
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(principal executive officer)
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By:
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/s/ Thomas E. Fox
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Thomas E. Fox
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President and Chief Operating Officer
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(principal financial and accounting officer)
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32
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