Table of Contents
As filed with the Securities and
Exchange Commission on August 4, 2008
Registration No. 333-140934
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2/A
ON FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SOUTHWEST CASINO CORPORATION
(Name of small business
issuer in its charter)
Nevada
|
|
7999
|
|
87-0686721
|
(State or jurisdiction
of incorporation or organization)
|
|
(Primary Standard
Industrial Classification Code Number)
|
|
(I.R.S. Employer
Identification number)
|
2001 Killebrew Drive, Suite 350
Minneapolis, MN 55425
Tel: 952-853-9990
Fax: 952-853-9991
(Address and telephone
number of principal executive office)
Thomas E. Fox
President and Chief Operation
Officer
2001 Killebrew Drive,
Suite 350
Minneapolis, MN 55425
Tel: 952-853-9990
Fax: 952-853-9991
|
|
(Name, address and
telephone number of agent for service of process)
Incorp
Services, Inc.
3155
East Patrick Lane, Suite 1
Las Vegas, NV 89120-3481
Tel: 702-866-2500
|
Copies
of all communications to:
D.
William Kaufman, Esq.
Patrick
J. Pazderka, Esq.
Oppenheimer, Wolff &
Donnelly
45 South 7
th
Street, Suite 3300
Minneapolis, MN 55402
Tel: 612-607-7000
Fax: 612-607-7100
Approximate date of
commencement of proposed sale to the public: From time to time after this
registration statement becomes effective, as determined by market
considerations and other factors.
If any securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following
box.
x
If this Form is
filed to register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
If this Form is a
post effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act. Large accelerated
filer
o
Accelerated
filer
o
Non-accelerated filer
o
Smaller reporting company
x
Calculation of Registration Fee
Title of Each Class of Securities
to be Registered
|
|
Amount to be
Registered (1)
|
|
Proposed
Maximum Offering
Price Per Share
(1)(2)
|
|
Proposed Maximum
Aggregate Offering Price (2)
|
|
Amount of
Registration Fee (3)
|
|
Common Stock, $0.001 par value
|
|
7,954,787
|
|
$
|
0.965
|
|
$
|
7,676,370.00
|
|
$
|
236.00
|
|
Common Stock, $0.001 par value, underlying warrants
|
|
4,708,602
|
|
$
|
0.965
|
|
$
|
4,543,801.00
|
|
$
|
140.00
|
|
TOTAL
|
|
12,663,
389
|
|
$
|
0.965
|
|
$
|
12,220,171.00
|
|
$
|
376.00
|
|
(1) The shares of our Common Stock registered under this statement
are being registered for resale by the selling security holders named in the
prospectus. Of the shares of common
stock, 7,954,787 shares are currently outstanding and 4,708,602 shares are
issuable upon the exercise of warrants.
In addition, pursuant to Rule 416 under the Securities Act of 1933,
this registration statement includes an indeterminate number of additional
shares that may be offered and sold to prevent dilution resulting from stock
splits, stock dividends, or similar transactions.
(2)
Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, based
upon the last sale price reported of the Registrants common stock as quoted on
the Over-the-Counter Bulletin Board of $0.965 on February 23, 2007.
(3)
Previously paid.
The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933 or until the registration statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may determine.
Table
of Contents
The information in this prospectus
is not complete and may be changed. The selling stockholders may not sell these
securities until our registration statement filed with the Securities and
Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED
,
2008.
PROSPECTUS
SOUTHWEST CASINO CORPORATION
12,663,389 SHARES OF COMMON STOCK
This prospectus relates
to 12,663,389 shares of common stock of Southwest Casino Corporation, a Nevada
corporation, which may be resold by selling stockholders named in this
prospectus. These shares consist of
7,954,787 shares currently outstanding and 4,708,602 shares issuable upon
exercise of outstanding warrants. We
have been advised by the selling stockholders that they may offer to sell all
or a portion of their shares of common stock being offered in this prospectus
from time to time. Our common stock is
quoted on the Over-the-Counter Bulletin Board (OTCBB) market under the symbol
SWCC.OB. On August 1, 2008, the last
sales price of our common stock as reported on the OTCBB was $0.55 per
share. No underwriter or any other
person has been engaged to facilitate the sale of the securities in this
offering. The shares of common stock
will be offered and sold as described under the heading Plan of Distribution
beginning on page 14.
Investing in our common stock
involves a high degree of risk that is described under the heading Risk
Factors beginning on page 3 of this prospectus. We urge you to carefully read the Risk
Factors section before you make your investment decision.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of these securities or passed upon the adequacy or accuracy of the
prospectus. Any representation to the
contrary is a criminal offense.
The date of this
prospectus is ,
2008.
Table of Contents
TABLE OF CONTENTS
You should rely only on
the information contained in this prospectus.
We have not authorized anyone to provide you with information that is
different. This prospectus may only be
used where it is legal to sell these securities. The information in this
prospectus is accurate as of the date on the front cover. You should not assume that the information
contained in this prospectus is accurate as of any other date.
In this prospectus,
references to Southwest, Southwest Casino, the company, we, our or us,
unless the context otherwise requires, refer to Southwest Casino Corporation
and its consolidated subsidiaries. The
terms we, us, or our in each case do not include the selling
stockholders.
Dealer Prospectus
Delivery Obligation
Until ninety days from the effective date of this
registration statement,
all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
i
Table
of Contents
PROSPECTUS
SUMMARY
The following is a summary that highlights what we believe to be the most important information regarding Southwest and the securities being offered herein. Because it is a summary, however, it may not contain all of the information that is important to you. To understand our business and this offering fully, you should read this entire prospectus and our financial statements and related notes carefully.
Our
Business
Southwest Casino
Corporation
develops,
owns, operates, manages and provides consulting services to casinos, gaming
facilities and related amenities in various markets across the United States
and the Caribbean. Based in Minneapolis,
Minnesota, we currently own two casinos in Colorado and a 50% membership
interest in North Metro Harness Initiative, LLC, which owns and operates
Running Aces Harness Park, a harness racetrack and card room in Minnesota. Running Aces Harness Park began harness
racing April 11, 2008 and opened its 50-table card room June 30,
2008, after completion of 50 days of live harness racing. We have approximately 150 full and part-time employees.
Running Aces Harness Park employs more than 550 additional people.
Gold Rush I, LLC, a wholly-owned subsidiary of Southwest
Casino and Hotel Corp. (a wholly-owned operating subsidiary of Southwest), owns
and operates the Gold Rush Hotel & Casino and the Gold Diggers casino
in Cripple Creek Colorado. Cripple Creek
is a small, historic mining town near Colorado Springs that is permitted to
engage in limited stakes ($5.00 maximum bet) gaming. Fifteen casinos operate currently in Cripple
Creek. The combined Gold Rush and Gold
Diggers facilities offer approximately 406 slot machines and a 4-table card
game area. Southwest also owns and
operates the Palladium, an outdoor amphitheater adjacent to the Gold Rush and
Gold Diggers facilities that offers live entertainment and other special
events.
North
Metro Harness Initiative, LLC, in which Southwest and MTR-Harness, Inc.,
an affiliate of MTR Gaming Group, Inc. each own a 50 percent membership
interest, owns and operates a harness racing track and card room facility on
approximately 180 acres of land in Columbus Township, Anoka County,
Minnesota. This project, named Running Aces Harness Park, opened with its
first day of live harness racing on April 11, 2008. The 50-table card room that is part of the
facility opened on June 30, 2008 after Running Aces completed 50 days of
live harness racing, as required by Minnesota law.
Running
Aces Harness Park offers pari-mutuel wagering on a 5/8-mile harness racing
track with capacity for more than 2,000 track, restaurant and card room
patrons. The Running Aces card room
offers 50 tables of poker and non-banked casino card games. Running Aces 25 poker tables deal games
including Texas Hold-em, Omaha and 7-card stud. Players can choose from a
variety of games at the 25 casino card game tables including blackjack, Fortune
Pai Gow Poker, Ultimate Texas Hold em, 3-card poker and 4-card poker. In addition to live harness racing and cards,
after the April 25, 2008 passage of a law permitting Running Aces to simulcast
races from all breeds of horses, Running Aces offers simulcast wagering on
horse races by all breeds that are broadcast into the facility.
In
September 2007, Southwest entered into a consulting agreement to work with
Palace Resorts in developing and opening a casino at the Moon Palace Casino,
Golf and Spa Resort now under construction in Punta Cana on the easternmost tip
of the Dominican Republic. Under the
consulting agreement, we assist Palace Resorts in all phases of design, game
selection, training and equipping the casino that will be part of the
1,700-room resort that is scheduled to open in 2008. Under the original agreement, we were to
receive consulting fees of $50,000 per month for 10 months beginning in October 2007. On June 26, 2008, we entered into a new
contract with a subsidiary of Palace Resorts that extended the length of the
consulting agreement until the opening of the casino in late 2008 or early
2009, after which we will manage the new casino (
see Recent Developments,
below). Palace Resorts provides world-class resort
vacations at all-inclusive properties throughout Cancun, the Riviera Maya,
Nuevo Vallarta, and Cozumel with the Punta Cana, Dominican Republic resort now
under construction.
Recent
Developments
Until August 17,
2007, Southwest Casino and Hotel Corp. managed the Lucky Star Concho and
Lucky Star Clinton casinos in Concho and Clinton, Oklahoma, under the terms of
a management agreement with the Cheyenne and Arapaho Tribes of Oklahoma. From May 19, 2007 to August 17,
2007, Southwest managed the Lucky Star Concho and Lucky Star Clinton
casinos under Amendment No. 11 to the Third Amended and Restated Gaming
Management agreement between Southwest and the Cheyenne and Arapaho Tribes of
Oklahoma, which extended that agreement for up to two years. On August 17, 2007, the Supreme Court of
the Cheyenne and Arapaho Tribes
1
Table of Contents
declared Amendment No. 11
invalid. Also on August 17, 2007,
the National Indian Gaming Commission (NIGC) reversed its prior approval of
Amendment No. 11. On August 24,
2007, the NIGC rejected our challenge to its decision to reverse that
approval. We have not received
management fees from the Cheyenne and Arapaho Tribes since August 17,
2007.
On June 26, 2008, we announced that we entered into an agreement
with a subsidiary of Palace Resorts to manage the casino at the Moon Palace
Casino, Golf and Spa Resort in Punta Cana, Dominican Republic. The casino will
be part of a 1700-room, all-inclusive luxury resort that Palace Resorts is
constructing on the far eastern tip of the Dominican Republic. We have been
consulting with Palace Resorts on the design, development and operation of the
casino since September 2007.
Under the new agreement, we will continue to assist Palace Resorts in
all phases of design, game selection, training and equipping the casino as a
consultant and then manage the casino for five years after it opens in late
2008 or early 2009. As manager, we will be responsible for all aspects of
casino operations and will work with Palace Resorts to market the casino and
the resort as a gaming destination. We receive a monthly fee as a consultant
and will receive management fees equal to 5 percent of net casino income after
the casino opens, subject to a minimum monthly fee.
Our Company
Southwest Casino and
Hotel Corp. is the primary, wholly-owned operating subsidiary of Southwest
Casino Corporation and was our parent company until the July 2004
reorganization that resulted in our current structure. Southwest Casino and Hotel Corp. was
organized under the laws of the State of Minnesota in 1992 under the name Southwest
Casino and Hotel Ventures, Inc. and has operated in the gaming industry
since formation.
On July 22, 2004,
Southwest Casino and Hotel Corp. completed a reverse merger in which it became
a wholly-owned subsidiary of Lone Moose Adventures, Inc., a Nevada
corporation, and the former Southwest Casino and Hotel Corp. equity security
holders acquired approximately 92% of the outstanding securities of Lone Moose
Adventures, Inc. Lone Moose then
changed its name to Southwest Casino Corporation, which is the surviving
reporting entity today.
Lone Moose Adventures, Inc.
was formed on January 2, 2002 to take clients on adventure tours in the
Wasatch mountain range of Utah. Before
closing the reorganization described above, Lone Moose conducted only minimal
operations and received only minimal revenue.
Upon closing the reorganization, we sold substantially all of the assets
and liabilities of Lone Mooses adventure tour business to Lone Mooses
founding shareholders. Since the
reorganization and sale of the adventure tour business, Southwest has not
engaged in any aspect of the business conducted by Lone Moose before the
reorganization.
Principal
Executive Offices
Southwest Casino
Corporation
2001 Killebrew
Drive, Suite 350
Minneapolis, MN
55425
Phone:
952-853-9990
The
Offering
Securities
Offered
|
12,663,389
shares of our common stock, consisting of 7,954,787 shares currently
outstanding, and 4,708,602 shares issuable to selling stockholders upon
exercise of outstanding warrants.
|
|
|
Use of Proceeds
|
We will not
receive any of the proceeds from the sale of the common stock offered by the
selling stockholders.
|
|
|
Risk Factors
|
The securities
offered hereby involve a high degree of risk. See Risk Factors.
|
|
|
Offering Price
|
All or part of
the shares of common stock offered hereby may be sold from time to time in
amounts and on terms to be determined by the selling stockholders at the time
of sale.
|
|
|
OTCBB Trading
Symbol
|
SWCC.OB
|
2
Table
of Contents
RISK
FACTORS
Investing in our stock is
highly speculative and risky. You should
be able to bear a complete loss of your investment. Before making an investment decision, you
should carefully consider the following risk factors in conjunction with any
other information included or incorporated by reference in, including in
conjunction with forward-looking statements made herein. If any event or circumstance described in the
following risk factors actually occurs, it could materially adversely affect
our business, operating results and financial condition. The risks and
uncertainties described below are not the only ones that we face. There may be additional risks and uncertainties
not presently known to us or those we currently believe are immaterial which
could also have a negative impact on our business, operating results and
financial condition.
In addition to the
influences identified elsewhere in this prospectus, there are several important
factors that could cause our actual results to differ materially from those
anticipated by us or that are reflected in any of our forward-looking
statements. These factors, which may
impact the success of our operations and our ability to achieve our goals,
include the following:
1.
Risks related to
Southwests financial condition:
We
no longer receive revenue from our prior Oklahoma management agreement
.
Our Gaming Management Agreement with the Cheyenne and Arapaho Tribes of
Oklahoma terminated on August 17, 2007.
We have not received any revenue from management of the Lucky Star
Concho and Lucky Star Clinton casinos since that date. Before August 17, 2007, revenue from
this management agreement was a significant source of our operating
revenue.
Failure to replace the
revenue previously generated from this management agreement would have a
material adverse effect our financial condition.
We
have an accumulated deficit and uncertainty with respect to achieving future
profitability
. We have incurred substantial operating losses
since inception and had an accumulated deficit of $12.6 million as of March 31,
2008. These losses are primarily the result of expenses related to our ongoing
pursuit of new gaming opportunities, including the development of the Running
Aces Harness Park owned by North Metro Harness Initiative, LLC. We cannot provide you any assurance that we
will be able to achieve profitability on a quarterly or annual basis in future
periods. Our future operating results
will depend upon a number of factors, including (a) the continuation and
future profitability of our Colorado casinos; (b) our ability to establish
new gaming opportunities; (c) our ability to maintain our current gaming
licenses and to obtain additional gaming licenses for new or expanded gaming
facilities; and (d) our ability to successfully identify, secure licensing
and maintain all necessary approvals and funding related to any additional
future gaming opportunities.
We
have a continuing need for additional capital
. We anticipate that we will need substantial
additional funding to provide working capital to meet current and future
obligations, including operating expenses and any obligations we may have to
contribute additional capital to North Metro Harness Initiative, LLC. We will also need additional funding for any
additional gaming projects we may choose to pursue. Failure to meet our
capital commitments related to the harness racetrack and card room could lead
to a dilution of our ownership interest in that project. Moreover, our
operating plans and financing needs are subject to change depending on, among
other things, market conditions and opportunities; land, equipment or other
asset-based financing that may be available in connection with our development
of gaming facilities; cash flow from operations, if any; and the number of new
gaming projects that we pursue. While additional funds may be provided through
borrowings from institutional investors or project partners, equipment leasing
or other forms of debt or equity financing, we do not have any unconditional
commitments relating to additional financing and we cannot assure you that
additional financing will be available when needed. Even if financing is
available when required, we cannot assure you that it will be on terms favorable
to us and our security holders in terms of cost or dilution.
3
Table of Contents
2.
Risks
related to our ownership interest in the North Metro Harness Initiative
racetrack and card room (Running Aces Harness Park):
Running
Aces Harness Park, in which we own a 50% membership interest, is a new business
and we cannot assure you that it will be successful.
Running
Aces Harness Park began horseracing operations on April 11, 2008 and
opened its 50-table card room on June 30, 2008. Running Aces is a new gaming venture in which
we have made a substantial investment of management time and financial
resources. As a new gaming venture, the
success of Running Aces is subject to all of the risks described in these
Risk Factors
, as well as all risks
associated with starting a new business venture. These new business risks include, but are not
limited to (a) hiring and training qualified personnel, (b) establishing
adequate and cost-effective operating procedures, (c) competing
effectively against other area gaming or entertainment options, and (d) effective
marketing and capture of customers. If
Running Aces does not progress as planned, we may not receive distributions
from its operations, may have to contribute additional capital to North Metro,
and could see the value of our investment in North Metro reduced, any of which
would materially and adversely affect our business and operating results.
We may be required to contribute additional capital to North
Metro.
Under the
Sponsor Support Agreement among Southwest Casino Corporation, Southwest Casino
and Hotel Corp. and the lenders to North Metro, Southwest is obligated to make
additional capital contributions to North Metro as necessary to achieve
Project Opening, as defined in the Credit Agreement. There is no limit on the amount of the
contributions that Southwest could be required to make under this
agreement. As of the date of this
filing, North Metro has not achieved Project Opening and Southwest remains
obligated to provide additional membership contributions.
We could forfeit our membership interest in Running Aces
Harness Park if North Metro defaults on its construction loan.
Southwest has pledged its membership
interests in North Metro to the lenders of North Metros construction
loan. If North Metro defaults on its
loan, those lenders could have the right to foreclose on Southwests membership
interests in North Metro, thus causing Southwest to forfeit its ownership of
Running Aces Harness Park.
We could be liable for up to $1 million, plus certain costs,
if North Metro defaults on its construction loan
.
Southwest has guaranteed up to $1 million
(plus certain costs) of the North Metro construction loan and, if North Metro
is unable to repay the loan, Southwest may be required to repay up to $1
million (plus certain costs) to the lenders.
North Metro has, at times, been in default under its
construction loan and is likely to be in default in the future.
North Metro has, at times, failed to satisfy
conditions or covenants under its construction loan and has entered into or
sought waivers or amendments to the terms of the credit agreement to address
these failures. We cannot assure you
that North Metro will not be in default under its credit agreement, that North
Metro will be able to cure any default under its credit agreement for which a
cure period is available in a timely manner or, alternatively, that North Metro
will be able to secure the lenders agreement to waive or amend provisions of
the credit agreement to resolve any default.
If North Metro is unable to reach a satisfactory resolution to any
default, the lenders may have the right to foreclose on our ownership interest
in North Metro and require us to repay up to $1 million (plus certain costs) of
the loan, which would have a material adverse effect on Southwest.
MTR
Gaming Group, Inc., the parent company of MTR-Harness, Inc., the
other 50 percent member of North Metro, has announced that it no longer
considers its ownership interest in North Metro a strategic asset
.
Under the North Metro Harness Initiative, LLC
Member Control Agreement, Southwest and MTR must now each provide 50 percent of
any additional funds needed for development or operation. If MTR were to make capital contributions in
excess of Southwest, our membership interest in
4
Table
of Contents
North Metro could be
diluted. If MTR were to fail to make any of its required or agreed upon
capital contributions to North Metro, North Metro may not have the financial
resources required to operate its racetrack and card room. MTR announced on July 30, 2008 that it
no longer considered North Metro a strategic asset. If North Metro is unable to operate its
racetrack and card room, and alternative financing was not available and agreed
to, we would not receive any cash or profit from the operation of the facility
and the value of our investment in North Metro would be materially adversely
affected.
It is
unlikely that North Metro will provide significant cash distributions to us for
several years due to restrictions under the construction financing agreements
for the North Metro Harness Initiative racetrack and card room
.
Under the terms of the construction loan for
North Metro, operating cash flow from North Metro must first be used to repay
the construction loan. North Metro will not be permitted to make distributions
to its owners (other than annual distributions for payment of income taxes),
including Southwest, unless it exceeds performance thresholds stated in the
loan agreements. As a result, we do not believe North Metro will be a
significant source of cash distributions to us for several years, if ever.
Delays
in developing North Metros racetrack and card room caused by legal challenges
to North Metros racing licenses increased the cost of the project
.
Legal challenges caused significant delays in
developing the North Metro project.
These delays caused the costs of developing the facility to increase
significantly due to, among other things, higher purchase prices for real property,
fluctuating interest rates and borrowing costs, rising construction and labor
costs, rising energy prices, and general inflation. These increased costs significantly increased
the ultimate development costs for the North Metro facility and will delay and
reduce the amount of profit, if any, generated by North Metro and available for
distribution to us.
Actions by the
Minnesota state legislature may reduce the value of our investment in North
Metro
.
If any
legislation should pass that excludes North Metro from any gaming expansions
afforded to Canterbury Park, Native American tribes or other gaming operators,
it would have a material adverse effect on North Metros operations. Similarly, any expansion of gaming in
Minnesota, whether Native American gaming or otherwise, that excludes North
Metro could also have a material adverse effect on North Metro and its
business. For example, legislation was
introduced and subsequently withdrawn in the Minnesota legislature to expand
the scope of gaming to permit slot machines (commonly referred to as a
racino) at Canterbury Park, the other Class A licensed pari-mutuel
wagering racetrack in the state, without affording North Metro the same
opportunity for 5 years. In addition,
the legislature has considered, but has not adopted, a significant tax on card
room revenue that, if passed, would reduce significantly net revenue generated
by North Metro.
3.
Risks related to our international consulting and management services:
Our consulting and management contract for a casino
in the Dominican Republic involves risks
.
We currently provide consulting services and will provide management services
for a new casino being developed in the Dominican Republic. Our ability to provide those services and
generate revenue from those services is subject to significant risks related to
(a) the gaming regulatory framework of the Dominican Republic, (b) our
ability to adapt to the different regulatory and gaming environment in the
Dominican Republic while remaining in compliance with the requirements of the
gaming regulatory authorities in the jurisdictions in which we currently
operate, as well as other applicable federal, state, or local laws in the
United States and the Dominican Republic, (c) our ability to operate in a
jurisdiction where English is not the primary language of our employees and
regulators, (d) potential political or economic instability in the
Dominican Republic, and (e) the extreme weather conditions in the region.
The decisions of sovereign
governments could have a material adverse effect on our international
consulting and management services business.
Sovereign governments, including the
Dominican Republic, may establish laws or regulations that will be deleterious
to our ability to provide such services or that will affect our ability, as a foreign
corporation, to operate in their country.
Governments have also, from time to time, established foreign exchange
controls that could have a material adverse effect on our business, financial
condition, and results of operations.
Because we will receive management fees based on a percentage of the
revenue of a casino, any action by a foreign government harmful to the business
of a casino we serve, even if it does not directly impact our ability to
provide consulting and management services, may reduce the revenue generated
through the consulting or management services we provide.
Palace Resorts, to whom we
provide consulting and management services in the Dominican Republic, has the
right to terminate our consulting and management services contract under
certain circumstances.
Under the terms of our agreement to provide consulting and management
services, Palace Resorts, the owner of the casino, may terminate our services
if (a) we fail to meet performance criteria stated contract (b) we
fail to obtain or maintain any license required to provide our services or to
operate the casino, (c) a material breach or default by Southwest that is
not timely cured, (d) insolvency or bankruptcy, or (e) we fail to
maintain insurance satisfactory to Palace Resorts.
4.
Regulatory risks related
to our participation in the gaming industry:
We,
and the gaming industry as a whole, are heavily regulated and any change in the
regulatory environment could have a material adverse effect on our business and
operations
.
The gaming industry is highly regulated at the federal and state
levels. The process of complying with all applicable government regulations is
complex and requires us to expend substantial time and resources. We cannot
assure you that we will be able to comply on a continuous or timely basis with
all applicable regulations, and delays in compliance, or failure to comply,
could have a material adverse effect on our business, financial condition,
results of operations and our ability to maintain and obtain needed licenses.
Changes in existing regulations or the adoption of new regulations at the
federal level or in the states in which we operate or pursue new opportunities
could delay or prevent our compliance with those regulations. Our failure to
comply with applicable laws or regulations, whether federal, state or local,
could result in, among other things, the termination or suspension of some of
our operations, both of which would have a material adverse effect on our
business.
5
Table
of Contents
We
face risks in connection with obtaining, maintaining and renewing gaming
licenses required for the conduct of our business
.
The development and
management of gaming facilities are subject to extensive licensing requirements
and we cannot assure you that we will be able to obtain or maintain all
necessary licenses, approvals and other clearances from regulatory authorities
having jurisdiction over our gaming facilities. Although we, and our
affiliates, have obtained the governmental licenses, permits and approvals we
believe are necessary for the continued operation of our Colorado casinos and
the harness track and card room in Minnesota, we cannot assure you that we will
be able to maintain or renew the necessary licenses, approvals and other
clearances required for our operations.
All
licenses that have been or may be obtained by us or our affiliates are subject
to various conditions and in many cases will be subject to renewal
.
A failure to comply with
gaming regulations or the conditions of any license we hold could have an
adverse effect upon our ability to secure, maintain or renew our gaming
licenses. We were fined $50,000 by the Colorado Division of Gaming in June 2004
for failure to properly maintain and review statistical data on slot machine
performance after receiving a warning letter regarding this deficiency and
failing to comply with its recommended action for correction of the deficiency.
We entered into a Stipulation and Agreement with the Colorado Limited Gaming
Control Commission in which we admitted that we failed to comply with the
applicable gaming regulations and agreed to take corrective action immediately.
As part of these proceedings, James Druck, in his capacity as Manager of the
facility in question, without any admission of guilt, agreed to take the steps
required to insure our compliance in this matter and, further, agreed to pay
the sum of $5,000 to Colorados Limited Gaming Fund as reimbursement for
expenses incurred by Colorado in this investigation. It is difficult to
predict with any certainty whether, and to what extent, this occurrence may
have a material adverse effect on our business or adversely affect our ability
and the ability of our key personnel to obtain or retain required licenses in
Colorado. In addition, we must disclose this violation to other jurisdictions
in which we hold or apply for gaming licenses. It is difficult to predict what
impact, if any, that disclosure may have on our ability to obtain or maintain
licenses in those jurisdictions.
5.
Risks related to the
gaming industry generally:
We
face intense competition in the gaming industry
.
The gaming
industry, including the development, operation and management of racetracks and
other types of facilities, is highly competitive, especially given the rapid
rate at which the industry is expanding. For example, a number of management
companies may make proposals to a particular tribe for the development and
management of a single Indian gaming facility, and any gaming facilities
developed or managed by us will compete with a rapidly expanding number of
other gaming facilities of varying quality and size, including gaming
facilities that are part of national or regional chains, and other forms of
gaming and entertainment. Many of our competitors have substantially greater
financial and personnel resources than we do. Competition in the future may
also be affected by overbuilding of gaming facilities in our markets, which can
adversely affect patronage levels. Given the current regulatory climate and
limited number of lucrative gaming opportunities available, competition is
likely to become more intense in the future.
Changes in the Cripple Creek, Colorado gaming market
may negatively impact the performance of our Gold Rush Hotel and Casino and the
Gold Diggers Casino.
A new casino offering approximately 700 gaming devices opened in Cripple
Creek, Colorado on May 31, 2008.
Our ability to maintain and grow our Colorado operations is largely
dependent on our ability to increase our market share in a highly competitive
environment. The opening of this new
casino will increase the level of competition in this market. At this time, we cannot predict the short or
long term effects of the opening of this facility on our Colorado operations. In addition, Colorado banned smoking on
casino floors effective January 1, 2008.
We expect this ban will have some negative impact on business volume in
the Cripple Creek market. We cannot
predict the impact of this smoking ban on the Gold Rush and Gold Diggers
casinos at this time.
We
face risks associated with our pursuit of new gaming projects
.
We have
pursued, are pursuing, and will continue to pursue new gaming projects that
involve substantial pre-development commitments of time and money with no
assurance we will receive the approvals needed to develop and operate the
proposed gaming facility. A number of these projects require legislation or
voter approval, which not only increases the cost of such projects but also
increases the risk the project will not be approved and extends the time
required to obtain licenses, complete development and begin operations. Gaming projects may be controversial in some areas
and face significant opposition from competitors or individuals and groups
opposed to gaming on moral grounds. In
addition to
6
Table
of Contents
increasing
the costs and difficulties in obtaining required approvals for gaming projects,
these opponents may also use litigation to try to delay or block new
projects. For example, after we received
all required approvals to develop a harness racetrack in Anoka County,
Minnesota, a group opposed to gaming on moral grounds delayed the start of
construction for almost two years by filing two separate lawsuits in attempts
to block the project.
We
will continue to face legislative and judicial hurdles and adverse legislative
and judicial changes
.
The legislative and judicial environments related to gaming are dynamic
and change rapidly. Any federal, state or local action, adverse legislation, or
judicial or regulatory ruling that limits gaming or constricts the scope of our
gaming operations could have a material adverse effect on the gaming industry
or our operations and financial condition.
We
face risks related to the nature of the gaming industry, including adverse
economic and political conditions and changes in the legislative and land use
regulatory climate
.
Similar to investment in other entertainment enterprises, adverse
changes in general and local economic conditions may adversely impact
investments in the gaming industry. Examples of economic conditions
subject to change include, among others, (a) competition in the form of
other gaming facilities and entertainment opportunities; (b) changes in
regional and local population and disposable income; (c) unanticipated
increases in operating costs; (d) restrictive changes in zoning and
similar land use laws and regulations, or in health, safety and environmental
laws, rules and regulations; (e) risks inherent in owning, financing
and developing real estate as part of our casino operations; (f) the
inability to secure property and liability insurance to fully protect against
all losses, or to obtain such insurance at reasonable costs; (g) seasonality;
(h) changes or cancellations in local tourist, recreational or cultural
events; and (i) changes in travel patterns or preferences (which may be
affected by increases in gasoline prices, changes in airline schedules and
fares, strikes, weather patterns or relocation or construction of highways,
among other factors).
6.
Additional Risks:
The
success of our current operations and our future growth potential are dependent
upon key personnel
.
Our success depends to a significant extent upon the efforts and
abilities of our executive officers, James B. Druck and Thomas E. Fox. Each of these individuals has developed
relationships and experience in the gaming industry that are integral to our
success. We have entered into employment agreements with Messrs. Druck and
Fox. We do not maintain key man life insurance on either of these individuals. The loss of the services of one or both of
these individuals could have a material adverse effect on our business and
current and proposed operations.
The
success of our current operations and our future growth potential are dependent
upon our relationship with and the performance of certain third parties
.
The successful operation of
our various proposed gaming facilities will be dependent to a significant
extent on the efforts of third parties. For example, (a) with
respect to the harness racing track and card room we are developing in
Minnesota, the success of that project will depend to a great extent on the
expertise of our 50/50 partner in that venture, MTR-Harness, Inc., an
affiliate of MTR Gaming Group, Inc., in managing racing facilities as well
as the ability of our financing sources to meet their commitments to us; (b) with
respect to any other project pursued by us, we may need to form partnerships or
secure third party funding in order to meet the financial requirements that
will likely transcend our own financial resources; and (c) with respect to
any facility located on Indian land, we will not own the facility and will
depend on the performance by a tribe of its obligations under the applicable
management agreement. The failure of any third party to perform its contractual
obligations to us could have a material adverse effect on our business and
operations. In addition, depending upon the structure of any particular
joint venture, we may be held responsible for the acts or omissions of our
co-venturers.
We
face risks related to the diminishing control of our existing management
.
Our directors and executive
officers currently beneficially own (together with their spouses, on a
fully-diluted basis and including shares that may be received in connection
with the exercise of outstanding options and warrants) approximately 28.6%
of
the outstanding shares of our common stock. By virtue of the forgoing, our
directors and executive officers will have limited voting influence in
connection with the election of our future directors and the control of our
business and affairs.
We have the right to redeem our Common Stock under
certain circumstances and the redemption price could be less than your original
investment
.
Under our Articles of Incorporation, w
e have the
right to redeem any outstanding share of our common or preferred stock if our
Board of Directors determines that the continued ownership of those shares may
cause any regulatory authority to deny or refuse to approve any gaming license
or
7
Table
of Contents
gaming
contract. In accordance with our
Articles of Incorporation, the redemption price will equal the lesser of (i) the
cash equivalent of the shareholders investment in the Corporation or (ii) the
current market price for the shares on the date the shareholder is found to be
unsuitable.
We
have the ability to issue shares of preferred stock that may reduce the value
of our common shares and your rights as a common shareholder
.
Our shareholders have authorized the issuance of up to 30 million shares
of preferred stock with rights and preferences to be determined by our Board of
Directors. No shares of preferred stock
are outstanding and we do not have a current intent to issue any shares of
preferred stock, although we reserve the right to do so in the future. It is not possible to determine the actual
effect of the authorization and issuance of the preferred stock on the rights
of Southwest shareholders until our Board determines the rights of the holders
of a series of preferred stock. However,
such effects might include, among other effects:
·
restrictions on the payment of dividends to holders of
common stock;
·
dilution of voting power to the extent that holders of
preferred stock are given voting rights;
·
dilution of equity interest and voting power if the
preferred stock is convertible into common stock;
·
restrictions upon any distribution of assets to the
holders of common stock upon liquidation or dissolution, and restrictions upon
the amounts of merger consideration payable to the holders of common stock upon
a merger or acquisition of Southwest, until the satisfaction of any liquidation
preference granted to the holders of preferred stock;
·
redemption rights for holders of preferred stock that
may restrict the availability of revenue for other corporate uses, including
the payment of dividends; and
·
special voting rights for holders of preferred stock
in connection with major corporate actions such as mergers, acquisitions or
other transactions.
In addition, any
particular issuance or series of preferred stock could, depending on the terms,
make it more difficult or discourage any attempt to obtain control of Southwest
by means of a merger, tender offer, proxy contest or other means. Issuance of preferred stock could have the
effect of diluting the stock ownership of persons seeking control of our
company, and the possibility of such dilution could have a deterrent effect on
persons seeking to acquire control. The Board also could, although it has no
present intention of so doing, authorize the issuance of preferred stock to a
holder who might thereby obtain sufficient voting power to assure that any
proposal to effect certain business combinations or amend our Articles of
Incorporation or Bylaws would not receive the required shareholder approval.
Accordingly, the power to issue shares of preferred stock could enable the
Board to make it more difficult to replace incumbent directors and to
accomplish business combinations opposed by the incumbent Board.
Because
our common stock is traded on the OTC Bulletin Board, your ability to sell
shares in the secondary trading market may be limited
. Our common stock trades on the
over-the-counter market on the OTC Bulletin Board. Consequently, the
liquidity of our common stock is impaired, not only in the number of shares
that are bought and sold, but also through delays in the timing of
transactions, and limited coverage by security analysts and the news media, if
any, of our company. As a result, prices for shares of our common stock
may be lower and more volatile than might otherwise prevail if our common stock
was quoted on the Nasdaq Stock Market or traded on a national securities exchange
like The New York Stock Exchange or American Stock Exchange.
Because
our shares are penny stocks, you may have difficulty selling them in the
secondary trading market
. Federal regulations under the Securities Exchange Act of 1934
regulate the trading of so-called penny stocks, which are generally defined
as any security not listed on a national securities exchange or Nasdaq, priced
at less than $5.00 per share and offered by an issuer with limited net tangible
assets and revenues. Since our common stock currently trades on the OTC
Bulletin Board at less than $5.00 per share, our common stock is a penny stock
and may not be traded unless a disclosure schedule explaining the penny stock
market and associated risks is delivered to a potential purchaser before any
trade.
8
Table of
Contents
In addition, because our
common stock is not listed on Nasdaq or any national securities exchange and
currently trades at less than $5.00 per share, trading in our common stock is
subject to Rule 15g-9 under the Exchange Act. Under this rule,
broker-dealers must take certain steps prior to selling a penny stock, which
steps include:
·
obtaining financial and investment
information from the investor;
·
obtaining a written suitability
questionnaire and purchase agreement signed by the investor; and
·
providing the investor a written
identification of the shares being offered and the quantity of the shares.
If the broker-dealer does
not follow these penny stock rules, the investor has no obligation to purchase
the shares. The application of these comprehensive rules will make
it more difficult for broker-dealers to sell our common stock and our
shareholders, therefore, may have difficulty selling their shares in the
secondary trading market.
Our stock
price may be volatile and your investment in our common stock could suffer a
decline in value.
The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control. These factors include:
·
government regulatory action affecting
our operations;
·
actual or anticipated fluctuations in our
operating results;
·
general market conditions for the gaming
industry;
·
broad market fluctuations; and
·
economic conditions in the United States
or abroad..
We do
not intend to pay any cash dividends in the foreseeable future.
We do not intend to pay any cash dividends in the
foreseeable future and, therefore, any return on your investment in our common
stock must come from increases in the fair market value and trading price of
our common stock. In addition, we have
entered into debt financing agreements that prohibit us from paying dividends
at this time and may enter into similar agreements in the future.
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus,
including any supplement to this prospectus, contains forward-looking
statements. You can identify these statements
by the fact that they do not relate strictly to historical or current
facts. These statements often contain
words such as may, will, project, might, expect, believe, anticipate,
intend, could, would, estimate, continue or pursue, or the negative
or other variations of those words or comparable terminology. In particular, they include statements
relating to, among other things, future actions, new projects, strategies,
future performance, the outcome of contingencies such as legal proceedings and
future financial results. We have based
these forward-looking statements on our current expectations and projections
about future events.
We
caution the reader that forward-looking statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied in the
forward-looking statements. These risks
and uncertainties include, but are not limited to, the following factors as
well as other factors described from time to time in our reports filed with the
Securities and Exchange Commission:
·
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
effects 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;
9
Table
of Contents
·
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;
·
changes
in laws (including increased tax rates), regulations or accounting standards,
third-party relationships and approvals, and decisions of courts, regulators
and governmental bodies; and
·
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.
USE
OF PROCEEDS
We will not receive any
proceeds from the sale of the shares of common stock offered by this prospectus
by the selling stockholders. This
offering is intended to satisfy our obligation to register, under the
Securities Act of 1933, the resale of share of our common stock, including
shares of common stock that will be issued upon the exercise of warrants. All proceeds from the sale of the shares will
be for the account of the selling stockholders, as described below in the
sections of this prospectus entitled Selling Stockholders and Plan of
Distribution. However, we will receive
the proceeds from the exercise of the warrants, if any. If all of the warrants covering shares under
this offering are exercised, we would receive $2,854,652.03, all of which we
intend to use for working capital. In
addition, we will incur all costs associated with this registration statement
and prospectus.
SELLING
SECURITY HOLDERS
The shares being offered
for resale by the selling stockholders consist of the 12,663,389 shares of our
common stock held by 57
shareholders. This prospectus covers:
·
2,659,342
shares of our common stock held by 15 shareholders that were sold to investors
in the second closing of our private placement occurring in February 2007;
·
1,063,740
shares of our common stock issuable upon exercise of warrants issued to
investors in the second closing of our private placement occurring in February 2007;
·
186,970
shares of common stock and warrants to purchase 177,621 shares of our common
stock issued to six affiliates of our placement agent in connection with the
second closing of our private placement occurring in February 2007;
·
4,792,391
shares of our common stock held by 28 shareholders that were sold to investors
in a private placement occurring in January 2007;
·
1,916,961
shares of our common stock issuable upon exercise of warrants issued to
investors in the private placement occurring in January 2007;
·
316,084
shares of common stock and warrants to purchase 300,280 shares of our common
stock issued to seven affiliates of our placement agent in connection with the January 2007
private placement; and
·
1,250,000
shares of common stock issuable upon exercise of outstanding warrants to
purchase 1,250,000 shares of our common stock which were issued to 12
investors
in a private placement of warrants ended October 20, 2005.
10
Table
of Contents
In the October 2005
private placement, investors purchased a warrant to purchase one share of our
common stock, with an exercise price of $0.50 per share ($0.58 per share for
our affiliates) for each $2.00 of a bank loan to the company guaranteed by the
investor. Such shares were issued pursuant
to Regulation D Rule 506 of the Securities Act of 1933. Five
shareholders,
including James B. Druck, Director and CEO, Gus A. Chafoulias, Director
(although Mr. Chafoulias was not a Director at the time of the 2005
warrant offering), Thomas E. Fox, President, and Jeffrey S. Halpern, Vice
President of Government Affairs, participated in both offerings either as an
individual or through an affiliated entity.
Only Mr. Chafoulias and Mr. Halpern purchased in their
capacity as individuals in both offerings.
The following table sets
forth the name of the selling stockholders, the number of shares of common
stock beneficially owned by each of the selling stockholders as of May 8,
2007 and the number of shares of common stock being offered by the selling
stockholders. The shares being offered hereby
are being registered to permit public secondary trading, and the selling
stockholders may offer all or part of the shares for resale from time to
time. However, the selling stockholders
are under no obligation to sell all or any portion of such shares nor are the
selling stockholders obligated to sell any shares immediately upon
effectiveness of this prospectus. All
information with respect to share ownership has been furnished by the selling
stockholders. Shares are deemed beneficially
owned by a person if that person, directly or indirectly, has sole or shared
power to vote or to direct the voting of those shares or sole or shared power
to dispose or direct the disposition of those shares. Except as otherwise
indicated, we believe that each of the beneficial owners of our capital stock
listed below, based on information provided by these owners, has sole
dispositive and voting power with respect to its shares, subject to community
property laws where applicable. Shares
not outstanding but deemed beneficially owned by virtue of the right of a
person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percent owned by that person
or group.
|
|
Shares Beneficially
Owned Prior to the Offering
|
|
Shares Beneficially
Owned After
Completion of
the Offering
|
|
Selling Stockholder
|
|
Shares
Subject to
Options and
Warrants
|
|
Total Shares
Beneficially
Owned
|
|
Percentage
|
|
Number of
Shares
Being
Offered (1)
|
|
Number
|
|
Percentage
|
|
RBC Dain Rauscher FBO James B. Druck IRA
|
|
27,200
|
|
95,200
|
|
*
|
|
95,200
|
|
0
|
|
|
|
Jeffrey S. Halpern (2)
|
|
377,280
|
|
2,027,980
|
|
7.3
|
%
|
145,480
|
|
1,882,500
|
|
6.8
|
%
|
Gus M. Chafoulias
|
|
310,228
|
|
583,186
|
|
2.1
|
%
|
404,547
|
|
178,639
|
|
*
|
|
David H. Abramson
|
|
143,250
|
|
198,250
|
|
*
|
|
42,000
|
|
156,250
|
|
*
|
|
Roger D. Rubinger
|
|
70,000
|
|
185,570
|
|
*
|
|
120,000
|
|
65,570
|
|
*
|
|
The Howard N. Short Living Trust (3)
|
|
68,000
|
|
338,430
|
|
1.2
|
%
|
238,000
|
|
100,430
|
|
*
|
|
F&B Properties (4)
|
|
54,546
|
|
213,698
|
|
*
|
|
190,910
|
|
22,788
|
|
*
|
|
Pierce Diversified Strategy Master Fund LLC, Ena (5)
|
|
54,546
|
|
190,910
|
|
*
|
|
190,910
|
|
0
|
|
|
|
David J. Moore
|
|
18,182
|
|
63,637
|
|
*
|
|
63,637
|
|
0
|
|
|
|
Praetorian Offshore Ltd. (6)
|
|
218,182
|
|
900,537
|
|
3.3
|
%
|
763,637
|
|
136,900
|
|
*
|
|
Fairfield Investment Group LLC (7)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Paragon Capital LP (8)
|
|
291,200
|
|
1,019,200
|
|
3.7
|
%
|
1,019,200
|
|
0
|
|
|
|
Enable Opportunity Partners LP (9)
|
|
54,546
|
|
190,910
|
|
*
|
|
190,910
|
|
0
|
|
|
|
Fort Mason Master LP (10)
|
|
145,455
|
|
145,455
|
|
*
|
|
145,455
|
|
0
|
|
|
|
Peter V. Mancuso
|
|
80,000
|
|
280,000
|
|
1.0
|
%
|
280,000
|
|
0
|
|
|
|
Diamond Opportunity Fund, LLC (11)
|
|
154,546
|
|
540,910
|
|
2.0
|
%
|
540,910
|
|
0
|
|
|
|
AS Capital Partners, LLC (12)
|
|
44,146
|
|
154,511
|
|
*
|
|
154,511
|
|
0
|
|
|
|
Walter W. Pollack Jr.
|
|
160,000
|
|
560,000
|
|
2.0
|
%
|
560,000
|
|
0
|
|
|
|
Cranshire Capital, L.P. (13)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Stuart Rosen 401-K
|
|
80,000
|
|
280,000
|
|
1.0
|
%
|
280,000
|
|
0
|
|
|
|
11
Table of
Contents
|
|
Shares Beneficially
Owned Prior to the Offering
|
|
Shares Beneficially
Owned After
Completion of
the Offering
|
|
Selling Stockholder
|
|
Shares
Subject to
Options and
Warrants
|
|
Total Shares
Beneficially
Owned
|
|
Percentage
|
|
Number of
Shares
Being
Offered (1)
|
|
Number
|
|
Percentage
|
|
Sidney Kaplan and Joy Kaplan, Trustees of the Sidney
Kaplan Revocable Trust U/A/D 10-11-93 (14)
|
|
20,000
|
|
95,000
|
|
*
|
|
70,000
|
|
25,000
|
|
*
|
|
David B. Rosenblatt
|
|
18,182
|
|
90,972
|
|
*
|
|
63,637
|
|
27,335
|
|
*
|
|
BFL General Partnership (15)
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Marissa F. Lasky
|
|
72,728
|
|
254,547
|
|
*
|
|
254,547
|
|
0
|
|
|
|
Michael G. Hofkin (16)
|
|
20,000
|
|
238,918
|
|
*
|
|
70,000
|
|
168,918
|
|
*
|
|
Richfield Hotel Associates Limited Partnership (17)
|
|
152,728
|
|
534,547
|
|
2.0
|
%
|
534,547
|
|
0
|
|
|
|
Lawrence A. Laukka
|
|
40,000
|
|
291,000
|
|
1.1
|
%
|
140,000
|
|
151,000
|
|
*
|
|
Howard Liszt
|
|
10,910
|
|
106,540
|
|
*
|
|
38,183
|
|
68,357
|
|
*
|
|
Whalehaven Capital Fund Limited (18)
|
|
218,182
|
|
763,637
|
|
2.8
|
%
|
763,637
|
|
0
|
|
|
|
S. Jay and Kathryn Ferrari
|
|
18,182
|
|
63,637
|
|
*
|
|
63,637
|
|
0
|
|
|
|
Daniel Ryweck
|
|
11,622
|
|
70,678
|
|
*
|
|
40,678
|
|
30,000
|
|
*
|
|
James M. Lewis
|
|
40,000
|
|
165,167
|
|
*
|
|
140,000
|
|
25,167
|
|
*
|
|
John S. Crouch
|
|
50,000
|
|
304,000
|
|
1.1
|
%
|
175,000
|
|
129,000
|
|
*
|
|
Norman H. Winer (19)
|
|
181,819
|
|
636,365
|
|
2.3
|
%
|
636,365
|
|
0
|
|
|
|
Marvin C. Ingber
|
|
23,637
|
|
124,395
|
|
*
|
|
82,728
|
|
41,667
|
|
*
|
|
Maricopa Equity Management Corp.
|
|
40,000
|
|
140,000
|
|
*
|
|
140,000
|
|
0
|
|
|
|
John H. Schwieters
|
|
40,000
|
|
140,000
|
|
*
|
|
140,000
|
|
0
|
|
|
|
Gemini Master Fund, Ltd. (20)
|
|
109,092
|
|
381,820
|
|
1.4
|
%
|
381,820
|
|
0
|
|
|
|
RHP Master Fund, Ltd. (21)
|
|
109,092
|
|
381,820
|
|
1.4
|
%
|
381,820
|
|
0
|
|
|
|
David McLukie (22)
|
|
6,400
|
|
22,400
|
|
*
|
|
22,400
|
|
0
|
|
|
|
Midtown Partners & Co., LLC (22)
|
|
70,725
|
|
143,782
|
|
*
|
|
143,782
|
|
0
|
|
|
|
Bruce Jordan (22)
|
|
23,575
|
|
47,928
|
|
*
|
|
47,928
|
|
0
|
|
|
|
Richard Henri Kreger (22)
|
|
235,748
|
|
479,273
|
|
1.7
|
%
|
479,273
|
|
0
|
|
|
|
Ariel Imas (22)
|
|
37,722
|
|
76,688
|
|
*
|
|
76,688
|
|
0
|
|
|
|
Braden Anthony Ferrari (22)
|
|
28,292
|
|
57,517
|
|
*
|
|
57,517
|
|
0
|
|
|
|
RHK Midtown Partners LLC (22)
|
|
75,439
|
|
153,367
|
|
*
|
|
153,367
|
|
0
|
|
|
|
Corporate Capital Management LLC (23)
|
|
3,786
|
|
13,250
|
|
*
|
|
13,250
|
|
0
|
|
|
|
Richard M. Berc (24)
|
|
100,000
|
|
132,560
|
|
*
|
|
100,000
|
|
32,560
|
|
*
|
|
Norman H. Winer Irrevocable Generation Skipping
Trust U/A dated August 28, 2006
|
|
200,000
|
|
311,226
|
|
1.1
|
%
|
200,000
|
|
111,226
|
|
*
|
|
James M. Gordon
|
|
150,000
|
|
701,364
|
|
2.6
|
%
|
150,000
|
|
551,364
|
|
2.0
|
%
|
Thomas LaSalle (24)
|
|
125,000
|
|
283,625
|
|
1.0
|
%
|
125,000
|
|
158,625
|
|
*
|
|
Bruce G. Nimmer (25)
|
|
125,000
|
|
175,566
|
|
*
|
|
125,000
|
|
50,566
|
|
*
|
|
Gene Rerat
|
|
50,000
|
|
50,000
|
|
*
|
|
50,000
|
|
0
|
|
|
|
Howard N. Short (26)
|
|
150,000
|
|
150,000
|
|
*
|
|
150,000
|
|
0
|
|
|
|
James B. Druck (27)
|
|
350,000
|
|
1,961,500
|
|
7.1
|
%
|
50,000
|
|
1,911,500
|
|
6.9
|
%
|
Thomas E. Fox (28)
|
|
350,000
|
|
1,912,500
|
|
6.9
|
%
|
50,000
|
|
1,862,500
|
|
6.8
|
%
|
*
Less
than one percent (1%)
(1)
Includes shares of outstanding common stock
and shares of common stock issuable upon the exercise of warrants.
(2)
Includes 40,000 shares held by Mr. Halperns
wife.
12
Table of
Contents
(3)
Howard N. Short as trustee of the Howard N. Short
Living Trust has voting and investment power over the securities beneficially
owned by the Howard N. Short Living Trust.
Does not include a warrant to purchase 150,000 shares held by Mr. Short
directly.
(4)
Thomas E. Fox is the 50% general partner of
F&B Properties. Does not include
shares, warrants and options held directly by Mr. Fox.
(5)
Mitch Levine, as managing partner of Pierce
Diversified Strategy Master Fund LLC, Ena, has voting and investment control
over the shares beneficially owned by Pierce Diversified Strategy Master Fund
LLC, Ena. Although Pierce Diversified
Strategy Master Fund LLC, Ena is an affiliate of a registered broker-dealer,
Pierce Diversified Strategy Master Fund LLC, Ena has represented to us that it
has purchased its shares being offered in this offering in the ordinary course
of business and at the time of such purchase, had no agreements or
understandings to distribute such securities.
(6)
Praetorian Capital Management, LLC is the
investment manager or advisor of Praetorian Offshore Ltd. and consequently has
voting control and investment discretion over securities owned by Praetorian
Offshore Ltd. Harris B. Kupperman is the
sole member and manager of Praetorian Capital Management LLC.
(7)
Jeffrey Benton, a managing director of
Fairfield Investment Group LLC, has voting and investment power over the
securities beneficially owned by Fairfield Investment Group LLC.
(8)
Alan P. Donenfeld, the managing member of the
general partner of Paragon Capital LP, has voting and investment power over the
securities beneficially owned by Paragon Capital LP. Although Paragon Capital LP is an affiliate
of a registered broker-dealer, Paragon Capital LP has represented to us that it
has purchased its shares being offered in this offering in the ordinary course
of business and at the time of such purchase, had no agreements or
understandings to distribute such securities.
(9)
Mitch Levine, the managing partner of Enable
Opportunity Partners LP, has voting and investment power over the securities
beneficially owned by Enable Opportunity Partners LP. Although Enable Opportunity Partners LP is an
affiliate of a registered broker-dealer, Enable Opportunity Partners LP has
represented to us that it has purchased its shares being offered in this offering
in the ordinary course of business and at the time of such purchase, had no
agreements or understandings to distribute such securities.
(10)
Intentionally omitted.
(11)
David Hokin, Rob Rubin and Richard Marks, in
their respective capacity as manager and managing Directors of Diamond
Opportunity Fund, LLC, have shared voting and investment control over the
shares held by Diamond Opportunity Fund, LLC.
Messrs. Hokin, Rubin and Marks disclaim beneficial ownership of
such securities.
(12)
Andrew Smukler, a managing member of AS
Capital Partners, LLC, has voting and investment power over the securities
beneficially owned by AS Capital Partners, LLC.
(13)
Mitchell P. Kopin, President of Downsview
Capital, Inc., the General Partner of Cranshire Capital, L.P., has sole
voting and investment power over the securities beneficially owned by Cranshire
Capital, L.P.
(14)
Sidney Kaplan, as trustee of the Sidney Kaplan
Revocable Trust U/A/D October 11, 1993, has voting and investment power
over the securities beneficially owned by the Sidney Kaplan Revocable Trust
U/A/D October 11, 1993. Does not
include 16,667 shares held by Sidney Kaplan directly or 95,570 shares held by
SPS Investments, a family partnership.
(15)
Thomas E. Fox, Richard M. Berc and Thomas W.
LaSalle are general partners of BFL General Partnership. Does not include shares, warrants or options
directly held by each of Messrs. Fox, Berc and LaSalle.
(16)
Includes 35,285 shares held by the Michael G.
Hofkin Trust FBO of Michael G. Hofkin of which Mr. Hofkin is the trustee
and 35,285 shares held by the Susan Salomon Trust FBO of Susan Salomon of which
Mr. Hofkin is the trustee.
(17)
Thomas W. LaSalle, Arthur J. Petrie and Bruce
G. Nimmer are partners of Richfield Hotel Associates Limited Partnership and
have shared voting and investment power over the securities beneficially owned
by Richfield Hotel Associates Limited Partnership. Does not include shares, warrants or options
directly held by each of Messrs. LaSalle, Petrie and Nimmer.
(18)
Michael Finkelstein, an investment manager and
majority shareholder of Whalehaven Capital Fund Limited, has voting and
investment power over the securities beneficially owned by Whalehaven Capital
Fund Limited.
(19)
Although Mr. Winer is an affiliate of a registered
broker-dealer, Mr. Winer has represented to us that he has purchased his
shares being offered in this offering in the ordinary course of business and at
the time of such purchase, had no agreements or understandings to distribute
such securities.
13
Table of
Contents
(20)
Gemini Strategies, LLC is the investment
manager of Gemini Master Fund, Ltd., and Steven Winters is the sole managing
member of Gemini Strategies, LLC. Each
of Gemini Strategies, LLC and Steven Winters expressly disclais any equitable
or beneficial ownership of such securities.
(21)
RHP Master Fund, Ltd. is a party to an
investment management agreement with Rock Hill Investment Management, L.P., a
limited partnership of which the general partner is RHP General Partner,
LLC. Pursuant to such agreement, Rock
Hill Investment Management directs the voting and disposition of shares owned
by RHP Master Fund. Messrs. Wayne
Bloch and Peter Lockhart own all of the interest in RHP General Partner. The aforementioned entities and individuals
disclaim beneficial ownership of the securities held by RHP Master Fund, Ltd.
(22)
Midtown Partners & Co., LLC is a
registered broker-dealer who received its shares being offered under this
prospectus as compensation for services rendered to Southwest. Midtown acted as agent in connection with
Southwests January and February 2007 private placements. In connection with the January and February 2007
private placements, Midtown received an aggregate of 503,054 shares and
warrants to purchase an aggregate of 477,901 shares of common stock. Midtown assigned some of its shares and
warrant shares to RHK Midtown Partners LLC and the following employees of
Midtown Partners & Co., LLC:
David McLukie, Bruce Jordan, Richard Henri Kreger, Ariel Imas and Braden
Anthony Ferrari. Bruce Jordan has voting
and investment power over the shares beneficially owned by Midtown Partners &
Co., LLC.
(23)
Mark Savage, a managing member of Corporate
Capital Management LLC, has voting and investment power over the securities
beneficially owned by Corporate Capital Management LLC. Corporate Capital Management acted as an
advisor in connection with Southwests February 2007 private
placement. In connection with the February 2007
private placement, Corporate Capital Management received 13,520 shares and a
warrant to purchase an aggregate of 5,408 shares of common stock. Corporate Capital Management assigned some of
its shares and warrant shares to Daniel Ryweck, an employee of Corporate
Capital Management LLC.
(24)
Does not include 181,819 shares and a warrant
to purchase 72,728 shares of common stock held by BFL General Partnership. Mr. Berc, Mr. Fox and Mr. LaSalle
are general partners of BFL General Partnership. See Footnote (15).
(25)
Does not include 381,819 shares and a warrant
to purchase 152,728 shares of common stock held by Richfield Hotel Associates
Limited Partnership. See Footnote (17).
(26)
Does not include 270,430 shares and a warrant
to purchase 68,000 shares of common stock held by The Howard N. Short Living
Trust. See Footnote (3).
(27)
Does not include 68,000 shares and a warrant
to purchase 27,200 shares of common stock held by RBC Dain Rauscher FBO James
B. Druck IRA as set forth in the table above.
(28)
Does note include: (i) 159,152 shares held by F&B
Properties, a partnership in which Mr. Fox is a 50% general partner; (ii) 181,819
shares held by BFL General Partnership, a partnership in which Mr. Fox is
a general partner, (iii) 381,819 shares held by Richfield Hotel Associates
Limited Partnership, in which Mr. Fox is general partner of a partnership
that is a limited partner; (iv) 54,546 shares issuable upon exercise of a
warrant held by F&B Properties; (v) 72,728 shares issuable upon
exercise of a warrant held by BFL General Partnership; and (vi) 152,728
shares issuable upon exercise of a warrant held by Richfield Hotel Associates
Limited Partnership. See Footnotes (4),
(15) and (17).
PLAN
OF DISTRIBUTION
Each selling stockholder of
the common stock and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board, or any other stock exchange, market
or trading facility on which the shares are traded, or in private
transactions. These sales may be at
fixed or negotiated prices. A selling
stockholder may use any one or more of the following methods when selling
shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
14
Table
of Contents
·
privately
negotiated transactions;
·
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
·
broker-dealers
may agree with the Selling Stockholders to sell a specified number of such
shares at a stipulated price per share;
·
through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;
·
a
combination of any such methods of sale; or
·
any
other method permitted under applicable law.
The selling stockholders
may also sell shares under Rule 144 under the Securities Act of 1933, as
amended, if available, rather than under this prospectus.
Broker-dealers engaged by
the selling stockholders may arrange for other brokers-dealers to participate
in sales. Broker-dealers may receive
commissions or discounts from the selling stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated, but, except as stated in a supplement to this Prospectus, in the
case of an agency transaction not in excess of a customary brokerage commission
in compliance with NASDR Rule 2440; and in the case of a principal
transaction a markup or markdown in compliance with NASDR IM-2440.
In connection with the
sale of the common stock or interests in the common stock, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling stockholders may also sell shares
of the common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn
may sell these securities. The selling
stockholders may also enter into option or other transactions with broker-dealers
or other financial institutions or the creation of one or more derivative
securities which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell under this prospectus
(as supplemented or amended to reflect such transaction).
The selling stockholders
and any broker-dealers or agents that are involved in selling the shares may be
deemed to be underwriters within the meaning of the Securities Act of 1933,
as amended, in connection with such sales.
In that event, any commissions received by such broker-dealers or agents
and any profit on the resale of the shares purchased by them may be deemed to
be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed us that
it does not have any written or oral agreement or understanding, directly or
indirectly, with any person to distribute the common stock. In no event will any broker-dealer receive
fees, commissions and markups that, in the aggregate, would exceed eight
percent (8%).
We are required to pay
certain fees and expenses that we incur incident to the registration of the
shares. We have agreed to indemnify the
selling stockholders against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
Because Selling
Stockholders may be deemed to be underwriters within the meaning of the
Securities Act, they will be subject to the prospectus delivery requirements of
the Securities Act, including Rule 172 promulgated under the Securities
Act. In addition, any securities covered
by this prospectus that qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this
prospectus. There is no underwriter or
coordinating broker acting in connection with the proposed sale of the resale
shares by the selling stockholders.
15
Table
of Contents
We agreed to keep this
prospectus effective until the earlier of (i) the date on which the shares
may be resold by the Selling Stockholders without registration and without
regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the
shares have been sold under this prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain
states, the resale shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Under applicable rules and
regulations under the Securities and Exchange Act of 1934, any person engaged
in the distribution of the resale shares may not simultaneously engage in
market making activities with respect to the common stock for the applicable
restricted period, as defined in Regulation M, before the commencement of the
distribution. In addition, the selling
stockholders will be subject to applicable provisions of the Securities and
Exchange Act of 1934 and the rules and regulations promulgated under the
Securities and Exchange Act of 1934, including Regulation M, which may limit
the timing of purchases and sales of shares of the common stock by the selling
stockholders or any other person. We
will make copies of this prospectus available to the selling stockholders and
have informed them of the need to deliver a copy of this prospectus to each
purchaser at or before the time of the sale (including by compliance with Rule 172
promulgated under the Securities Act).
LEGAL
PROCEEDINGS
Alleged
Breach of Gaming Management Agreement
On July 24, 2007,
the Governor of the Cheyenne and Arapaho Tribes of Oklahoma delivered notice to
Southwest that on July 13, 2007 he had initiated an arbitration proceeding
against us for alleged breach of the Third Amended and Restated Gaming
Management Agreement under which we then managed two casinos for the
Tribes. On November 2, 2007, we
filed a counterclaim in this proceeding alleging a breach of the Gaming
Management Agreement by the tribal Governor. The three-member arbitration panel
for this proceeding was appointed in February 2008.
After a 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 its formal complaint on April 23, 2008. We are now
proceeding with discovery in this matter.
In
the arbitration demand and formal complaint, the Governor alleged wrongful
management practices and 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 originally sought termination of the management contract and $10
million in damages and continues to pursue a claim for damages against
us. We do not believe we improperly interfered with or attempted to
influence internal governmental decisions of the Tribes or improperly managed
the casinos and we are vigorously defending Southwest 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 have taken on behalf of the gaming
operations we managed or as part of our efforts to extend our gaming management
relationship with the Tribes are consistent with that provision.
In
our 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
do not expect any material adverse consequence from this action. Accordingly,
no provision has been made in our financial statements for any such loss. We do
expect to incur additional legal and administrative costs in connection with
this arbitration. In accordance with our accounting policies, we do not accrue
for estimated future legal and related defense costs, but rather record these
costs as period costs when the services are rendered.
16
Table
of Contents
Theft and Distribution of
Surveillance Video from Lucky Star Clinton casino
On August 24, 2007, Southwest Casino
and Hotel Corp., as exclusive manager of the Lucky Star casinos of the Cheyenne
and Arapaho Tribes of Oklahoma filed a lawsuit against Doris Thunderbull,
Darrell Flyingman, in his individual capacity, and John Does No. 1 and 2
alleging theft (conversion) of confidential surveillance video from the Lucky
Star Clinton casino and subsequent copyright infringement and defamation in
connection with the posting of the stolen video on the website www.YouTube.com
and widespread distribution of DVDs containing the video by mail. We
initially sought an emergency temporary restraining order barring further
distribution of the video. That request was denied on August 27, 2007 and
we withdrew our request for restraining order on September 24, 2007.
We continue to pursue claims for conversion, copyright infringement, tortious
interference with contract, defamation, and conspiracy against the defendants.
On January 14, 2008,
Mr. Flyingman, as Governor of the Tribes, filed a declaratory judgment
action in Cheyenne and Arapaho Trial Court asserting that the Tribes, not
Southwest, owned the surveillance footage and the copyright in it. Southwest filed an answer to the complaint
asserting the tribal court did not have jurisdiction and a motion to compel
arbitration of the matter on February 15, 2008. On February 13, 2008, the Federal
District Court issued a stay of the proceedings before the federal court
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.
Other
Litigation Matters
In addition to the
matters described above, we are involved in other various claims, legal actions
and other complaints arising in the ordinary course of business. In the
opinion of management, any losses that may occur from these matters are
adequately covered by insurance or are provided for in our financial statements
and the ultimate outcome of these other matters will not have a material effect
on our financial position or results of operations.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Our directors and
executive officers, their ages and the offices they held with Southwest Casino
Corporation, as of July 15, 2008, are as follows:
Name
|
|
Age
|
|
Position
|
James B. Druck
|
|
66
|
|
Chief Executive Officer
and Director
|
|
|
|
|
|
David H. Abramson
|
|
67
|
|
Director
|
|
|
|
|
|
Gus A. Chafoulias
|
|
72
|
|
Director
|
|
|
|
|
|
Jim Holmes
|
|
66
|
|
Director
|
|
|
|
|
|
Gregg P. Schatzman
|
|
55
|
|
Director
|
|
|
|
|
|
Thomas E. Fox
|
|
60
|
|
President and Chief
Operating Officer
|
|
|
|
|
|
Jeffrey S. Halpern
|
|
65
|
|
Vice President of
Government Affairs and Secretary
|
|
|
|
|
|
Tracie L. Wilson
|
|
41
|
|
Chief Financial Officer
|
James
B. Druck
. Mr. Druck joined the Southwest Casino
Corporation Board of Directors and was appointed as our Chief Executive Officer
and Secretary on July 22, 2004 in connection with the closing of the
reorganization in which Southwest Casino and Hotel Corp. became a wholly-owned
subsidiary of Southwest Casino Corporation (formerly Lone Moose
Adventures). Mr. Druck has been a director of Southwest Casino and
Hotel Corp. since its inception. He served as President of Southwest
Casino and Hotel Corp. from October 1992 until June 2004,
17
Table of Contents
at which time he became
the Chief Executive Officer of Southwest Casino and Hotel Corp. From 1967
until April 1993, Mr. Druck was an attorney in private practice in
Minneapolis, Minnesota. His practice focused primarily in the areas of
real estate development and finance.
Thomas
E. Fox
. Mr. Fox was elected to the Southwest
Casino Corporation Board of Directors and appointed as our President, Chief
Operating Officer, and Chief Financial Officer on July 22, 2004 in
connection with the closing of the reorganization in which Southwest Casino and
Hotel Corp. became a wholly-owned subsidiary of Southwest Casino
Corporation. Mr. Fox resigned from our Board of Directors on December 7,
2005 in connection with the election of four new independent directors. Mr. Fox
resigned his position as Chief Financial Officer in June 2006 in
connection with the hiring of our new CFO. Mr. Fox has been a
Certified Public Accountant since November 1969. He began his career
with Arthur Andersen & Co. in June 1969, and was promoted to tax
manager in June 1973. In September 1976, Mr. Fox
co-founded the accounting firm of Berc & Fox, Limited. He joined
Southwest Casino and Hotel Corp. as Chief Financial Officer in November 1993
and was appointed to the Board of Directors of Southwest Casino and Hotel Corp.
in January 2000.
Jeffrey
S. Halpern
. Mr. Halpern has served as our Vice
President of Government Affairs and Secretary since November 21,
2005. Mr. Halpern was appointed Chairman of the Southwest Casino
Corporation Board of Directors on July 22, 2004 in connection with the
closing of the reorganization in which Southwest Casino and Hotel Corp. became
a wholly-owned subsidiary of Southwest Casino Corporation. He resigned
from his position as Chairman of the Board of Directors on December 7,
2005 in connection with the election of four new independent board
members. Mr. Halpern had been a director of Southwest Casino and
Hotel Corp. since its inception in 1992. He served as Chairman of the
Board and Chief Executive Officer of Southwest Casino and Hotel Corp. from October 1992
until June 2004. Mr. Halpern also serves currently as a
director and Vice President of Government Affairs and Secretary of Southwest
Casino and Hotel Corp. From 1967 until July 1993, Mr. Halpern
was an attorney in private practice in Minneapolis, Minnesota. His practice
focused primarily in the areas of corporate finance and securities.
Tracie
L. Wilson
. Tracie Wilson joined Southwest on June 7,
2006 as our Chief Financial Officer. Ms. Wilson has also served as chief
Financial Officer of Southwest Casino and Hotel Corp. since June 7,
2006. Before joining Southwest, Ms. Wilson served as a
consultant to and, most recently, as the Director of Financial Reporting for
Lakes Entertainment, Inc. where she had worked since January 2005.
From December 1999 through December 2004, Ms. Wilson held
positions as Director of Finance and as Vice President of Finance and Treasurer
of Netco Communications Corporation, a global network information technology
company. Before joining Netco Communications, Ms. Wilson served as a
CPA in the public accounting firms of Grant Thornton LLP and Deloitte &
Touche LLP from 1989 to 1999. Ms. Wilson is a Certified Public Accountant
(inactive license holder) and received a Bachelor of Science in Business from
the University of Colorado.
David
H. Abramson
. David Abramson joined the Southwest Board
of Directors on December 7, 2005 and was elected to chair its Audit
Committee on January 10, 2006. He is also a member of the Boards
Nominating Committee. Mr. Abramson is the Chairman and CEO of David
Abramson & Associates, LLC, a retained executive search and leadership
development firm he founded in January 2002. Immediately before
founding David Abramson & Associates, he was a Senior Vice President
of AXA Financial/Equitable Life Insurance and the Chairman and CEO of Grant
Thornton Advisors, a joint venture of AXA Financial/Equitable Life Insurance
and Grant Thornton, LLP, from January to December 2001. Before
this, Mr. Abramson had an extensive career at Grant Thornton, certified
public accountants, beginning in 1967 during which he was a member of the
National Leadership and Senior Management Team and the Managing Partner of and
an audit partner in the Minneapolis office. Among many board memberships,
Mr. Abramson has been the Chairman of Board of Directors of the
Minneapolis Chamber of Commerce, President and Board member of the Minnesota
Society of Certified Public Accountants, Chairman and board member of the
Minnesota Cooperation Office for Job Creation, and a member of the Governing
Council of the American Institute of CPAs. Mr. Abramson holds a B.S.
in Accounting from the Carlson School of Management and an MBA from the
University of Michigan.
Gus A.
Chafoulias
. Gus Chafoulias joined to Southwests Board
of Directors on December 7, 2005 and was elected chair of its Nominating
Committee on February 1, 2006. He is also a member of the Boards
Compensation Committee. Mr. Chafoulias is Chairman of the Board of
Chafoulias Management Company, where he has worked since 1987. Mr. Chafoulias
has developed more than 3 million square feet of apartments and commercial
space during more than 40 years in the development business. One of Mr. Chafoulias
liquor stores, which Mr. Chafoulias
18
Table of Contents
has owned and operated
since 1957, has been voted as a top ten liquor retailer in the United
States. Mr. Chafoulias is also a United Way Alexis de Tocqueville
Society member, Leadership 100 board member, and Blue Cross Blue Shield
Champions of Health award winner. He has served on numerous boards of
directors including the Rochester (MN) Chamber of Commerce, Diversity Council,
U.S. Bank, Medvision, and Comfortex, Inc. In addition to Southwest, Mr. Chafoulias
currently serves as
the
Chairman of Kardia Health Systems.
Jim
Holmes.
Jim Holmes was elected a Director of Southwest on December 7,
2005 and serves on the Boards Audit Committee and Compensation
Committee. Mr. Holmes is a 1965 graduate of West Points U.S.
Military Academy and has a masters degree in law enforcement administration
from Central Missouri State University. Mr. Holmes has significant
experience on both the regulatory and business sides of the gaming
industry. Since 1991, Mr. Holmes has been President of Jim Holmes
and Company and, beginning in 1987, has acted as a national and international
gaming consultant for lottery operations, bingo projects, casinos and Indian
gaming, specializing in start-up operations and risk analysis. In
addition, from March 2005 to October 2005 Mr. Holmes was an
Executive Vice President for Cadillac Jack, Inc., a slot machine
manufacturer, and from February 2001 to January 2004, Mr. Holmes
was president of API Technologies, LLC. From January 2000 to January 2001,
Mr. Holmes was Executive Vice President of Sierra Design Group. In
1985, Mr. Holmes was appointed by then Governor Ashcroft as the first
Executive Director of the Missouri Lottery. Before working to establish
the Missouri Lottery, he spent 15 years with the FBI in Missouri as both a
Special Agent and Supervisor.
Gregg
P. Schatzman
. Gregg Schatzman joined Southwests Board
of Directors on December 7, 2005. He also serves on the Boards
Audit Committee and Compensation Committee, which he chairs. Mr. Schatzman
has in-depth experience as both a regulator and an operator in the gaming
industry. Mr. Schatzman has been the Managing Director of Schatzman &
Associates, LLC, which provides consulting services to gaming companies and law
firms regarding casino operations and regulatory issues, since June 2003.
From March 2003 to June 2003, he was a partner and owner of Castaways
Hotel and Casino in Las Vegas, Nevada and owned and worked as Executive Vice
President of VSS Enterprises, LLC, from March 1999 to May 2003.
Mr. Schatzmans 13 years in casino operations included work as an
Executive Vice President of Primadonna Resorts, Inc.; a Vice President and
General Manager for Ameristar Casinos and Vice President and General Manager
for Gem Gaming and worked with Trump casinos. Before joining the business
side of the gaming industry, Mr. Schatzman spent 10 years as a gaming
regulator with the Nevada Gaming Control Board, rising from Financial
Investigator to Chief of Investigations. As Chief of Investigations, Mr. Schatzman
supervised the work of the 80 agents in the Investigations and Corporate
Securities Divisions of the Gaming Control Board.
Each of Mr. Abramson,
Mr. Chafoulias, Mr. Holmes and Mr. Schatzman has been determined
to be independent under the rules of the Nasdaq stock market.
Family Relationships
No family relationships
exist among our directors and executive officers.
Legal Proceedings
To the knowledge of our
management, during the past five years, no present or former director, person
nominated to become a director, executive officer, promoter or control person
of our company, except as disclosed below:
·
was
a general partner or executive officer of any business by or against which any
bankruptcy petition was filed, whether at the time of such filing or two years
prior the filing;
·
was
convicted in a criminal proceeding or named the subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses);
·
was
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities.
19
Table
of Contents
·
was
found by a court of competent jurisdiction in a civil action, or by the
Securities and Exchange Commission or the Commodity Futures Trading Commission
to have violated federal or state securities or commodities law, and the
judgment has not been subsequently reversed, suspended, or vacated.
Prior Bankruptcy Proceeding of
Subsidiary
James B. Druck, Jeffrey
S. Halpern and Thomas E. Fox are Managers of Gold Rush I, LLC, a Colorado
limited liability company and a wholly-owned subsidiary of Southwest Casino and
Hotel Corp. In August 2001, Cripple
Creek Development Corp., a Colorado corporation, Blue Building Development, Inc.,
a Wyoming corporation, Mark Brockley, an individual, and Annesse Brockley, an
individual, initiated a lawsuit against Gold Rush I, LLC, and Southwest Casino
and Hotel Corp. in District Court, Teller County, Colorado (01-CV-156). The plaintiff alleged that the defendants
failed to pay certain obligations to the plaintiffs under the terms of their
lease agreement and breach of contract.
The lease included a provision that capped the maximum monthly amount
required to be paid to Mr. Brockleys creditors. In the early years of the operation, Mr. Brockleys
obligations to creditors far exceeded this cap and Southwest paid these
obligations as they came due. Under the
lease, Southwest set off against current rent the amount of the excess
payments. In the lawsuit, Mr. Brockley
sought to evict Gold Rush I from the premises for failing to pay amounts
claimed to be owed under the Lease. Gold
Rush I responded by denying any failure to pay.
Before an evidentiary
hearing in this lawsuit was completed, Gold Rush I filed a voluntary petition
for reorganization under Chapter 11 of the United States Bankruptcy Code in the
Bankruptcy Court for the District of Minnesota (Case No. 01-33755) to
ensure that we did not lose possession of the premises while the underlying
claims were litigated. On October 15,
2001, the Colorado District Court entered an Order in which it found (a) that
Gold Rush I was not in default under the lease, (b) that Gold Rush I had
made payments in excess of the monthly caps provided in the lease (which
overpayments the court subsequently quantified at $554,362.09), and (c) that
Gold Rush I was entitled to offset the overpayments against rent and other
payments due under the terms of the lease.
Mr. Brockley appealed the Colorado District Courts Order to the
Colorado Court of Appeals, which dismissed the appeal on May 21,
2002. After successfully defending the
lawsuit brought by its landlord, Gold Rush I emerged from bankruptcy on January 10,
2003,when the Bankruptcy Court confirmed its reorganization plan, which
provided for full payment to all creditors, with interest.
Colorado Regulatory Proceeding
In June 2004,
Southwest Casino and Hotel Corp. paid a $50,000 fine to the Colorado Division
of Gaming for failure to properly maintain and review statistical data on slot
machine performance after receiving a warning letter regarding this deficiency
and failing to comply with its agreement to correct the deficiency. Southwest Casino and Hotel Corp. paid the
full amount of the fine. As part of
these proceedings, James Druck, in his capacity as manager of the facility in
question, without any admission of guilt, agreed to take the necessary steps to
ensure Southwest Casino and Hotel Corp.s compliance in this matter and,
further, agreed to pay $5,000 to the Limited Gaming Fund to reimburse expenses
incurred by Colorado in this investigation.
20
Table of
Contents
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table
states the information known to us with respect to the beneficial ownership of
our common stock as of June 30, 2008 for (1) each person known by us
to beneficially own more than 5% of our common stock, (2) each of our
executive officers, (3) each of our directors, and (4) all of our
executive officers and directors as a group.
Shares are deemed beneficially
owned by a person if that person, directly or indirectly, has sole or shared
power to vote or to direct the voting of those shares or sole or shared power
to dispose or direct the disposition of those shares. Except as otherwise indicated, we believe
that each of the beneficial owners of our capital stock listed below, based on
information provided by these owners, has sole dispositive and voting power
with respect to its shares, subject to community property laws where applicable,
except as descried in the notes below.
Shares not outstanding but deemed beneficially owned by virtue of the
right of a person or member of a group to acquire them within 60 days are
treated as outstanding only when determining the amount and percent owned by
that person or group.
|
|
Common Stock
|
|
Name and Address
|
|
Number
|
|
Percent
|
|
James B. Druck (1)
|
|
2,355,058
|
(2)
|
7.6
|
%
|
David H. Abramson (3)
|
|
273,250
|
(4)
|
*
|
|
Gus A. Chafoulias (5)
|
|
1,031,418
|
(6)
|
3.3
|
%
|
Jim Holmes (1)
|
|
137,500
|
(7)
|
*
|
|
Gregg P. Schatzman (1)
|
|
137,500
|
(7)
|
*
|
|
Thomas E. Fox (1)
|
|
3,056,870
|
(8)
|
9.8
|
%
|
Jeffrey S. Halpern (1)
|
|
2,465,610
|
(9)
|
7.9
|
%
|
Tracie L. Wilson (1)
|
|
128,314
|
(10)
|
*
|
|
All executive officers and
directors as a group (8 persons)
|
|
9,584,677
|
(11)
|
28.6
|
%
|
*
Less than 1 percent
(1)
Address: 2001 Killebrew Drive, Suite 350, Minneapolis, MN 55425
(2)
Includes (i) 100,000 shares held by Mr. Drucks wife, (ii) 363,750
shares of common stock issuable upon exercise of options, and (iii) 364,804
shares issuable upon exercise of warrants.
(3)
Address: Parkdale Plaza, 1660 S. Highway 100, Suite 500,
Minneapolis, MN 55416.
(4)
Includes 206,250 shares issuable upon exercise of stock options and
12,000 shares issuable upon exercise of a warrant.
(5)
Address: 121 23rd Avenue SW, Rochester, MN 55902.
(6)
Includes 137,500 shares issuable upon exercise of stock options and
553,498 shares issuable upon exercise of warrants.
(7)
Consists of 137,500 shares issuable upon exercise of stock options.
(8)
Includes: (i) 159,152 shares held by F&B Properties, a
partnership in which Mr. Fox is a 50% general partner; (ii) 335,666
shares held by BFL General Partnership, a partnership in which Mr. Fox is
a general partner, (iii) 363,750 shares issuable upon exercise of stock
options; (iv) 337,604 shares issuable upon exercise of warrants; (v) 54,546
shares issuable upon exercise of a warrant held by F&B Properties; and (vi) 195,805
shares issuable upon exercise of a warrant held by BFL General Partnership.
(9)
Includes: (i) 40,000 shares held by Mr. Halperns
wife; (ii) 363,750 shares issuable upon exercise of stock options; and (iii) 360,916
shares issuable upon exercise of warrants.
(10)
Includes:
(i) 107,814 shares issuable upon exercise of stock options; and (ii) 9,111
shares issuable upon exercise of warrants.
(11)
Includes:
(i) an aggregate of 1,817,814 shares issuable upon exercise of options; (ii) 1,888,284
shares issuable upon exercise of warrants; (iii) 494,818 shares held by
partnerships in which an executive officer is a general partner; and (iv) 140,000
shares held by spouses of executive officers.
21
Table
Of Contents
DESCRIPTION
OF SECURITIES
General
Our authorized capital
stock consists of 75,000,000 shares of common stock, par value of $0.001 per
share and 30,000,000 shares of preferred stock at a par value of $0.001 per
share. There are no provisions in our charter or by-laws that would delay, defer
or prevent a change in our control.
Common
Stock
As of June 30, 2008,
30,299,997 shares of common stock are issued and outstanding and held by
approximately 330 shareholders of record. Holders of our common stock are
entitled to one vote for each share on all matters submitted to a stockholder
vote.
Holders of our common
stock do not have cumulative voting rights.
Therefore, holders of a majority of the shares of common stock voting
for the election of directors can elect all of the directors. Holders of our
common stock representing a majority of the voting power of our capital stock
issued and outstanding and entitled to vote, represented in person or by proxy,
are necessary to constitute a quorum at any meeting of our stockholders. A vote
by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to our Articles of Incorporation.
Although there are no
provisions in our charter or by-laws that may delay, defer or prevent a change
in control, we are authorized, without shareholder approval, to issue shares of
preferred stock that may contain rights or restrictions that could have this
effect.
Holders of common stock
are entitled to share in all dividends that the board of directors, in its
discretion, declares from legally available funds. In the event of liquidation,
dissolution or winding up, each outstanding share entitles its holder to
participate pro rata in all assets that remain after payment of liabilities and
after providing for each class of stock, if any, having preference over the
common stock. Holders of our common stock have no pre-emptive rights, no
conversion rights. We have the right to
redeem any outstanding share of our common or preferred stock if our Board of
Directors determines that the continued ownership of those shares may cause any
regulatory authority to deny or refuse to approve any gaming license or gaming
contract.
Preferred
Stock
Our articles of
incorporation also provide that we are authorized to issue up to 30,000,000
shares of preferred stock with a par value of $0.001 per share. As of the date
of this prospectus, there are no shares of preferred stock issued and
outstanding. Our Board of Directors has the authority, without further action
by the shareholders, to issue from time to time the preferred stock in one or
more series for such consideration and with such relative rights, privileges,
preferences and restrictions that the Board may determine. The preferences, powers,
rights and restrictions of different series of preferred stock may differ with
respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and purchase
funds and other matters. The issuance of preferred stock could adversely affect
the voting power or other rights of the holders of common stock.
Dividends
Since inception we have
not paid any dividends on our common stock. We currently do not anticipate
paying any cash dividends in the foreseeable future on our common stock. We
have entered into debt financing agreements that prohibit us from paying
dividends at this time and may enter into similar agreements in the
future. Although we intend to retain our
earnings, if any, to finance our business and fund growth opportunities, our
Board of Directors may have the discretion to declare and pay dividends in the
future. Payment of dividends in the future will depend upon our earnings,
capital requirements, and other factors, which our Board of Directors may deem
relevant.
22
Table
of Contents
Options
and Warrants
As of June 30, 2008,
we had outstanding options to purchase an aggregate of 4,367,500 shares of
common stock at exercise prices ranging between $0.12 and $1.00 per share. All outstanding options provide for
antidilution adjustments in the event of certain mergers, consolidations,
reorganizations, recapitalizations, stock dividends, stock splits or other
similar changes in our corporate structure and shares of our capital
stock. As of June 30, 2008, we had
outstanding warrants to purchase an aggregate of 10,344,512 shares of common
stock at exercise prices ranging between $0.12 and $1.00. The warrants provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in our
corporate structure of our company.
Registration Rights
On October 20,
2005, Southwest Casino and Hotel Corp., the wholly-owned operating subsidiary
of Southwest Casino Corporation, entered into a Revolving Credit and Term Loan
Agreement with Crown Bank of Minneapolis, Minnesota. Under the terms of
the Loan Agreement, Crown Bank extended to Southwest Casino & Hotel a
new $2.5 million term loan and assumed Southwest Casino & Hotels
$450,000 revolving line of credit with an outstanding balance of approximately
$446,000 from Associated Bank Minnesota, N.A. The $2.5 million term loan
is secured by the guaranties of 12 Southwest Casino Corporation
shareholders. In consideration for these shareholder guaranties,
Southwest Casino Corporation issued five-year fully exercisable warrants to
purchase an aggregate of 1,250,000 shares of its common stock at an exercise
price of $0.50 per share to the non-affiliated shareholder guarantors and $0.58
per share to Mr. Druck, Mr. Fox and Mr. Halpern. Each guarantor received a warrant to purchase
one share of Southwest Casino Corporation common stock for each $2.00 of term
loan guaranteed by that shareholder. Warrant holders received the right
to have the shares of our common stock purchasable upon exercise of their
warrants included in any registration statement that we may file in the future
under the terms of a registration rights agreement.
On January 24,
2007, we entered into a Securities Purchase Agreement with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, pursuant
to which we sold in a private placement an aggregate of 4,792,391 shares of our
common stock and warrants to purchase an aggregate of 1,916,961 shares of our
common stock, at a purchase price of $0.55 per unit. Pursuant to the
terms of a Registration Rights Agreement dated January 24, 2007 with
certain investors, we have agreed to register the resale of the shares sold in
the January 2007 private placement, including shares issuable upon
exercise of the warrants, on a registration statement to be filed by us with
the Securities and Exchange Commission. We have agreed to use commercially
reasonable efforts to file the registration statement with the SEC within 30
days after the closing of the private placement, to cause such registration
statement to be declared effective by the SEC within the earlier of 120 days
after the closing (or, in the event, of a review by the SEC, 150 days after
closing) or the 5
th
business day following the date on which we are
notified by the SEC that the SEC will not review the registration statement or
that the SEC has no further comments on the registration statement and to cause
such registration statement to remain effective for the required registration
period. We are subject to certain
covenants regarding the ongoing effectiveness of the registration statement.
If certain of its obligations are not met, we have agreed to make
pro-rata cash payments as liquidated damages to each investor.
On February 26,
2007, we had a second closing of our January 2007 private placement in
which we entered into a Securities Purchase Agreement with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, pursuant
to which we sold in a private placement an aggregate of 2,659,342 shares of our
common stock and warrants to purchase an aggregate of 1,063,740 shares of our
common stock, at a purchase price of $0.55 per unit. These investors are entitled to the same
registration rights as the January 2007 investors.
The registration
statement, of which this prospectus is a part, satisfies our obligations to the
groups of shareholders and warrant holders described above. We are required to use good faith commercially
reasonable efforts to cause this registration statement to remain effective
until the earlier of (1) the sale of all the shares of our common stock
covered by this registration statement; or (2) such time as the selling
stockholders named in this registration statement become eligible to resell the
shares our common stock and the shares of our common stock issuable upon the
exercise of the warrants without volume restrictions pursuant to Rule 144(k) under
the Securities Act.
23
Table
of Contents
On March 7, 2008,
Southwest Casino and Hotel Corp. entered into a series of eight promissory notes
with Crown Bank of Minneapolis, Minnesota. Under the promissory notes,
Crown Bank loaned Southwest Casino & Hotel an aggregate $1.55
million. Each of the eight promissory notes is co-signed by a shareholder
of Southwest Casino Corporation. Each of these co-signers is fully
obligated to Crown Bank and individually liable for the principal amount and
any accrued and unpaid interest and costs outstanding under the co-signed
note. As a condition to entering into the Notes, Crown Bank required each
of James Druck, Chief Executive Officer, Thomas Fox, President and Chief
Operating Officer, and Jeffrey Halpern, Vice President of Government Affairs of
Southwest Casino Corporation to increase their previously existing $150,000
personal guarantees of Southwest Casino & Hotels outstanding $450,000
line of credit to $250,000 and extend those guarantees to cover both the line
of credit and the eight promissory notes through their respective repayment
terms.
In consideration of
co-signing the promissory notes, on March 10, 2008 Southwest Casino
Corporation issued five-year fully exercisable warrants to purchase an
aggregate of 2,300,000 shares of its common stock at an exercise price of $0.39
per share to the shareholder co-signers. Each co-signer received a warrant
to purchase one share of Southwest Casino Corporation common stock for each
$1.00 in principal amount of the promissory note co-signed by that
shareholder. In consideration of the increase in the amount and extension
of the term of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase one share of Southwest Casino Corporation
common stock for each $1.00 of guarantee, or 250,000 shares. The $0.39
per share exercise price of these warrants represented the average closing
market price of one share of Southwest Casino Corporations common stock over
the 5 trading days preceding the closing of the loan. Warrant holders
also received the right to have the shares of Southwest Casino Corporation
common stock purchasable upon exercise of their warrants included in any
registration statement that Southwest Casino Corporation may file under the
terms of a separate Registration Rights Agreement.
On June 17, 2008,
Southwest Casino Corporation entered into a Securities Purchase Agreement with
certain institutional and other accredited investors, as defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933, as amended,
pursuant to which Southwest sold in a private placement an aggregate of
2,693,589 shares of its common stock with accompanying warrants to purchase
2,154,873 shares of its common stock at a price of $0.65 per unit, with each
unit consisting of one share of common stock and a warrant to purchase .8
shares of common stock. The warrants are exercisable for a period of five
years at an exercise price of $0.85 per share. Southwest received net
proceeds from this offering of approximately $1,644,336.00, after the deduction
of estimated offering expenses.
The Securities Purchase Agreement provides that if
Southwest determines to file a registration statement for its equity
securities, participants in this offering will have the right to request
inclusion of their common stock and shares of common stock issuable upon
exercise of their warrants in the registration statement (piggy-back
registration rights).
Anti-takeover Provisions
Nevada law prohibits
business combinations between Nevada corporations and interested stockholders
for a period of three years after the interested stockholders date of
acquiring shares unless the combination or the purchase of the shares by the
interested stockholder is approved by the Board of Directors.
Applicable Nevada law
also prohibits business combinations between Nevada corporations and interested
stockholders following the expiration of three years after the interested
stockholders date of acquiring shares unless the combination meets the
requirements specified in Section 78.439 for director and stockholder
approvals or Sections 78.441 through 78.444 with respect to the
consideration to be received in the combination by all stockholders other than
the interested stockholder. Applicable
Nevada law defines interested stockholders to include persons who, alone or
together with affiliates, beneficially own at least 10% of the outstanding
stock of the corporation. As allowed
under Nevada law, we have opted out of the application of these provisions
under our Articles of Incorporation.
Applicable Nevada law
also denies voting rights to a stockholder who acquires a controlling interest
in a Nevada corporation, unless the voting rights are approved by a majority of
the voting powers of the corporation. A
Nevada corporation may opt out of the application of these provisions, but we
have not opted out.
24
Table
of Contents
Nevada law does not
require a stockholder vote of the surviving corporation in a merger if:
|
·
|
the merger does
not amend the existing articles of incorporation;
|
|
|
|
|
·
|
each outstanding
share of the surviving corporation before the merger is unchanged; and
|
|
|
|
|
·
|
the number of
shares to be issued by the surviving corporation in the merger does not
exceed 20% of the shares outstanding immediately prior to such issuance.
|
The effect of these
provisions may be to make more difficult the accomplishment of a merger or
other takeover or change in control. To
the extent that these provisions have this effect, removal of our incumbent
Board of Directors and management may be rendered more difficult. Further, these provisions may make it more
difficult for stockholders to participate in a tender or exchange offer for
common stock and in so doing may diminish the market value of the common stock.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No expert or counsel
named in this prospectus as having prepared or certified any part of this
prospectus or having given an opinion upon the validity of the securities being
registered or upon other legal matters in connection with the registration or
offering of the common stock was employed on a contingency basis, or had, or is
to receive, in connection with the offering, a substantial interest, direct or
indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the
registrant or any of its parents or subsidiaries as a promoter, managing or
principal underwriter, voting trustee, director, officer, or employee.
Eide Bailly LLP,
certified public accountants, have audited the annual financial statements to
the extent and for the periods set forth in their report appearing elsewhere in
this prospectus and in the registration statement, and are included in reliance
upon that report given upon the authority of Eide Bailly LLP as experts in
auditing and accounting.
PERSONAL
LIABILITY OF DIRECTORS AND OFFICERS
Nevada law
authorizes a Nevada corporation to eliminate or limit the personal liability of
directors and officers to the corporation and its stockholders for damages for
breach of fiduciary duties as a director. We believe that such a provision is
beneficial in attracting and retaining qualified directors and officers, and
accordingly, our Articles of Incorporation, as amended, include a provision
eliminating liability for damages for any breach of fiduciary duty as a
director or officer, except for the following:
|
·
|
acts or
omissions which involve intentional misconduct, fraud or a knowing violation
of law; or
|
|
|
|
|
·
|
authorizing an
unlawful distribution in violation of Nevada law.
|
Directors are not
insulated from liability for breach of their duty of loyalty or for claims
arising under the federal securities laws.
These provisions of our Articles of Incorporation, as amended, may
reduce the likelihood of derivative litigation against directors for breaches
of their fiduciary duties, even though such an action, if successful, might
otherwise have benefited us and our stockholders. We have comprehensive directors and officers
liability insurance coverage, with an aggregate limit of $10,000,000 for the
benefit of our officers and directors insuring them against various
liabilities, including liabilities under the securities laws.
Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons under these
provisions of our Articles of Incorporation, as amended, or otherwise, we have
been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
25
Table of
Contents
DESCRIPTION
OF BUSINESS
(a)
Business
Development.
Corporate Reorganization
On July 22, 2004,
Southwest Casino and Hotel Corp. merged with Lone Moose Acquisition
Corporation, a wholly-owned subsidiary of Lone Moose Adventures, Inc., a
Nevada corporation. Southwest Casino and Hotel Corp. was organized under
the laws of the State of Minnesota in 1992 under the name Southwest Casino and
Hotel Ventures, Inc. and has operated in the gaming industry since
formation. Lone Moose Acquisition
Corporation was formed solely for the purpose of completing our
reorganization. Southwest Casino and Hotel Corp. was the surviving
corporation in that merger and became a wholly-owned subsidiary of Lone Moose
Adventures, Inc., which changed its name to Southwest Casino
Corporation. Under the terms of the reorganization agreement among
Southwest Casino and Hotel Corp., Lone Moose Adventures, Inc. and certain
shareholders of Lone Moose Adventures, Inc., Southwest Casino Corporation
acquired 100% of the issued and outstanding shares of Southwest Casino and
Hotel Corp. common and preferred stock in exchange for more than 16 million
shares of Lone Moose common stock issued to the shareholders of Southwest
Casino and Hotel Corp. Including shares of Lone Moose common stock
acquired by principal shareholders of Southwest Casino and Hotel Corp. before
the reorganization, the former Southwest Casino and Hotel Corp. equity security
holders acquired approximately 92% of the outstanding securities of Southwest
Casino Corporation in the reorganization.
Lone Moose Adventures, Inc.
was formed on January 2, 2002 and, before closing the reorganization
described above, conducted only minimal operations and received only minimal
revenue. Lone Moose was organized to take clients on adventure tours in
the Wasatch mountain range of Utah. Lone Moose conducted fewer than two
dozen adventure tours before our reorganization. Upon closing the reorganization,
we sold substantially all of the assets and liabilities of Lone Mooses
adventure tour business to Lone Mooses founding shareholders. Since the
reorganization and sale of the adventure tour business, Southwest has not
engaged in any aspect of the business conducted by Lone Moose before the
reorganization.
Prior
Bankruptcy
Gold Rush I, LLC, a wholly-owned subsidiary of
Southwest Casino and Hotel Corp., filed a voluntary petition for Chapter 11
protection under the United States Bankruptcy Act as a result of a dispute over
rent with the landlord of the Gold Rush and Gold Diggers Casinos in Cripple
Creek, Colorado. Gold Rush I was successful in its litigation against the
landlord regarding the rent dispute and emerged from bankruptcy on January 10,
2003 when the Bankruptcy Court confirmed its reorganization plan, which
provided for full payment to all creditors with interest.
(b)
Business
of Company
.
Principal
Products or Services and Markets and Status of Publicly-Announced New Products
or Services
Southwest
develops, owns, operates, manages and
provides consulting services to casinos, gaming facilities and related
amenities in various markets across the United States and the Caribbean. Based in Minneapolis, Minnesota, we currently
own two casinos in Colorado and a 50% membership interest in North Metro
Harness Initiative, LLC, which owns and operates Running Aces Harness Park, a
harness racetrack and card room in Minnesota.
Running Aces Harness Park began harness racing April 11, 2008 and
opened its 50-table card room June 30, 2008, after completing 50 days of
live harness racing as required under Minnesota law. We have approximately 150 full and part-time employees.
Running Aces Harness Park employs more than 550 additional people.
Our growth plans include
diversifying and expanding existing operations and pursuing new gaming
opportunities.
Casino
Operations
Gold Rush I, LLC, a wholly-owned subsidiary of Southwest
Casino and Hotel Corp. (a wholly-owned operating subsidiary of Southwest), owns
and operates the Gold Rush Hotel & Casino and the Gold Diggers casino
in Cripple Creek Colorado. Cripple Creek
is a small, historic mining town near Colorado Springs that is permitted to
engage in
26
Table
of Contents
limited stakes ($5.00 maximum bet) gaming. Fifteen casinos operate currently in Cripple
Creek. The combined Gold Rush and Gold
Diggers facilities offer approximately 406 slot machines and a 4-table card
game area. Southwest also owns and
operates the Palladium, an outdoor amphitheater adjacent to the Gold Rush and
Gold Diggers facilities that offers live entertainment and other special
events.
North Metro Harness
Initiative, LLC, in which Southwest and MTR-Harness, Inc., an affiliate of
MTR Gaming Group, Inc. each own a 50 percent membership interest, owns and
operates a harness racing track and card room facility on approximately 180
acres of land in Columbus Township, Anoka County, Minnesota. This
project, named Running Aces Harness Park, opened with its first day of live
harness racing on April 11, 2008.
The 50-table card room that is part of the facility opened on June 30,
2008 after Running Aces completed 50 days of live harness racing, as required
by Minnesota law.
Running
Aces Harness Park offers pari-mutuel wagering on a 5/8-mile harness racing
track with capacity for more than 2,000 track, restaurant and card room
patrons. The Running Aces card room
offers 50 tables of poker and non-banked casino card games. Running Aces 25 poker tables deal games
including Texas Hold-em, Omaha and 7-card stud. Players can choose from a
variety of games at the 25 casino card game tables including blackjack, Fortune
Pai Gow Poker, Ultimate Texas Hold em, 3-card poker and 4-card poker. In addition to live harness racing and cards,
after the April 25, 2008 passage of a law permitting Running Aces to
simulcast races from all breeds of horses, Running Aces offers simulcast
wagering on horse races by all breeds that are broadcast into the facility.
Consulting
Services
In
September 2007, Southwest entered into a consulting agreement to work with
Palace Resorts in developing and opening a casino at the Moon Palace Casino,
Golf and Spa Resort now under construction in Punta Cana on the easternmost tip
of the Dominican Republic. Under the
consulting agreement, we assist Palace Resorts in all phases of design, game
selection, training and equipping the casino that will be part of the
1,700-room resort that is scheduled to open in 2008. Under the original agreement, we were to
receive consulting fees of $50,000 per month for 10 months beginning in October 2007. On June 26, 2008, we entered into a new
contract with a subsidiary of Palace Resorts that extended the length of the
consulting agreement until the opening of the casino in late 2008 or early
2009, after which we will manage the new casino (
see Casino Management,
below). Palace Resorts provides world-class resort vacations
at all-inclusive properties throughout Cancun, the Riviera Maya, Nuevo
Vallarta, and Cozumel with the Punta Cana, Dominican Republic resort now under
construction.
Casino
Management
On June 26, 2008, we announced that we entered into an agreement
with a subsidiary of Palace Resorts to manage the casino at the Moon Palace
Casino, Golf and Spa Resort in Punta Cana, Dominican Republic. The casino will
be part of a 1700-room, all-inclusive luxury resort that Palace Resorts is
constructing on the far eastern tip of the Dominican Republic. We have been
consulting with Palace Resorts on the design, development and operation of the
casino since September 2007.
Under the new agreement, we will continue to assist Palace Resorts in
all phases of design, game selection, training and equipping the casino as a
consultant and then manage the casino for five years after it opens in late
2008 or early 2009. As manager, we will be responsible for all aspects of
casino operations and will work with Palace Resorts to market the casino and
the resort as a gaming destination. We receive a monthly fee as a consultant
and will receive management fees equal to 5 percent of net casino income after
the casino opens, subject to a minimum monthly fee.
From 1993 to August 17, 2007, we managed the Lucky Star Concho
and Lucky Star Clinton casinos in Concho and Clinton, Oklahoma, under the
terms of a management agreement with the Cheyenne and Arapaho Tribes of
Oklahoma.
We continue to actively seek other opportunities in consulting and
casino management.
Prior
Business of Lone Moose Adventures, Inc.
Prior to the July 2004
reorganization, Lone Moose engaged in limited operations primarily related to
the provision of adventure tours in the State of Utah. Immediately after closing
the reorganization in which Lone Moose Adventures became Southwest Casino
Corporation and Southwest Casino and Hotel Corp. became a wholly-owned
subsidiary of Southwest Casino Corporation, we sold substantially all of the
assets and liabilities of Lone Mooses
27
Table of Contents
adventure tour business
to the founding shareholders of Lone Moose. Since closing the reorganization
and sale of assets, Southwest has not engaged in any aspect of the business
Lone Moose conducted before the reorganization.
Competition
The gaming industry,
including the development, operation and management of casinos, racetracks and
other types of gaming facilities, is highly competitive, especially given the
rapid rate at which the industry is expanding. For example, a number of
management companies may make proposals to a particular Native American tribe
for the development and management of a single Indian gaming facility, and any
gaming facilities developed or managed by us will compete with a rapidly
expanding number of other gaming facilities of varying quality and size,
including gaming facilities that are part of national or regional chains, along
with other forms of gaming and entertainment. Similarly, with respect to
projects we are pursuing or may pursue in the future, new competitors could
surface at any time and present alternative proposals for consideration. Many
competitors have available to them substantially greater financial and
personnel resources than us. Competition in the future may also be affected by
overbuilding which can adversely affect patronage levels. Given the current
regulatory climate and limited number of new gaming opportunities, it is likely
that competition in our industry will intensify in the future.
The Cripple Creek,
Colorado market in which we operate the Gold Rush Hotel & Casino and
the adjoining Gold Diggers casino consists of fifteen gaming facilities with
approximately 4,266 machines (as of December 2007), of which we operate
406. In June 2007 we closed the
Uncle Sams casino that we had operated since 1999 due to poor
performance. The Cripple Creek market
generated total gaming revenues of approximately $155 million during calendar
year 2007. This is a very competitive market that has shown relatively
slow revenue growth in recent years, even as the number of gaming devices
continues to grow. A new casino offering
approximately 700 gaming devices opened in Cripple Creek, Colorado on May 31,
2008.
In
addition, Colorado banned smoking in casinos beginning January 1, 2008,
which may negatively impact revenue. Our
ability to maintain and grow our Colorado operations is largely dependent on
our ability to increase our market share in a highly competitive
environment. We believe that the Gold Rush and Gold Diggers Casinos
attract customers primarily from Colorado Springs, Pueblo and surrounding
areas.
We own a 50 percent
membership interest in North Metro Harness Initiative, LLC, which owns and
operates a harness racing track and 50-table card room north of the Twin Cities
of Minneapolis and St. Paul, Minnesota. This facility competes with an
existing thoroughbred racetrack and card room on the south side of the Twin
Cities metropolitan area as well as several Indian gaming facilities located
outside of the Twin Cities areas.
For more information
regarding the competitive environment in which we operate, please see
discussion under the heading Risk Factors beginning on page 3 of this
prospectus.
Dependence
on One or a Few Major Customers
Our current gaming
activities are concentrated in our Colorado operations. We currently provide consulting services
to Palace Resorts pursuant to an
agreement entered into on June 26, 2008 to assist in all phases of design, game selection, training and equipping
a casino at the Moon Palace Casino, Golf and Spa Resort in Punta Cana,
Dominican Republic and then will manage the casino for five years after it
opens in late 2008 or early 2009. Under
the terms of our agreement to provide consulting and management services,
Palace Resorts, the owner of the casino, may terminate our services if (a) we
fail to meet performance criteria stated contract (b) we fail to obtain or
maintain any license required to provide our services or to operate the casino,
(c) a material breach or default by Southwest that is not timely cured, (d) insolvency
or bankruptcy, or (e) we fail to maintain insurance satisfactory to Palace
Resorts. The loss of any of these
opportunities or constriction in the scope or types of gaming permitted in
these facilities would have a material adverse effect on our business.
During 2007, the
management fees we received under a gaming management agreement with the
Cheyenne and Arapaho Tribes of Oklahoma for the Lucky Star casinos in Concho,
Oklahoma and Clinton, Oklahoma was our primary source of operating revenue.
This management agreement terminated on August 17, 2007. The loss of the management fees we received
for managing these facilities has had a material adverse effect on our
financial condition.
28
Table
of Contents
Patents,
Trademarks, Licenses, Franchises and Concessions, Royalty Agreements and Labor
Contracts
In addition to the gaming
licenses described below, we own a federally registered trademark in the name Lucky
Star for our management of gaming-related businesses. We do not own any
other registered trademarks or patents or other significant intellectual
property.
Need for
Governmental Approvals of Principal Services
The gaming industry is
highly regulated at the federal and state levels and gaming on tribal land is
further regulated by the National Indian Gaming Commission and the Bureau of
Indian Affairs. We must maintain the gaming licenses applicable to each of our
operations in order to continue our current business and, in most instances,
must obtain new or amended gaming licenses in connection with any expansion of
our current operations or development of new gaming facilities.
In Colorado, we hold
licenses issued by Colorado Division of Gaming for our Gold Rush Hotel &
Casino and Gold Diggers casino in Cripple Creek. North Metro Harness
Initiative, LLC, in which we own a 50 percent membership interest, holds class
A and B licenses to own and operate a harness racetrack and card room in
Columbus, Minnesota.
In connection with these
licenses, the Colorado Division of Gaming and the Minnesota Racing Commission
must approve any addition of a director, officer or five percent or greater
shareholder. In addition, any affiliate
of ours, such as the joint ventures we have worked with in pursuit of some of
our new gaming opportunities, is subject to review by and the rules and
regulations of any jurisdiction in which we hold a gaming license, and we are
subject to review by and the rules of jurisdictions in which they hold
licenses.
Effect
of Existing or Probable Governmental Regulations on Business
The gaming industry and
our operations within that industry are regulated extensively. Historically, we have provided services to
Native American tribes that are regulated under the federal Indian Gaming Regulatory
Act, the rules and regulations of the National Indian Gaming Commission,
the rules and regulations of the tribal gaming authority and, in some
instances the state in which the tribal lands are located. The Gold Rush
Hotel and Casino and Gold Diggers casino in Cripple Creek, Colorado are
subject to the Colorado Limited Gaming Act and related rules and
regulations that are enforced by the Colorado Division of Gaming. The
Minnesota Racing Commission regulates the activities of North Metro Harness
Initiative, LLC, in which Southwest Casino and Hotel Corp. owns a 50 percent
membership interest, under its class A and class B licenses to develop and
operate a harness racetrack and card room on the north side of the
Minneapolis-St. Paul metropolitan area.
Our consulting and management services in the Dominican Republic will
also require us to comply with gaming and business regulations in that
country. We are in the process of
obtaining all such necessary approvals and authorizations.
The process of complying
with all applicable state, federal and foreign governmental and tribal
regulations is lengthy and has required and will continue to require the
expenditure of substantial time and resources. There can be no assurance
that we will be able to comply on a continuous or timely basis with all
applicable regulations, and delays in compliance, or failure to comply, could
have a material adverse effect on our business, financial condition, results of
operations and our ability to maintain our licenses. Changes in existing regulations
or the adoption of new regulations at the federal level or in the states and
foreign countries in which we currently operate or are pursuing new
opportunities could delay or prevent our compliance with such
regulations. Our failure to comply with applicable laws or regulations,
whether federal, state, foreign or tribal, could result in, among other things,
the termination of management agreements to which we may be a party or the
suspension of one or more of our operations, either of which would have a
material adverse effect on our business.
Gaming
Regulation in Colorado
The Colorado Division of
Gaming has broad power to ensure compliance with the Colorado gaming laws and
regulations (collectively, the Colorado Regulations). The Division may
inspect without notice, impound or remove any gaming device. The Colorado
Director may examine and copy any licensees records, may investigate
29
Table of Contents
the background and
conduct of licensees and their employees, and may bring disciplinary actions
against licensees and their employees. The Division of Gaming may also
conduct detailed background investigations of persons who loan money to, or
otherwise provide financing to, a licensee.
Colorado issues five
types of gaming and gaming-related licenses. These licenses are revocable
and non-transferable. All persons employed at our Colorado casinos, and
involved in gaming operations must obtain a Colorado gaming license. All
licenses must be renewed annually, except those for key and support employees,
which must be renewed every two years. Failure to maintain any of the
licenses or approvals required to operate any of our Colorado casinos would
have a material adverse effect on our operations.
As a general rule, no
person may have an ownership interest in more than three retail gaming
licenses in Colorado. In addition, Colorado Regulations restrict the
ability of any person with a substantial interest in a manufacturer or
distributor of slot machines to also hold a substantial interest in a casino
operator. The Division of Gaming has ruled that a person does not have a substantial
interest if that persons sole ownership interest in a licensee is through the
ownership of less than 5% of the outstanding voting securities of a publicly
traded licensee or publicly traded affiliated company of a licensee.
Under the Colorado
Regulations, any person or entity having any direct or indirect interest in us
may be required to supply the Colorado Commission with substantial information,
including, but not limited to, background information, source of funding
information, a sworn statement that such person or entity is not holding his or
her interest for any other party, and fingerprints. This information,
investigation and licensing as an associated person will be required
automatically of all persons (other than certain institutional investors) that
directly or indirectly own beneficially 10 percent or more of our outstanding
voting securities. Persons that own more than 10 percent of our outstanding
securities must report their interest within 10 days and file appropriate
applications within 45 days after acquiring that interest. Persons who directly
or indirectly own beneficially 5% or more (but less than 10%) of a direct or
indirect beneficial ownership or interest in our voting securities, must report
their interest to the Colorado Commission within 10 days after acquiring that
interest and may be required to provide additional information and to be found
suitable. All licensing and investigation fees will have to be paid by
the person in question. If the person is unable to receive approval from the
Division of Gaming or chooses not to provide information requested by the
Division of Gaming that person will be required to dispose of their Southwest
stock holdings in accordance with our Articles of Incorporation.
The Colorado Commission
also has the right to request information from any person directly or
indirectly interested in, or employed by, a licensee, and to investigate the
moral character, honesty, integrity, prior activities, criminal record,
reputation, habits and associations of: (1) all persons licensed pursuant
to the Colorado Limited Gaming Act; (2) all officers, directors and
stockholders of a licensed privately held corporation; (3) all officers,
directors and stockholders holding either a 5% or greater interest or a
controlling interest in a licensed publicly traded corporation; (4) all
general partners and all limited partners of a licensed partnership; (5) all
persons that have a relationship similar to that of an officer, director or
stockholder of a corporation (such as members and managers of a limited
liability company); (6) all persons supplying financing or loaning money
to any licensee connected with the establishment or operation of limited
gaming; (7) all persons having a contract, lease or ongoing financial or
business arrangement with any licensee, where such contract, lease or
arrangement relates to limited gaming operations, equipment devices or
premises; and (8) all persons contracting with or supplying any goods and
services to the gaming regulators.
The Division of Gaming
interprets the Colorado Regulations to permit investigations of persons or
entities providing financing to or acquiring securities from us or our Colorado
casinos. While the Colorado Regulations do not require prior approval for
credit facilities or debt securities, the Division reserves the right to
approve, require changes to or require the termination of any financing.
In any event, lenders, note holders, and others providing financing will not be
able to exercise certain rights and remedies without the prior approval of the
Colorado gaming authorities. Information regarding lenders and holders of
securities will be periodically reported to the Colorado gaming authorities.
An application for
licensure or suitability may be denied for any cause deemed reasonable by the
Colorado Commission or the Colorado Director, as appropriate. Specifically, the
Colorado Commission and the Colorado Director must deny a license to any
applicant who, among other things: (1) fails to prove by clear and
convincing
30
Table of Contents
evidence that the
applicant is qualified; (2) fails to provide information and documentation
requested; (3) fails to reveal any fact material to qualification, or
supplies information which is untrue or misleading as to a material fact
pertaining to qualification; (4) has been convicted of, or has a director,
officer, general partner, stockholder, limited partner or other person who has
a financial or equity interest in the applicant who has been convicted of
specified crimes; or (5) has refused to cooperate with any state or
federal body investigating organized crime, official corruption or gaming
offenses.
If the Colorado
Commission determines that a person or entity is unsuitable to directly or
indirectly own interests in our company, one or more of our Colorado casinos
may be sanctioned, which may include the loss of our approvals and licenses.
In addition, the Colorado
Regulations prohibit us from paying any unsuitable person any dividends or
interest upon any voting securities or any payments or distributions of any
kind (except as set forth below), paying any unsuitable person any remuneration
for services, or recognizing the exercise of any voting rights by any
unsuitable person. Further, under the Colorado Regulations, we may repurchase
voting securities from anyone found unsuitable at the lesser of the cash
equivalent to the original investment or the current market price as of the
date of the finding of unsuitability unless such voting securities are
transferred to a suitable person (as determined by the Colorado Commission)
within sixty (60) days after the finding of unsuitability.
Because of their
authority to deny an application for a license or suitability, the Colorado
Commission and the Colorado Director effectively can disapprove a change in
corporate position of a licensee and can cause us to suspend or dismiss
managers, officers, directors and other key employees or sever relationships
with other persons who refuse to file appropriate applications or who the
authorities find unsuitable to act in such capacities.
The sale, lease, purchase
and conveyance or acquisition of a controlling interest in a Colorado casino is
subject to the approval of the Colorado Commission. Under some circumstances,
we may not sell any interest in our Colorado gaming operations without the
prior approval of the Colorado Commission.
We are required to
provide information and file periodic reports with the Colorado Division
identifying those who have a 5% or greater ownership, financial or equity
interest in us, or who have the ability to control us or exercise significant
influence over us, or who loan money or other things of value to us, or who
have the right to share in our limited gaming revenues, or to whom any interest
or share in profits of limited gaming has been pledged as security for a debt
or performance of an act. Any person licensed by the Division of Gaming
and any associated person of a licensee must report criminal convictions and
criminal charges to the Colorado Division.
The Colorado Commission
has broad authority to sanction, fine, suspend and revoke a license for
violations of the Colorado Regulations. Violations of many provisions of the
Colorado Regulations also can result in criminal penalties.
We were fined a total of
$55,000 in June 2004 for failure to comply with Colorado gaming
regulations related to maintenance and review of statistical information
regarding slot machine performance and have entered into an agreement with the
Colorado Division of Gaming under which we agreed to bring our practices into
compliance. Failure to do so could lead to suspension or revocation of our
license. For more information, see the risk factor regarding risks we face in
connection with obtaining, maintaining and renewing our gaming licenses under
the heading
Risk Factors,
beginning
on page 3 of this prospectus.
Regulation
of Horse Racing and Card Playing in Minnesota
In December 2003,
North Metro Harness Initiative, LLC and Southwest Casino and Hotel Corp. filed
applications for Class A and Class B licenses, respectively, to
develop and operate a harness racing track and card room in Anoka County,
Minnesota. The Class B license application was subsequently amended
and, on January 19, 2005, the Minnesota Racing Commission voted to grant Class A
and Class B licenses to North Metro. The class A License is
effective until revoked or suspended by the Racing Commission, or relinquished
by the licensee. The Class B License is renewable each year by the
Racing Commission after a public hearing (if required by the Racing
Commission).
31
Table of Contents
Minnesota established the
Minnesota Racing Commission to regulate horse racing and card playing in the
state under its pari-mutuel horse racing statute. North Metro and
Southwest, as a 50 percent owner of North Metro, have been subject to the horse
racing statute and rules and regulations promulgated under it (the Racing
Act) since we filed the class A and class B license application. Our
horse racing operations will also be subject to the federal Interstate Horse Racing
Act of 1978.
The Racing Commission has
broad authority to enforce the Racing Act and regulate substantially all
aspects of horse racing in Minnesota. The Racing Commission granted and
will oversee North Metros ownership and operating licenses, including:
licensing all employees of North Metros racetrack as well as jockeys,
trainers, veterinarians and other participants; regulating the transfer of
ownership interests in licenses; allocating live race days and simulcast-only
race days; approving race programs; regulating the conduct of races; setting
specifications for the racing ovals, animal facilities, employee quarters and
public areas of North Metros racetrack; and regulating the types of wagers on
horse races and approve significant contractual arrangements with North Metro,
including management agreements, simulcast arrangements, totalizator contracts
and concessionaire agreements. Decisions by the Racing Commission in
regard to any one or more of these matters could adversely affect the Companys
operations.
The Racing Act requires
prior approval by the Racing Commission of all officers, directors, 5%
shareholders, or other persons having a present or future direct or indirect
financial or management interest in any person applying for a class A and class B
license, and if a change of ownership of more than 5% of the licensees shares
is made after an application is filed or the license issued, the applicant or
licensee must notify the Racing Commission of the changes within five days of
this occurrence and provide the information required by the Racing Act.
North Metro submitted a
card room plan of operation and received approval from the Racing Commission in
connection with North Metros class B license. The Racing Commission
regulates the playing of unbanked or player pool card games at North Metros
card room, as well as harness racing. North Metro must reimburse the
Racing Commission for its actual costs, including personnel costs, of
regulating the card room. North Metro must have the class B license
and card room authorization renewed annually by the Racing Commission after a
public hearing (if required by the Racing Commission).
Regulation
of Indian Gaming
The Company is not
currently managing the operations of Indian-owned casinos or otherwise involved
in gaming on Indian land in the United States, activities that are subject to
the Indian Gaming Regulatory Act (IGRA), which is administered by NIGC, and
also are subject to the provisions of statutes relating to contracts with Indian
tribes that are administered by the Secretary of the Interior and the Bureau of
Indian Affairs (BIA).
If we were to enter into
new management agreements with Indian-owned casinos we would be required to
provide the NIGC with background information on each of our directors and each
shareholder who holds five percent or more of our outstanding securities,
including a complete financial statement, a description of that persons gaming
experience, and a list of jurisdictions in which that person holds gaming
licenses. Background investigations of key employees also may be
required. Under IGRA, the Chairman of the NIGC must approve any
management contracts we enter into as well as any amendments to those
management contracts and certain related agreements.
The NIGC will not approve
a management contract if any of our directors or a 5% shareholders (i) is
an elected member of the Indian tribal government that owns the facility we
contract with; (ii) has been or is convicted of a felony gaming offense; (iii) has
knowingly and willfully provided materially false information to the NIGC or
the tribe; (iv) has refused to respond to questions from the NIGC; or (v) is
a person whose prior history, reputation and associations pose a threat to the
public interest or to effective gaming regulation and control, or create or
enhance the chance of unsuitable activities in gaming or the business and
financial arrangements incidental thereto.
In addition, the NIGC will not approve a management contract if we or
any of our agents have attempted to unduly influence any decision or process of
tribal government relating to gaming, or if the management company has breached
materially the terms of the management contract or the tribes gaming
ordinance, or a trustee, exercising due diligence, would not approve such
management contract.
The NIGC also will not
approve a management contract unless the NIGC determines that the contract
provides, among other things, for (i) adequate accounting procedures and
verifiable financial reports to be furnished to the
32
Table of Contents
tribe; (ii) tribal
access to the daily operations of the gaming enterprise, including the right to
verify daily gross revenues and income; (iii) minimum guaranteed payments
to the tribe, which must have priority over the retirement of development and
construction costs; (iv) a ceiling on the repayment of development and
construction costs; and (v) a contract term not exceeding five years and a
management fee not exceeding 30% of profits; provided that the NIGC may approve
up to a seven year term and a management fee not to exceed 40% of profits if
NIGC is satisfied that the capital investment required, the risk exposure, and
the income projections for the particular gaming activity justify the larger
profit allocation and longer term.
In addition to IGRA,
tribal-owned gaming facilities on Indian land are subject to a number of other
federal statutes. The operation of gaming on Indian land is also dependent upon
whether the law of the state in which the casino is located permits gaming by
non-Indian entities, which may change over time. Indian tribes are sovereign
nations with their own governmental systems, which have primary regulatory
authority over gaming on land within the tribes jurisdiction. Because of their
sovereign status, Indian tribes possess immunity from lawsuits to which the
tribes have not otherwise consented or otherwise waived their sovereign
immunity defense. Therefore, we may not be able to enforce our contracts with
Indian tribes unless the tribe has expressly waived its sovereign immunity as
to the tribes contractual obligations. Courts strictly construe such waivers.
Securities
Law Regulation
We are also subject to
certain aspects of the Sarbanes-Oxley Act of 2002. This Act requires
creation of a strong and independent accounting oversight board to oversee the
conduct of auditors of public companies and strengthens auditor
independence. It also requires us to take steps to enhance the direct
responsibility of senior members of management for financial reporting and for
the quality of financial disclosures we make; establishes clear statutory rules to
limit, and to expose to public view, possible conflicts of interest affecting
securities analysts; creates guidelines for audit committee members
appointment, compensation and oversight of the work of our auditors; prohibits
certain insider trading during pension fund blackout periods; and establishes a
federal crime of securities fraud, among other provisions.
Costs
and Effects of Compliance with Environmental Laws
Gold Rush I, LLC, leases
real property in Cripple Creek, Colorado, a portion of which included a gas station
and convenience store. The gas station and related storage tanks were
removed in October 1998, before Gold Rush I leased the property. We
participate in a Corrective Action Plan approved by the Colorado Department of
Labor and Employment, Division of Oil and Public Safety related to groundwater
monitoring and remediation at the site. We have spent approximately $212,000 monitoring and remediating
this site since we leased it in March 1999
.
We have applied for reimbursement of some or all of these
expenses from the Colorado Petroleum Storage Tank Fund and have received a
total of approximately $113,000
in reimbursement to date. We have additional requests for reimbursement
pending and will continue to request reimbursement of any additional expenses incurred
in connection with monitoring and remediation. We typically receive
reimbursement of one-half to two-thirds of our expenses incurred from the
Petroleum Tank Storage Fund, but are uncertain whether we will continue to
receive some or all of that reimbursement.
Number
of Employees
We currently employ
approximately 150 full and part-time employees.
33
Table
of Contents
MANAGEMENTS
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a
discussion and analysis of the financial position and operating results of
Southwest Casino Corporation (referred to in this discussion, together with its
consolidated subsidiaries where appropriate, as Southwest Casino, the Company,
we, our and us) for the three months ended March 31, 2008 and 2007
and for the years ended December 31, 2007 and 2006.
Overview:
Our principal business is
the management, operation and development of gaming facilities in emerging and
established gaming jurisdictions. Currently, we operate two casinos in
Cripple Creek, Colorado Gold Rush Hotel and Casino and Gold Diggers
Casino. Until July 28, 2007, we also operated Uncle Sams Casino in
Cripple Creek. A new casino opened on May 31,
2008 in Cripple Creek that offers approximately 700 gaming devices, or ~14% of
the market in terms of gaming devices (based upon March Cripple Creek
reported gaming device totals). Until August 17, 2007 we managed two
Native American gaming operations in Oklahoma for the Cheyenne and Arapaho
Tribes of Oklahoma, Lucky Star - Concho and Lucky Star Clinton. We also
own a 50% membership interest in North Metro Harness Initiative, LLC, (North
Metro). North Metro opened its harness racetrack and 50-table card room
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
completing 50 days of live racing (as required by Minnesota statute). 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. On June 26, 2008, we entered into a
new contract with a subsidiary of Palace Resorts that extends the term of the
consulting agreement until the opening of the casino in late 2008 or early
2009, after which we will manage the new casino. After the casino opens, we will be
responsible for all aspects of casino operations and will work with Palace
Resorts to market the casino and resort as a gaming destination. We will receive a management fee equal to
five percent of net casino income after the casino opens, subject to a minimum
monthly fee. Palace Resorts provides
world-class resort vacations at all-inclusive properties throughout Cancun, the
Riviera Maya, Nuevo Vallarta, and Cozumel with the new resort under
construction at Punta Cana, Dominican Republic.
From May 19, 2007 to
August 19, 2007, we managed the Lucky Star Concho and Lucky Star
Clinton casinos under Amendment No. 11 to the Third Amended and Restated
Gaming Management agreement between Southwest Casino and Hotel Corp. and the
Cheyenne and Arapaho Tribes of Oklahoma, which extended that agreement for up
to two years. On August 17, 2007, the Supreme Court of the Cheyenne
and Arapaho Tribes declared Amendment No. 11 invalid. Also on August 17,
2007, the National Indian Gaming Commission reversed its prior approval of
Amendment No. 11. On August 24, 2007, the NIGC rejected our
challenge to its decision and we have not received management fees from the
Cheyenne and Arapaho Tribes since August 17, 2007. Due to the loss
of management fees from this management contract, in March 2008 we secured
additional debt financing to fund our current operations including project
development costs.
We continually evaluate
other management, consulting, development and acquisition opportunities related
to gaming that have the potential to generate new revenue streams for us.
Comparison of the three months ended March 31,
2008 with the three months ended March 31, 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.
34
Table of Contents
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 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.
35
Table of Contents
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.
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 Note 3 to our
financial statements beginning on page F-38 of this prospectus). 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
36
Table of Contents
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.
Comparison of the year ended December 31, 2007
with the year ended December 31, 2006
Summary of Consolidated Operating Results:
For the year ended December 31,
2007, we had a net loss of $1,493,699 on revenues of $19,536,740 compared to
net income of $1,157,211 on revenues of $21,474,908 for the same period in
2006. This amounts to a basic loss per outstanding share during the year
ended December 31, 2007 of $0.06 and basic and fully diluted earnings per
outstanding share during the year ended December 31, 2006 of $0.06.
The net loss of
$1,493,699 in the year ended December 31, 2007, compared to net income of
$1,157,211 for the same period in 2006, primarily results from a reduction in
revenues of approximately $2.3 million from our management contract with the
Cheyenne and Arapaho Tribes of Oklahoma, which terminated on August 17,
2007 and increased operating expenses of approximately $1.3 million, primarily
due to an increase in corporate expenses of $1.0 million. We also
incurred other expenses of $1.0 million during the year ended December 31,
2007 compared to $1.2 million in 2006. The significant components of the $0.2
million decrease related to a decrease in interest expense of $0.3 million and
a gain on the disposition of the Uncle Sams casino of $0.5 million, which were
offset by the write off of financing costs of $0.6 million. During the
year ended December 31, 2006 we recognized income tax expense of $0.7
million compared to $0 in 2007.
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:
37
Table of Contents
Casino Management and
Consulting:
|
|
Casino Operations:
|
Lucky Star Concho
|
|
Gold Rush/ Gold
Diggers Casinos
|
Lucky Star Clinton
|
|
Uncle Sams Casino
|
Palace Resorts
|
|
|
Casino
Management:
We
managed two casinos for the Cheyenne and Arapaho Tribes of Oklahoma under the
Third Amended and Restated Gaming Management Agreement dated June 16, 1995
between us and the Cheyenne and Arapaho Tribes of Oklahoma (the Tribes) until
August 17, 2007.
On May 18,
2007, the National Indian Gaming Commission approved Amendment No. 11 to
the Third Amended and Restated Gaming Management Agreement. Southwest
continued to manage the Tribes Lucky Star Concho and Lucky Star Clinton
casinos under the terms of Amendment No. 11 until August 17, 2007.
The May 18,
2007 NIGC approval was based on a May 18, 2007 decision of the Cheyenne
and Arapaho Trial Court finding Amendment No. 11 valid under the Tribes
constitution. On May 21, 2007, the Governor of the Cheyenne and
Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Court
seeking to overturn the decision of the tribal Trial Court. On August 17,
2007, the Supreme Court reversed the Trial Court order and declared the
contract extension invalid. Also on August 17, 2007, the NIGC issued a
decision and order reversing its May 18, 2007 approval of the two-year
contract extension based on the tribal Supreme Court decision. Based on
the decision of the NIGC, tribal representatives took control of the casinos on
Sunday, August 19, 2007. On August 21, 2007, Southwest appealed
the decision of the NIGC to reverse its approval of the two-year contract
extension. On August 24, 2007, the NIGC rejected that appeal and
affirmed its decision. Southwest has not received management fees from
the casinos since August 17, 2007.
Lucky Star - Concho
We earned management fees
of $2,045,984 and $3,501,795 from Lucky Star - Concho during the year ended December 31,
2007 and 2006, respectively. The decrease in management fees for the
year ended December 31, 2007 compared to the same period in the prior year
is due to the amendment of our management contract in May 2007 that
changed the management fee structure and the subsequent termination of the
management contract on August 17, 2007.
Lucky Star - Clinton
We earned management fees
of $1,520,125 and $2,363,885 from Lucky Star - Clinton during the year ended December 31,
2007 and 2006, respectively. The decrease in management fees for
the year ended December 31, 2007 compared to the same period in the prior
year is due to the amendment of our management contract in May 2007 that
changed the management fee structure and the subsequent termination of the
management contract on August 17, 2007.
Palace Resorts
In September 2007,
we entered into a consulting agreement to work with Palace Resorts to develop
and open a casino at the Moon Palace Casino, Golf and Spa Resort, now under
construction in Punta Cana on the easternmost tip of the Dominican Republic.
Under the consulting agreement, we immediately began assisting Palace Resorts
in all phases of design, game selection, training and equipping the casino that
will be part of the 1,700-room resort scheduled to open in the last quarter of
2008. We receive $50,000 per month for 10 months under the consulting
agreement, which began October 2007. Palace Resorts provides
world-class resort vacations at all-inclusive properties throughout Cancun, the
Riviera Maya, Nuevo Vallarta, and Cozumel with the new resort under
construction at Punta Cana, Dominican Republic.
We recognized $150,000 of consulting revenue for the year ended December 31,
2007.
Otoe-Missouria Tribe of Indians
Southwest entered into a
Gaming Management Agreement with the Otoe-Missouria Tribe of Indians under
which we were to manage the Tribes Seven Clans Paradise Casino in Red Rock,
Oklahoma, on March 24, 2006. The Otoe-Missouria Tribe submitted the
Gaming Management Agreement to the National Indian Gaming Commission, which
must approve it before it can be effective, on April 10, 2006.
In response to comments from the NIGC,
38
Table of Contents
Southwest and the Tribe
submitted a revised agreement to the NIGC in August 2006. The NIGC
provided additional comments on and requested additional changes to the
management agreement on September 15, 2006. The Tribe did not
respond to the NIGC or to our efforts to complete a revised management
agreement.
On July 11, 2007,
the NIGC delivered a letter to Southwest and the Chairman of the Tribe requesting
that we submit a revised management agreement or withdraw the request for
approval of the current agreement within 30 days. We met with
representatives of the Tribes Economic Development Authority (OMDA) on August 6,
2007 and discussed the status of the management agreement. The OMDA has
told us that they do not intend to go forward with the management agreement and
we have withdrawn our request for NIGC review of this management agreement. We
continue to seek reimbursement from the Otoe-Missouria of expenses we incurred
while working with the Tribe in 2006.
Casino
operations
:
Gold Rush/Gold Diggers Casino (GR/GD) Results
|
|
Year
Ended
December 31, 2007
|
|
Year
Ended
December 31, 2006
|
|
Percentage
Increase
(Decrease)
|
|
Casino revenues
|
|
$
|
14,635,321
|
|
$
|
13,930,824
|
|
5.1
|
%
|
Total revenues
|
|
15,278,862
|
|
14,640,824
|
|
4.4
|
%
|
Profit before income taxes+
|
|
749,182
|
|
768,011
|
|
(2.5
|
)%
|
Earnings margin *
|
|
4.9
|
%
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
+
Profit before income
taxes is determined by reducing total revenues by, among other things,
primarily related to interest expense on our capital lease at the Gold Rush and
depreciation and amortization expenses. The capital lease was carried on
our Consolidated Balance Sheet in the amount of approximately $7.25 million as
of December 31, 2007. Interest expense was $795,000 and $844,000 for
the years ended December 31, 2007 and 2006, respectively.
Depreciation and amortization expense was $1,450,000 and $1,527,000 for years
ended December 31, 2007 and 2006, respectively.
*
The earnings margin is
calculated by dividing profit before income taxes by total revenues.
For
the year ended December 31, 2007, GR/GDs total casino revenues increased
by 5.1% over the prior year. The Cripple Creek market grew by 1.2% during
this same time period. We increased marketing expenses as a result of
closing Uncle Sams (see below) and offering incentives to players in order to
attract customers who played at Uncle Sams to play at GR/GD. This
resulted in a slight decrease in our earnings margin.
We closed Uncle Sams
casino on July 29, 2007. We transferred approximately eight
employees to our GR/GD properties. Thus certain salaries and expenses
previously incurred by Uncle Sams have been included with operations of the
GR/GD properties since the closure of Uncle Sams casino on July 29, 2007.
Additionally, the players/customers who played at Uncle Sams were
offered incentives to migrate their play to the Gold Rush and Gold Diggers
casino. We have estimated that we retained approximately 40%
- 70% of the revenues from those players who played previously at Uncle Sams
and now are playing at the Gold Rush and Gold Diggers casinos. The Gold
Rush and Gold Diggers casinos had available capacity to absorb the players from
Uncle Sams. The Uncle Sams brand name is no longer used in our
operations. However, since inception we have used an integrated players
club for all three Cripple Creek casinos whereby the player could redeem points
earned at one casino at any of the casinos.
We also include within
the operating segment Casino Operations our outdoor amphitheatre at the Gold
Rush. Revenues from the amphitheatre are less than 1% of total revenues.
Uncle
Sams Casino
:
|
|
Year
Ended
December 31, 2007
|
|
Year
Ended
December 31, 2006
|
|
Total revenues
|
|
464,697
|
|
940,562
|
|
Profit (loss) before income taxes
|
|
126,011
|
|
(574,866
|
)
|
39
Table
of Contents
Operating
results at Uncle Sams continued to deteriorate in 2007 because the property
was small, detached from the GR/GD and we did not make significant improvements
to the property. On June 25, 2007, we entered into an
agreement with the landlord to purchase the leased real property on which we
operated Uncle Sams Casino in Cripple Creek, Colorado. The purchase
agreement provided that we would not be obligated to purchase the real property
unless we assigned our rights under the purchase agreement to a third
party. On June 26, 2007, we entered into an agreement to assign our
rights under the purchase agreement and the operating lease. On July 29,
2007, we closed Uncle Sams Casino and, on July 31, 2007, we assigned our
rights under the purchase agreement and lease and received an assignment fee of
approximately $487,000. We recognized a gain of $477,407 on this
transaction that is recorded in the Consolidated Statement of Operations during
year ended December 31, 2007 as a separate line item within Other Income
(Expense) and included in the schedule above in Profit (loss) before income
taxes. We transferred the majority of the equipment and slot machines to
the Gold Rush and Gold Diggers casinos in the amount of their net book value of
approximately $58,000. Additionally, approximately eight employees were
transferred to the Gold Rush and Gold Diggers casinos and the customers were
offered incentives to migrate their play at Uncle Sams to the Gold Rush and
Gold Diggers casinos.
Project Development
costs for the year
ended December 31, 2007 and 2006 were $374,384 and $290,623,
respectively. The increase for the year ended December 31, 2007 is
primarily a result of increased costs associated with the management contract
with the Cheyenne and Arapaho Tribes see above discussion under Casino
Management, and costs associated with obtaining our consulting agreement with
Palace Resorts in September 2007.
Corporate expenses
were $3,782,615 and
$2,774,022 during the year ended December 31, 2007 and 2006, respectively,
an increase of approximately $1.0 million.
The increase in corporate
expenses of approximately $1.0 million during the year ended December 31,
2007 over the prior year is primarily due to increased salary and benefit
expense of approximately $600,000 which included discretionary performance
bonuses approved by the board of directors in March 2007 of approximately
$385,000 (with no corresponding amount in the same period in 2006), fees for
investor relations and financial consulting services of approximately $215,000
and increased legal and accounting fees of approximately $140,000 due primarily
to Sarbanes Oxley compliance and legal fees associated with the Cheyenne and
Arapaho legal and arbitration matters (see
Legal Proceedings
,
above and Note 24 to our financial statements beginning on page F-3 of
this prospectus). The bonus approved and recorded in March 2007
consists of $210,000 that was paid in March 2007, and $175,000 to be paid
on or after July 1, 2007 at such time as management determines that we
have sufficient financial resources for the payment. The $175,000 is
accrued as a liability at December 31, 2007.
Impairment loss
was approximately
$400,000 for the year ended December 31, 2007. The impairment loss
relates to the write-off of costs related to the termination of the management
contract with the Cheyenne and Arapaho Tribes of Oklahoma.
Interest Expense
was $877,585 and
$1,204,296 for the year ended December 31, 2007 and 2006, respectively, a
decrease of approximately $327,000. The
decrease is primarily due to lower interest from our $2.5 million term loan as
the loan was fully paid in April 2007.
Write off of acquisition and financing costs
of $613,372 during the year ended December 31, 2007 relate to the
write-off of costs associated with the proposed acquisition of the Double Eagle
and the write-off of financing costs. See further discussion below under Liquidity
and Capital Resources.
Loss of unconsolidated subsidiary, net of tax benefit
represents our share of the losses of North Metro, which were $436,494 and
182,873 for the year ended December 31, 2007 and 2006, respectively.
The increase in losses in 2007 compared to 2006 is primarily due to
increased real estate taxes in 2007, as a result of higher assessed land values
following the purchase of land by North Metro in late 2005.
Effective tax rate.
For the
year ended December 31, 2007, we did not record a tax benefit for the net
loss as a result of our evaluation of deferred tax assets and our ability to
utilize the deferred tax assets in the future. During the year ended December 31,
2006 we recorded a tax provision of approximately $671,000, a 33.4% effective
tax rate. As of December 31, 2005, we evaluated all evidence and
determined that a portion of the deferred tax assets relating to net operating
losses in previous years would be utilized in 2006 based upon forecasted income
for 2006. At December 31, 2006 we recorded 100% valuation allowance
against the deferred tax assets due to the uncertainty surrounding the Cheyenne
and Arapaho management relationship. We
continue to record a 100% valuation allowance against
40
Table of Contents
the deferred tax assets
at December 31, 2007 because of the termination of our management
agreement with the Cheyenne and Arapaho Tribes, effective August 17,
2007. As of December 31, 2007, our deferred tax asset is zero.
Liquidity and Capital Resources:
We continue to generate
cash flow from our casino operations in Colorado and our consulting. 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 are 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 have secured additional debt
financing to fund our future operations including project development costs.
We closed on a bank loan of $1.55 million on March 7, 2008. The interest rate is the prime rate plus 1.5%
with a minimum interest rate of 7%. The
effective interest rate on this loan, after giving effect to the warrant
consideration issued in connection with it, is approximately 25.5 percent (see
Note 4 to our financial statements beginning on page F-38 of this
prospectus). We are required to make interest only payments through January 2009
after which time 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.
41
Table
of Contents
·
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.
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.
Liquidity and Capital Resources Reported Subsequent to May 14,
2008
Sale of Common Stock with Warrants.
Subsequent to the
first quarter of 2008, on June 17, 2008, Southwest Casino Corporation
entered into a Securities Purchase Agreement with certain institutional and
other accredited investors, as defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended, pursuant to which
Southwest sold in a private placement an aggregate of 2,693,589 shares of its
common stock with accompanying warrants to purchase 2,154,873 shares of its
common stock at a price of $0.65 per unit, with each unit consisting of one
share of common stock and a warrant to purchase .8 shares of common
stock. The warrants are exercisable for a period of five years at an
exercise price of $0.85 per share. Southwest received net proceeds from
this offering of approximately $1,644,336.00, after the deduction of estimated
offering expenses. The Securities Purchase Agreement provides that if Southwest
determines to file a registration statement for its equity securities,
participants in this offering will have the right to request inclusion of their
common stock and shares of common stock issuable upon exercise of their
warrants in the registration statement (piggy-back registration rights).
Amendment to North Metro Financing.
On July 1, 2008,
North Metro entered into Amendment No. 2 to its Credit Agreement dated as
of April 20, 2007 by and among North Metro, other designated Loan Parties,
Black Diamond Commercial Finance, L.L.C. (Black Diamond), as Agent, Lead
Arranger and a Lender and other Lenders (the Credit Agreement). The
Credit Agreement provides financing for the construction and opening of Running
Aces Harness Park by North Metro.
42
Table
of Contents
Amendment No. 2 amends
the Credit Agreement to, among other things, (1) increase the total amount
of the financing by $600,000 from $41.7 million to $42.3 million, (2) increase
the interest rate applicable to the financing by 0.30%, and (3) temporarily
reduce North Metros requirements for available cash from $1,250,000 to
$750,000. The available cash requirement will increase incrementally over
five months, returning to $1,250,000 as of November 30, 2008. The
increase in the loan amount and reduction in the available cash requirement
were needed due to the expense of completing 50 days of live harness racing
before North Metro could open its 50-table card room, as required under state
law. The card room opened on June 30, 2008.
In connection with
Amendment No. 2, on July 1, 2008, Southwest Casino Corporation and
its wholly owned subsidiary Southwest Casino and Hotel Corp. entered into a
Limited Guaranty in favor of Black Diamond, as agent under the Credit
Agreement. Southwest Casino and Hotel Corp owns a 50 percent membership
interest in North Metro. Under the Limited Guaranty, Southwest Casino
Corporation and Southwest Casino and Hotel Corp. agree to guaranty a maximum of
$1 million plus certain costs of the $42.3 million in financing provided to
North Metro under the Credit Agreement, as amended. The limited guaranty
will remain in full force and effect until the earlier of June 30, 2010 or
the date on which the North Metro financing is repaid in full.
As a condition to entry
into Amendment No. 2, Southwest Casino and Hotel Corp. and MTR-Harness, Inc.,
the other 50 percent member in North Metro Harness Initiative, LLC, were
required to make an aggregate of $615,000 in additional membership
contributions to North Metro. These additional membership contributions
were made on or about June 20, 2008.
Seasonality:
We believe that the
operations of all casinos owned by us will be affected by seasonal factors,
including holidays, weather and travel conditions.
Effects of Current Economic and Political Conditions:
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.
43
Table of Contents
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 Pronouncements
:
We adopted Statement of
Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007, which did not
have a significant impact to our financial statements.
In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements which is effective for fiscal years beginning after November 15,
2007 and for interim periods within those years. This statement defines
fair value, establishes a framework for measuring fair value and expands the
related disclosure requirements. 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
.
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.
44
Table of Contents
Description
of Property:
We
own, lease or manage the following real property:
Gold Rush I, LLC,
operates the Gold Rush Casino with 321 slot machines, four table games, a
bar/restaurant and 13 hotel rooms, and the Gold Diggers Casino with 86 slot
machines and a bar. These properties are physically connected, but
operate under separate Colorado gaming licenses. We lease the casino
buildings, another building that houses our marketing and accounting offices,
the Gold Rush Palladium site, two additional storefronts and related parking
lots under a 20-year lease from Mark and Annesse Brockley, Cripple Creek
Development Corporation and Blue Building Corporation that expires in June 2019.
Gold Rush I pays base rent in the amount of $40,000 per month for this
property, plus an additional payment based on the combined net income of the
Gold Rush and Gold Diggers casinos. Through 2007, we have not been required to
make any additional payments based on combined net income. In addition, Gold
Rush I assumed obligations to make numerous payments to third parties for
outstanding accounts payable and debt obligations related to acquisition and
operation of the Gold Rush and Gold Diggers before we entered into this
lease. These additional payments are capped at $125,000 per month. If the
payments exceed that amount, the excess amount is deducted from the base rent
due. In 2007, these assumed obligations averaged approximately $91,000
per month.
Southwest Entertainment, Inc.,
a wholly owned subsidiary of Southwest Casino and Hotel Corp., operates the
Gold Rush Palladium, an outdoor music amphitheatre with 1,200 seats. The
Palladium is located behind the Gold Rush and Gold Diggers casinos on a
portion of the property leased by Gold Rush I, LLC from Mark and Annesse
Brockley, Cripple Creek Development Corporation and Blue Building Corporation
under the lease described above that expires in June 2019. Southwest
Entertainment hosts music events at the Palladium intended to increase traffic
at the Gold Rush and Gold Diggers casinos. Under the sublease between
Southwest Entertainment and Gold Rush I for this site, Southwest Entertainment
is required to pay rent of $1,000 per month.
In addition to the Gold
Rush and Gold Diggers casinos, the lease with Mark and Annesse Brockley,
Cripple Creek Development and Blue Building Corporation includes two additional
storefronts that we sublease to a third party. The monthly rent we
receive for these properties is $1,000.
North Metro Harness
Initiative, LLC, in which we own a 50 percent membership interest, purchased
approximately 180 acres of real property in Columbus Township, Anoka County, Minnesota
during October 2005. North Metro built a harness racetrack and card room
on this site. North Metro also acquired a separate 24-acre parcel in the
city of Hugo in Washington County, Minnesota that will be used for wetland
mitigation required in connection with the development of the harness racetrack
and card room. We estimate the total cost of this development to be
approximately $62 million. As of December 31, 2007, the members of North
Metro have provided approximately $21.3 million of that amount. (See
Note 4 to our financial statements beginning on page F-3 of this
prospectus).
Southwest Casino
Corporation leases 4,780 square feet of office space at 2001 Killebrew Drive, Suite 350
in Minneapolis, Minnesota with a base rent of approximately $9,000 per month
plus certain operating costs for its corporate offices under a five-year lease
that expires in December 2009.
Southwest does not own
any interest in real property solely for investment purposes. Southwest
does not invest in real estate mortgages or in the securities of persons
primarily engaged in real estate activities.
Our management considers
our leased properties suitable and adequate for our current operations.
In the opinion of our management, all of these properties are adequately covered
by insurance.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
On June 17, 2008, we held a closing in a private
placement of common stock with accompanying warrants in which we raised
approximately $1,644,336.00, after the deduction of estimated offering
expenses. We sold units consisting of
one share of common stock and a warrant to purchase 0.8 shares of common stock
at a price of $0.65 per unit. The
warrants are exercisable for five years at a price of $0.85 per share. James B. Druck, CEO, Thomas E. Fox, President
and COO, Jeffrey S. Halpern, Vice President of Government Affairs, Tracie L.
Wilson, CFO, and
45
Table
of Contents
Gus Chafoulias, Director, each participated in this
offering on the same terms as all other investors. Each of Mr. Druck, Mr. Fox, Mr. Halpern,
and Ms. Wilson participated by investing net proceeds (after taxes and
other withholding) from deferred bonuses owed to them by the Company, resulting
in a reduction in the Companys outstanding liabilities to these officers of
$165,000. The amounts of their
respective investments were:
Name
|
|
Title
|
|
Common Shares
|
|
Warrant Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
James Druck
|
|
CEO, Director
|
|
47,004
|
|
37,604
|
|
$
|
30,552.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Fox
|
|
President, COO
|
|
47,004
|
|
37,604
|
|
$
|
30,552.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Halpern
|
|
VP Govt. Affairs
|
|
42,044
|
|
33,636
|
|
$
|
27,328.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Tracie Wilson
|
|
CFO
|
|
11,389
|
|
9,111
|
|
$
|
7,402.50
|
|
|
|
|
|
|
|
|
|
|
|
|
Gus Chafoulias
|
|
Director
|
|
38,462
|
|
30,770
|
|
$
|
25,000.00
|
|
On March 10, 2008,
we issued warrants to purchase 250,000 shares of its common stock at a price of
$0.39 per share to each of James B. Druck, CEO, Thomas E. Fox, President and
COO, and Jeffrey S. Halpern, Vice President of Government Affairs, on March 10,
2008. These warrants are exercisable for
a period of five years. We issued these
warrants to Messrs. Druck, Fox and Halpern in consideration of their
agreement to increase the amount of their personal guarantees of our
indebtedness to Crown Bank from $150,000 to $250,000 and to extend the
termination date of those guarantees from April 19, 2008 to January 11,
2010.
On March 10, 2008,
we issued a warrant to purchase 300,000 shares of our common stock at a price
of $0.39 per share to Gus Chafoulias, a member of the companys Board of
Directors, on March 10, 2008. This
warrant is exercisable for a period of five years. We issued this warrant to Mr. Chafoulias
in consideration of his agreement to co-sign a $300,000 promissory note with
Southwest Casino & Hotel Corp. for a bank loan to Southwest.
On January 24 and February 26, 2007, we held
separate closings in a private placement of common stock with accompanying warrants
in which we raised $4.1 million. We sold
units consisting of one share of common stock and a warrant to purchase 0.4
shares of common stock at a price of $0.55 per unit. The warrants are exercisable for five years
at a price of $0.61 per share. James B.
Druck, CEO, Thomas E. Fox, President and COO, Jeffrey S. Halpern, Vice
President of Government Affairs, Gus Chafoulias, Director and David Abramson,
Director each participated in this offering on the same terms as all other
investors. The amounts of their
respective investments were:
Name
|
|
Title
|
|
Common Shares
|
|
Warrant Shares
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
James Druck
|
|
CEO, Director
|
|
68,000
|
|
27,200
|
|
$
|
37,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Fox
|
|
President, COO
|
|
318,183
|
|
127,274
|
*
|
$
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey Halpern
|
|
VP Govt. Affairs
|
|
68,200
|
|
27,280
|
|
$
|
37,510
|
|
|
|
|
|
|
|
|
|
|
|
|
Gus Chafoulias
|
|
Director
|
|
181,819
|
|
72,728
|
|
$
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
David Abramson
|
|
Director
|
|
30,000
|
|
12,000
|
|
$
|
16,500
|
|
*
Consists
of common shares and warrants to purchase common shares acquired by entities in
which Mr. Fox has an ownership interest.
Does not include 381,819 shares and warrants to purchase 152,728 shares
held by Richfield Hotel Associates Limited Partnership (RHALP). Mr. Fox is general partner of a
partnership that is a
46
Table
of Contents
limited partner of RHALP and does not have or share
investment control over RHALP and thus does not beneficially own these shares.
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.
The Company had outstanding liabilities to James B.
Druck, Thomas E. Fox and Jeffrey S. Halpern for unpaid compensation and expense
reimbursements of $122,467 as of March 31, 2008.
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. The purchase price for the furniture and
equipment was less than their value as determined by independent third-party
appraisers. 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.
During the year ended December 31,
2007, Southwest paid Jennifer Sparlin Druck $1,000 for performing at the Gold
Rush Palladium. Ms. Druck is the wife of James B. Druck.
Virginia Skruppy is a
part-time employee of North Metro Harness Initiative, LLC. Ms. Skruppy is the wife of Tom Fox,
President of Southwest Casino Corporation.
We anticipate that her earnings in 2008 from North Metro will not exceed
$20,000.
Each of Mr. Abramson,
Mr. Chafoulias, Mr. Holmes and Mr. Schatzman has been determined
to be independent under the rules of the Nasdaq stock market.
47
Table
Of Contents
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock is
quoted on the Over-the-Counter Bulletin Board (OTCBB) of the National
Association of Securities Dealers, Inc. under the symbol SWCC.OB.
The market for shares in our common stock is limited because only a small
number of our outstanding shares are available for trading in the public
market. The following table sets forth the high and low bid prices for our
common stock, as reported by the OTCBB, for the fiscal quarters indicated:
Fiscal Year ended December 31, 2008:
|
|
High
|
|
Low
|
|
Quarter ended June 30, 2008
|
|
$
|
1.12
|
|
$
|
0.43
|
|
Quarter ended March 31, 2008
|
|
$
|
0.52
|
|
$
|
0.30
|
|
Fiscal Year ended December 31, 2007:
|
|
High
|
|
Low
|
|
Quarter ended Dec. 31, 2007
|
|
$
|
0.55
|
|
$
|
0.34
|
|
Quarter ended Sept. 30, 2007
|
|
$
|
0.70
|
|
$
|
0.32
|
|
Quarter ended June 30, 2007
|
|
$
|
1.24
|
|
$
|
0.50
|
|
Quarter ended March 31, 2007
|
|
$
|
1.26
|
|
$
|
0.59
|
|
Fiscal Year ended December 31, 2006:
|
|
High
|
|
Low
|
|
Quarter ended Dec. 31, 2006
|
|
$
|
0.70
|
|
$
|
0.42
|
|
Quarter ended Sept. 30, 2006
|
|
$
|
0.71
|
|
$
|
0.40
|
|
Quarter ended June 30, 2006
|
|
$
|
0.84
|
|
$
|
0.51
|
|
Quarter ended March 31, 2006
|
|
$
|
0.73
|
|
$
|
0.40
|
|
These bid quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and may not represent actual transactions.
Number
of Record Holders
As of June 30, 2008
there were approximately 330 record holders of our common stock.
48
Table of Contents
EXECUTIVE
COMPENSATION
The following table
provides summary information concerning cash and non-cash compensation paid to
or earned by our principal executive officer and our two other highest paid
executive officers during the Southwest Casino Corporation fiscal year ended December 31,
2007. We will provide a copy of our
revised Code of Conduct and Ethics to any person, without charge, upon written
request submitted to our office at 2001 Killebrew Drive, Suite 350,
Minneapolis, MN 55425, Attn: Investor Relations. We intend to disclose any amendments to and
any waivers from a provision of our Code of Conduct and Ethics on a Form 8-K
filed with the SEC.
SUMMARY
COMPENSATION TABLE
Name And
|
|
|
|
Salary
|
|
Bonus
|
|
Stock
Award(s)
|
|
Option
Awards
|
|
Nonequity
Incentive
Plan
Compensation
|
|
Non qualified
deferred
compensation
earnings
|
|
All Other
Compensation
|
|
Total
|
|
Principal Position
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
James B. Druck,
|
|
2007
|
|
243,100
|
|
55,000
|
|
|
|
|
|
|
|
|
|
48,637
|
(2)
|
346,737
|
|
CEO & Director
|
|
2006
|
|
220,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
44,988
|
(2)
|
264,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas E. Fox,
|
|
2007
|
|
243,100
|
|
55,000
|
|
|
|
|
|
|
|
|
|
42,200
|
(2)
|
340,300
|
|
President & COO
|
|
2006
|
|
220,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
31,961
|
(2)
|
251,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian L. Foster,
|
|
2007
|
|
46,500
|
(3)
|
192,422
|
|
|
|
|
|
|
|
|
|
17,536
|
(4)
|
256,458
|
|
VP Native American Operations
|
|
2006
|
|
|
(3)
|
203,790
|
|
|
|
|
|
|
|
|
|
14,746
|
(4)
|
218,536
|
|
(1)
Does not include $50,000
paid to Mr. Druck and $10,000 paid to Mr. Fox during the second
quarter of 2006 as partial payment of salary earned in years before 1998 but
not paid.
(2)
Consists of company paid
medical, dental, life and disability insurance, 401(k) matching funds, and
a car allowance.
(3)
Mr. Foster managed
two gaming facilities owned by the Cheyenne and Arapaho Tribes of Oklahoma
until August 17, 2007. Mr. Foster also received compensation,
including a salary, directly from the Cheyenne and Arapaho Tribes of Oklahoma
tribal enterprises. Effective June 30,
2008, Mr. Foster no longer acts as Southwests Vice President of Native
American Operations and is no longer an executive officer of Southwest,
although Mr. Foster will continue to work with Southwest in numerous
capacities.
(4)
Consists of company paid
medical, dental, life and disability insurance, and 401(k) matching funds.
James
Druck Employment Agreement
In July 2004, we
entered into an employment agreement with James B. Druck under which Mr. Druck
serves as our Chief Executive Officer. The initial term of this agreement
continued until July 1, 2006, after which the term renews automatically
for additional one-year periods unless terminated earlier by either party.
Under this agreement, Mr. Druck receives a base salary of $220,000 per
year, an automobile allowance of $1,000 per month, and is eligible for an
additional performance bonus if granted by our Board of Directors. Any
adjustment to base salary will be determined by the Board of Directors.
Effective April 1, 2007, the base salary was increased to $250,800 per
year. Bonuses are discretionary and no
bonus was awarded during fiscal year 2006. Our Board of Directors
approved bonus payments of $110,000 at its meeting on March 13, 2007. The initial $55,000 of that bonus was paid on
March 31, 2007 and the remaining $55,000 will be paid on or after July 1,
2007, at such time as management determines that Southwest has sufficient
financial resources for the payments. As
of December 31, 2007 the $55,000 remaining bonus payment is included in
accrued liabilities on the Consolidated Balance Sheet. This is the first bonus or salary increase
awarded to Mr. Druck since entering into their employment agreements in
2004. Under the employment agreement Mr. Druck
was also granted a non-plan option to purchase 300,000 shares of our common
stock at a price
49
Table of Contents
of $1.00 per share that
is now fully vested. After the initial
two-year term of the agreement if Mr. Druck is terminated without cause,
in connection with a change in control of the company, or if Mr. Druck
terminates his employment for good reason, Mr. Druck may elect to
continue employment with us in a diminished capacity. If Mr. Druck so
elects, Mr. Druck will continue to receive his base salary and medical
benefits for 12 months. After 12 months, Mr. Druck will receive a salary
of not less than $25,000 and continuing medical benefits. Mr. Druck
is also subject to customary assignment of inventions, confidentiality,
non-solicitation and non-compete provisions.
Thomas
Fox Employment Agreement
In July 2004, we
entered into an employment agreement with Thomas E. Fox under which Mr. Fox
serves as our President and Chief Operating Officer. The initial term of this
agreement continued until July 1, 2006, after which the term renews
automatically for additional one-year periods unless terminated earlier by
either party. Under this agreement, Mr. Fox receives a base salary of
$220,000 per year, an automobile allowance of $1,000 per month, and is eligible
for an additional performance bonus if granted by our Board of Directors.
Any adjustment to base salary will be determined by the Board of
Directors. Effective April 1, 2007;
the base salary was increased to $250,800 per year. Bonuses are discretionary and no bonus was
awarded during fiscal year 2006. Our Board of Directors approved bonus
payments of $110,000 at its meeting on March 13, 2007. The initial $55,000 of that bonus was paid on
March 31, 2007 and the remaining $55,000 will be paid on or after July 1,
2007, at such time as management determines that Southwest has sufficient
financial resources for the payments. As
of December 31, 2007 the $55,000 remaining bonus payment is included in
accrued liabilities on the Consolidated Balance Sheet. This is the first bonus or salary increase
awarded to Mr. Fox since entering into their employment agreements in
2004. Under the employment agreement Mr. Fox
was also granted a non-plan option to purchase 300,000 shares of our common
stock at a price of $1.00 per share that is now fully vested. After the initial two-year term of the
agreement if Mr. Fox is terminated without cause, in connection with a
change in control of the company, or if Mr. Fox terminates his employment
for good reason, Mr. Fox may elect to continue employment with us in a
diminished capacity. If Mr. Fox so elects, Mr. Fox will continue to
receive his base salary and medical benefits for 12 months. After 12 months, Mr. Fox
will receive a salary of not less than $25,000 and continuing medical
benefits. Mr. Fox is also subject to customary assignment of
inventions, confidentiality, non-solicitation and non-compete provisions.
Change
in Control Arrangements.
Under our employment
agreements with Mr. Druck and Mr. Fox, if either of them is
terminated within nine months after a change in control occurs, they may elect
to continue their employment with us in a diminished capacity and receive
continuing salary and medical benefits at his then base rate for 12 months
after which his salary may be reduced to not less than $25,000 with continuing
medical benefits. In addition, any unexpired stock options will vest
immediately.
For purposes of these
employment agreements, a change in control includes:
·
any merger,
acquisition, reorganization or consolidation after which the shareholders of
Southwest immediately before the transaction do not own a majority of the
surviving corporation;
·
any sale,
lease, license or transfer of substantially all of our assets;
·
any
statutory exchange of securities with another entity (except where we are the
acquiring entity);
·
acquisition
by any individual or group of more than 50 percent of our outstanding voting
stock from existing shareholders;
·
members of
our Board of Directors as of July 1, 2004 or new board members approved by
a majority of those board members cease to constitute a majority of our Board
of Directors; or
·
any other
transaction or series of transactions (other than venture capital or institutional
investor financings) that the SEC would require us to report.
50
Table of Contents
Under our 2004 Stock
Incentive Plan, incentive awards granted under the plan will become fully
exercisable after certain changes in control of our company, such as:
·
the sale,
lease, exchange or other transfer of all or substantially all of our assets;
·
our
shareholders approve any plan of or proposal for the liquidation or dissolution
of our company;
·
any person
becomes the beneficial owner of:
·
20% or more,
but not 50% or more, of the combined voting power of our outstanding securities
ordinarily having the right to vote at elections of directors, unless the
transaction resulting in their ownership was approved in advance by the continuity
directors who are members of the Board of Directors at the time of the special
meeting or whose nomination for election meets certain approval requirements
related to continuity with our current Board of Directors; or
·
50% or more
of the combined voting power of our outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any approval by the continuity
directors); provided that a traditional institution or venture capital financing
transaction are excluded from this definition;
·
we are a
party to a merger or consolidation that results in our shareholders
beneficially owning securities representing:
·
more than
50%, but less than 80%, of the combined voting power of the surviving
corporations then outstanding securities ordinarily having the right to vote
at elections of directors, unless the merger or consolidation was approved in
advance by the continuity directors; or
·
50% or less
of the combined voting power of the surviving corporations then outstanding
securities ordinarily having the right to vote at elections of directors
(regardless of any approval by the continuity directors);
·
a change in
control that outside legal counsel determines must be reported under Section 13
or 15(d) of the Exchange Act, whether or not we are then subject to these
reporting requirements; or
·
the continuity
directors cease, for any reason, to constitute at least a majority of the
Board of Directors, at any time after the date that our securities are first
sold in a registered public offering.
51
Table of Contents
OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR END TABLE
The following
table provides information regarding unexercised options for our named
executive officers that remain outstanding at December 31, 2007.
|
|
|
|
Stock Awards
|
|
|
|
Option Awards
|
|
|
|
|
|
|
|
Equity
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
Option
Exercise
price
($/share)
|
|
Option
Expiration
Date
|
|
Number
of
Shares
or Units
of Stock
that
have
not
Vested
(#)
|
|
Market
Value of
Shares
or Units
of Stock
that
have
not
Vested
($)
|
|
Equity
Incentive
Plan
Awards:
Number
of Shares
that have
not
Vested (#)
|
|
Incentive
Plan
Awards;
Market
Value of
Shares or
Units of
Stock that
have not
Vested ($)
|
|
James
Druck
|
|
300,000
|
(1)(2)
|
|
|
|
|
1.00
|
|
6/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Fox
|
|
300,000
|
(1)(2)
|
|
|
|
|
1.00
|
|
6/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian
Foster(3)
|
|
250,000
|
|
|
|
|
|
0.12
|
|
12/7/2013
|
|
|
|
|
|
|
|
|
|
(1)
Does not include
warrants issued to Mr. Druck, Mr. Fox or parties in which Mr. Fox
has a beneficial ownership interest in connection with (a) their
participation in our October 2005 private placement of warrants in
connection with guaranteeing a $2.5 million term loan with Crown Bank that was
paid in full in April 2007, (b) our January and February 2007
private placement of common stock with accompanying warrants, and (c) with
their participation of our March 2008 private placement of warrants in
connection with guaranteeing a $1.55 million loan with Crown Bank.
(2)
Does not include options
to purchase 170,000 shares of our common stock awarded to each of Mr. Druck
and Mr. Fox on March 20, 2008.
These options were issued under our 2004 Stock Incentive Plan. The exercise price under each of these
options is $0.48 per share, the closing market price for one share of Southwest
Casino Corporation common stock on the grant date. The options became exercisable immediately
with respect to 42,500 shares and will become exercisable with respect to the
remaining shares in equal installments on the last day of each fiscal quarter
over a three-year period.
(3)
Effective June 30,
2008, Mr. Foster no longer acts as Southwests Vice President of Native
American Operations and is no longer an executive officer of Southwest,
although Mr. Foster will continue to work with Southwest in numerous
capacities.
52
Table of
Contents
DIRECTOR
COMPENSATION
The following
table states information concerning the compensation of members of our Board of
Directors during the fiscal year ended December 31, 2007.
Name
|
|
Fees
earned
or paid
in cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-equity
incentive
plan
compensation
($)
|
|
Non-qualified deferred
compensation earnings ($)
|
|
All other
compensation
($)
|
|
Total ($)
|
|
David
H. Abramson(1)
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,500
|
|
Gus
A. Chafoulias(2)
|
|
$
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,000
|
|
Jim
Holmes (2)
|
|
$
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,000
|
|
Gregg
P. Schatzman(2)
|
|
$
|
14,500
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,500
|
|
(1)
As of December 31,
2007, Mr. Abramson had options to acquire an aggregate of 225,000 shares
of common stock at a price of $0.65 per share outstanding that had been awarded
to him in 2006 in connection with his service as an independent director and
Chairman of the Audit Committee of the Board of Directors. Does not include options to purchase an
aggregate of 225,000 shares of common stock at a price of $0.48 per share that
were awarded to Mr. Abramson on March 20, 2008 in connection with his
continued service as an independent director and Chairman of the Audit
Committee.
(2)
As of December 31,
2007, Messrs. Chafoulias, Holmes and Schatzman each had options to acquire
an aggregate of 150,000 shares of common stock at a price of $0.65 per share
outstanding that had been awarded to them in 2006 in connection with their
service as independent directors. Does
not include options to purchase 150,000 shares of common stock at a price of
$0.48 per share that were awarded to each of Messrs. Chafoulias, Holmes
and Schatzman on March 20, 2008 in connection with their continued service
as independent directors.
Our Board of Directors
consists of four independent, non-employee directors and James Druck, our CEO. Mr. Druck
does not receive any additional compensation for his service as a director.
Beginning in the first
quarter of 2006, the non-employee members of our Board of Directors receive a
quarterly retainer of $2,500, with an initial retainer of $5,000 paid for the
fourth quarter of 2005, their first quarter of service. Each director also
received a non-qualified option to purchase 150,000 shares of Southwest common
stock under our 2004 Stock Incentive Plan. These options were granted on January 10,
2006 and have an exercise price of $0.65 per share. The options become
exercisable in 12 equal quarterly installments on the last day of each quarter
over three years. We also pay directors meeting fees of $1,000 for each
in-person meeting and $500 for each telephonic meeting at which formal action
is taken by our board or any committee of the board. These meeting fees do not
apply to one in-person meeting of the Board of Directors and one meeting of
each committee on which a board member serves each quarter. The increased
retainer during the first quarter of a directors service is intended to
compensate the director for the extra time and meetings required to orient a
director to Southwest and the work of our Board.
We also issued a
non-qualified option to purchase 75,000 shares of Southwest common stock, on
the same terms as described above, to David Abramson to compensate him for his
work as Chairman of the Audit Committee of the Board of Directors.
On March 20, 2008,
we issued additional non-qualified options to purchase 150,000 shares of our
common stock under our 2004 Stock Incentive Plan to each of our independent
directors. These options have an
exercise price of $0.48 per share and become exercisable in 12 equal quarterly
installments on the last day of each quarter over three years beginning on the
last day of the fourth quarter of 2008 (the first quarter after the options
granted to our independent directors on January 10, 2006 are fully
vested). We also issued an additional
non-qualified option to purchase 75,000 shares of our common stock, on the same
terms, to David Abramson to compensate him for his work as Chairman of the
Audit Committee of the Board of Directors.
53
Table of
Contents
REPORTS
TO SECURITY HOLDERS
We are subject to the reporting and other requirements of the Exchange
Act and furnish to our stockholders annual reports containing financial
statements audited by our independent auditors and to make available quarterly reports
containing unaudited financial statements for each of the first three quarters
of each year. We also file these reports
with the United States Securities and Exchange Commission.
You may read and copy any materials we file with the SEC at the SECs
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. We file these reports
electronically and the SEC maintains an Internet site that contains reports,
proxy and information statements, and other information regarding Southwest
Casino Corporation that we file electronically.
You may access this information through the SEC website at www.sec.gov.
The mailing
address and telephone number of our principal executive offices is:
Southwest Casino
Corporation
2001 Killebrew
Drive, Suite 350
Minneapolis, MN
55425
Phone:
952-853-9990
54
Table
Of Contents
FINANCIAL
STATEMENTS
Table of
Contents
Financial Statements for
the Years Ended December 31, 2007 and 2006
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets December 31, 2007 and
2006
|
F-3
|
Consolidated Statements of Operations for the Years
Ended December 31, 2007 and 2006
|
F-4
|
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2007 and 2006
|
F-5
|
Consolidated Statements of Changes in Stockholders
Equity for the Years Ended December 31, 2007 and 2006
|
F-6
|
Notes to Financial Statements
|
F-7
|
|
|
Financial
Statements for the Three Months Ended March 31, 2008 and 2007
|
|
Consolidated Balance Sheets March 31, 2008
(Unaudited) and December 31, 2007
|
F-38
|
Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2008 and 2007
|
F-39
|
Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2008 and 2007
|
F-40
|
Consolidated Statements of Changes in Stockholders
Equity for the (Unaudited) for the Three Months Ended March 31, 2008
|
F-41
|
Notes to Unaudited Financial Statements
|
F-42
|
F-1
Table of Contents
[Letterhead of Eide Bailly LLP]
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors
Southwest Casino Corporation
Minneapolis, Minnesota
We have audited the
accompanying consolidated balance sheets of
Southwest
Casino Corporation
(the Company) as of December 31, 2007 and
2006, and the related consolidated statements of operations, stockholders
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based upon our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we do not express such an opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of
Southwest
Casino Corporation
as of December 31, 2007 and 2006 and the
results of its operations its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America.
|
/s/ Eide Bailly
LLP
|
|
|
Minneapolis,
Minnesota
|
|
March 31, 2008
|
|
F-2
Table
of Contents
SOUTHWEST
CASINO CORPORATION
Consolidated Balance Sheets
December 31,
2007
ASSETS
|
|
|
|
|
|
2007
|
|
2006
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,892,401
|
|
$
|
1,531,260
|
|
Accounts Receivable
|
|
54,582
|
|
157,506
|
|
Accounts Receivable - Related Party
|
|
41,572
|
|
|
|
Inventories
|
|
141,041
|
|
173,216
|
|
Prepaid Expenses and Other Current Assets
|
|
679,583
|
|
709,649
|
|
Total Current Assets
|
|
$
|
2,809,179
|
|
$
|
2,571,631
|
|
|
|
|
|
|
|
PROPERTY AND
EQUIPMENT
|
|
|
|
|
|
Leasehold Improvements
|
|
15,389,750
|
|
15,747,888
|
|
Furniture and Equipment
|
|
5,280,282
|
|
6,046,315
|
|
Accumulated Depreciation
|
|
(10,835,938
|
)
|
(10,940,192
|
)
|
Net Property and Equipment
|
|
$
|
9,834,094
|
|
$
|
10,854,011
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
Other Assets
|
|
33,374
|
|
375,287
|
|
Investment in Unconsolidated Subsidiary
|
|
7,218,720
|
|
5,054,020
|
|
Total Other Assets
|
|
$
|
7,252,094
|
|
$
|
5,429,307
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
19,895,367
|
|
$
|
18,854,949
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts Payable
|
|
$
|
659,284
|
|
$
|
535,294
|
|
Accounts Payable - Related Party
|
|
25,000
|
|
|
|
Accrued Expenses
|
|
1,085,797
|
|
972,804
|
|
Accrued Liabilities - Related Parties
|
|
122,467
|
|
122,467
|
|
Notes Payable
|
|
450,000
|
|
446,292
|
|
Current Portion of Long-Term Liabilities
|
|
1,005,940
|
|
1,720,193
|
|
Accrued Interest Payable
|
|
55,465
|
|
5,927
|
|
Total Current Liabilities
|
|
$
|
3,403,953
|
|
$
|
3,802,977
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
Long-Term Liabilities Net of Current
Portion
|
|
$
|
6,486,365
|
|
$
|
7,495,224
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Preferred Stock, $.001 Par Value;
30,000,000 Shares Authorized
|
|
$
|
|
|
$
|
|
|
Common Stock, $.001 Par Value
75,000,000 Shares Authorized, 27,817,953 Shares
Issued and 27,460,953 Outstanding at December 31, 2007
|
|
27,819
|
|
19,689
|
|
Additional Paid-in Capital
|
|
21,496,064
|
|
17,239,894
|
|
Accumulated Deficit
|
|
(11,196,534
|
)
|
(9,702,835
|
)
|
|
|
10,327,349
|
|
|
|
Less Treasury Stock (357,000 shares
redeemed)
|
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
10,005,049
|
|
7,556,748
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
19,895,367
|
|
$
|
18,854,949
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-3
Table
of Contents
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Operations
For the Year Ended December 31, 2007 and 2006
|
|
For the year
|
|
For the year
|
|
|
|
ended
December 31,
2007
|
|
ended
December 31,
2006
|
|
|
|
|
|
|
|
NET
REVENUES
|
|
|
|
|
|
Casino
|
|
$
|
15,087,784
|
|
$
|
14,844,607
|
|
Food & Beverage/Hotel
|
|
501,057
|
|
556,475
|
|
Management and Consulting
|
|
3,716,109
|
|
5,865,680
|
|
Entertainment
|
|
67,807
|
|
17,429
|
|
Other
|
|
163,983
|
|
190,717
|
|
|
|
19,536,740
|
|
21,474,908
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Casino
|
|
$
|
11,685,289
|
|
$
|
11,492,218
|
|
Food & Beverage/Hotel
|
|
1,379,610
|
|
1,410,887
|
|
Corporate Expense
|
|
3,782,615
|
|
2,774,022
|
|
Project Development Costs
|
|
374,384
|
|
290,623
|
|
Entertainment
|
|
187,333
|
|
117,905
|
|
Impairment Loss - Management Contract
|
|
400,435
|
|
|
|
Depreciation and Amortization
|
|
1,781,570
|
|
2,169,990
|
|
|
|
19,591,236
|
|
18,255,645
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
$
|
(54,496
|
)
|
$
|
3,219,263
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
Interest Income
|
|
$
|
3,421
|
|
$
|
2,849
|
|
Interest Expense
|
|
(877,585
|
)
|
(1,204,296
|
)
|
Gain (Loss) on Disposition of Property and
Equipment
|
|
7,420
|
|
(6,932
|
)
|
Gain on Disposition of Casino
|
|
477,407
|
|
|
|
Write-off of Acquisition and Financing
Costs
|
|
(613,372
|
)
|
|
|
|
|
(1,002,709
|
)
|
(1,208,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes, equity in
earnings
of unconsolidated subsidiaries
|
|
(1,057,205
|
)
|
2,010,884
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
|
(670,800
|
)
|
Loss of Unconsolidated Subsidiaries, Net of
Tax Benefit
|
|
(436,494
|
)
|
(182,873
|
)
|
|
|
|
|
|
|
Income (Loss) from Continuing Operations
|
|
(1,493,699
|
)
|
1,157,211
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(1,493,699
|
)
|
$
|
1,157,211
|
|
|
|
|
|
|
|
Income
(loss) per share - basic
|
|
$
|
(0.06
|
)
|
$
|
0.06
|
|
Income
(loss) per share - diluted
|
|
|
|
$
|
0.06
|
|
Weighted
average common shares outstanding - basic
|
|
26,847,743
|
|
19,675,779
|
|
Weighted
average common shares outstanding - diluted
|
|
|
|
20,651,331
|
|
See Notes to Consolidated Financial Statements
F-4
Table
of Contents
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Cash Flows
For the
Year Ended December 31, 2007 and 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash Flows
from Operating Activities:
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(1,493,699
|
)
|
$
|
1,157,211
|
|
Adjustments to Reconcile Net Income (Loss)
to
|
|
|
|
|
|
Net Cash Provided by Operating Activities:
|
|
|
|
|
|
Depreciation and Amortization
|
|
1,781,570
|
|
2,169,990
|
|
Amortization of Loan Costs
|
|
56,619
|
|
162,906
|
|
Impairment Loss - Management Contract
|
|
400,435
|
|
|
|
Write-off of Acquisition and Financing
Costs
|
|
613,372
|
|
|
|
(Gain) Loss on Disposition of Property and
Equipment
|
|
(7,420
|
)
|
6,932
|
|
Issuance of Common Stock for Services
|
|
12,500
|
|
|
|
Stock Based Compensation Expense
|
|
278,833
|
|
175,078
|
|
Loss of Unconsolidated Subsidiary
|
|
436,494
|
|
244,673
|
|
Gain on Disposition of Casino
|
|
(477,407
|
)
|
|
|
Change in
Current Assets and Liabilities,
|
|
|
|
|
|
(Increase) Decrease in Restricted Cash
|
|
|
|
2,656
|
|
(Increase) Decrease in Receivables
|
|
102,924
|
|
411,288
|
|
(Increase) Decrease in Receivables -
Related Party
|
|
(41,572
|
)
|
|
|
(Increase) Decrease in Inventories
|
|
32,175
|
|
(24,933
|
)
|
(Increase) Decrease in Prepaid Expenses
|
|
(30,327
|
)
|
(14,360
|
)
|
(Increase) Decrease in Other Assets
|
|
48,375
|
|
(42,849
|
)
|
(Increase) decrease in Deferred Tax Asset
|
|
|
|
573,000
|
|
Increase (Decrease) in Accounts Payable
|
|
(33,909
|
)
|
(96,067
|
)
|
Increase (Decrease) in Accrued Expenses
|
|
108,354
|
|
(103,434
|
)
|
Increase (Decrease) in Accrued Interest
Payable
|
|
49,538
|
|
(11,625
|
)
|
Net Cash Provided By Operating Activities
|
|
$
|
1,836,855
|
|
$
|
4,610,466
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
(364,062
|
)
|
(426,927
|
)
|
Proceeds from Sale of Property and
Equipment
|
|
15,121
|
|
|
|
Proceeds from Disposition of Casino
|
|
490,018
|
|
|
|
Receipt (Payment) of Deposit
|
|
(3,318
|
)
|
(728
|
)
|
Payment of Costs Associated with Management
and Consulting Contracts
|
|
(439,168
|
)
|
|
|
Investment in Unconsolidated Subsidiary
|
|
(2,601,194
|
)
|
(1,000,326
|
)
|
Net Cash Used in Investing Activities
|
|
$
|
(2,902,603
|
)
|
$
|
(1,427,981
|
)
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net Payments on Short-Term Notes Payable
|
|
$
|
3,708
|
|
|
|
Principal Payments on Long-Term Borrowings
|
|
(1,723,112
|
)
|
(2,675,826
|
)
|
Proceeds from Issuance of Common Stock upon
Exercise of Warrants
|
|
30,000
|
|
12,000
|
|
Proceeds from Issuance of Common Stock and
Warrants
|
|
4,003,360
|
|
|
|
Redemption of Common Stock
|
|
(322,300
|
)
|
|
|
Payment of Financing Costs
|
|
|
|
(72,544
|
)
|
Payment of Financing Costs Written-Off
|
|
(564,767
|
)
|
|
|
Payments for Liabilities Owed to Related
Parties
|
|
|
|
(110,000
|
)
|
Net Cash Provided (Used) by Financing
Activities
|
|
$
|
1,426,889
|
|
$
|
(2,846,370
|
)
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
361,141
|
|
336,115
|
|
|
|
|
|
|
|
CASH AND
CASH EQUIVALENTS
|
|
|
|
|
|
Beginning of Period
|
|
1,531,260
|
|
1,195,145
|
|
End of Period
|
|
$
|
1,892,401
|
|
$
|
1,531,260
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
Interest Paid
|
|
$
|
825,492
|
|
$
|
1,006,812
|
|
Income Taxes Paid
|
|
$
|
41,632
|
|
$
|
22,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Capital assets acquired with acounts
payable
|
|
$
|
135,492
|
|
$
|
7,303
|
|
Capital assets acquired with acounts
payable - related party
|
|
$
|
25,000
|
|
|
|
Financing costs included in accounts
payable
|
|
$
|
13,606
|
|
$
|
11,352
|
|
Costs related to management contract
included in accounts payable
|
|
$
|
27,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
Table of Contents
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Changes in Stockholders Equity
For the
Years Ended December 31, 2007 and 2006
|
|
Treasury
Stock
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
|
Number
of
|
|
|
|
Additional
|
|
Retained
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2005
|
|
|
|
|
|
19,588,656
|
|
$
|
19,589
|
|
$
|
17,052,916
|
|
$
|
(10,860,046
|
)
|
$
|
6,212,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock Upon Exercise of Warrants
|
|
|
|
|
|
100,000
|
|
100
|
|
11,900
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
175,078
|
|
|
|
175,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
1,157,211
|
|
1,157,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2006
|
|
|
|
$
|
|
|
19,688,656
|
|
$
|
19,689
|
|
$
|
17,239,894
|
|
$
|
(9,702,835
|
)
|
$
|
7,556,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock and Warrants, Net
|
|
|
|
|
|
7,954,787
|
|
7,955
|
|
3,935,012
|
|
|
|
3,942,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of
Warrants and Issuance of Common Stock
|
|
|
|
|
|
150,000
|
|
150
|
|
29,850
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock for Services
|
|
|
|
|
|
24,510
|
|
25
|
|
12,475
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of
Common Stock
|
|
(357,000
|
)
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
278,833
|
|
|
|
278,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
(1,493,699
|
)
|
(1,493,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
(357,000
|
)
|
$
|
(322,300
|
)
|
27,817,953
|
|
$
|
27,819
|
|
$
|
21,496,064
|
|
$
|
(11,196,534
|
)
|
$
|
10,005,049
|
|
See Notes to Consolidated Financial Statements
F-6
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
NOTE
1 ORGANIZATION AND NATURE OF OPERATIONS
Southwest Casino
Corporation
Southwest
Casino and Hotel Corp. is the primary, wholly-owned operating subsidiary of
Southwest Casino Corporation and was the parent company until the July 2004
reorganization that resulted in the current structure. Southwest Casino
and Hotel Corp. was organized under the laws of the State of Minnesota in 1992
under the name Southwest Casino and Hotel Ventures, Inc. The
Company has operated in the gaming industry since formation.
On July 22, 2004,
Southwest Casino and Hotel Corp. merged with Lone Moose Acquisition
Corporation, a wholly-owned subsidiary of Lone Moose Adventures, Inc., a
Nevada corporation. Lone Moose Acquisition Corporation was formed solely
for the purpose of completing our reorganization. Southwest Casino and
Hotel Corp. was the surviving corporation in that merger and became a
wholly-owned subsidiary of Lone Moose Adventures, Inc., which changed its
name to Southwest Casino Corporation. The reorganization represented a
recapitalization of Southwest Casino Corporation with accounting treatment
similar to that used in a reverse acquisition, except that no goodwill or
intangible is recorded. A recapitalization is characterized by the merger
of a private operating company into a non-operating public shell corporation with
nominal net assets and typically results in the owners and managers of the
private company having effective operating control after the transaction.
Southwest Casino Corporation emerged as the surviving reporting entity after
the reorganization.
The Companys principal
business is the management, operation and development of gaming facilities in
emerging and established gaming jurisdictions. Southwest Casino
Corporation, through its wholly-owned subsidiaries, operates two casinos in
Cripple Creek, Colorado Gold Rush Hotel and Casino and Gold Diggers
Casino. Until July 28, 2007, the Company also operated Uncle Sams
Casino in Cripple Creek. Until August 17, 2007 the Company managed
two Native American gaming operations in Oklahoma for the Cheyenne and Arapaho
Tribes of Oklahoma, Lucky Star - Concho and Lucky Star Clinton. The
Company also owns a 50% membership interest in North Metro Harness Initiative,
LLC, (North Metro). North Metro is building a harness racetrack and
50-table card room in Columbus, Minnesota on the north side of the Minneapolis
St. Paul Metropolitan area. In September 2007, the Company entered
into a consulting agreement to work with Palace Resorts in developing and
opening a casino at the Moon Palace Casino, Golf and Spa Resort now under
construction in Punta Cana on the easternmost tip of the Dominican Republic.
Southwest Casino
Corporations operations include the following consolidated and unconsolidated
subsidiaries:
Southwest Casino and
Hotel Corp
.
Southwest Casino and
Hotel Corp. was formed in 1992 and provides management and consulting services
for casinos under contractual agreements and operated Uncle Sams Casino in
Cripple Creek, Colorado until July 2007, see Note 7.
Gold Rush I, LLC
Gold Rush I, LLC, was formed
during 1999 and operates the Gold Rush Hotel and Casino and Gold Diggers
Casino both in Cripple Creek, Colorado under a long-term capitalized lease
agreement.
Southwest Entertainment.
Inc
.
Southwest Entertainment, Inc.,
located in Minneapolis, Minnesota, was formed on November 4, 1998. The
company operates an outdoor amphitheatre for entertainment events in Cripple
Creek, Colorado.
F-7
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
North Metro Harness
Initiative, LLC (Unconsolidated)
North Metro Harness
Initiative, LLC (North Metro) (a development stage Minnesota limited liability
company) was formed on June 16, 2003 for the purpose of developing,
owning, and operating a harness racetrack and card room north of Minneapolis,
Minnesota, in Anoka County. North Metro was issued licenses to own and
operate the racetrack by the Minnesota Racing Commission on February 16,
2005. Southwest Casino Corporation owns a 50% interest in North Metro.
SW Missouri, LLC
SW Missouri, LLC was
formed on May 25, 2004. Its sole asset is a 30% membership interest
in Southwest Missouri Gaming, LLC (which is currently a shell company).
Southwest Missouri
Gaming, LLC (Unconsolidated)
SW Missouri, LLC owns a
30% membership interest in Southwest Missouri Gaming, LLC, which was formed March 29,
2004. This entity had no activities in 2006 or 2007.
Southwest Eagle, LLC
On February 22,
2006, the Company formed a new subsidiary, Southwest Charitable Enterprises,
LLC, a Minnesota limited liability company. Southwest is the sole member
of Southwest Charitable Enterprises, LLC, which was established to pursue
business opportunities in charitable gaming. In December 2006, the
subsidiarys name was changed to Southwest Eagle, LLC for purposes of the
Double Eagle acquisition that never came to fruition.
NOTE 2
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of
Consolidation
The accompanying
consolidated financial statements include the accounts of Southwest Casino
Corporation, its wholly-owned subsidiaries (referred to as the Company or Southwest),
and North Metro Harness Initiative, LLC, which is accounted for as an equity
investment, see Note 4. All material inter-company transactions and
balances have been eliminated in consolidation.
Basis of Accounting
The consolidated
financial statements of the Company are prepared using the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recognized when incurred. This basis of accounting conforms to generally
accepted accounting principles in the United States of America.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting
principles in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
F-8
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
Cash Equivalents
The Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less when purchased to be cash equivalents.
Revenue Recognition
Casino revenue is the net
win from gaming activities, which is the difference between gaming wins and
losses. Revenue from food, beverage and hotel operations is recorded upon
delivery of goods or services, and excludes promotional allowances.
Revenue from casino management and consulting contracts with outside parties is
recognized over the term of the agreements. Consideration given in
exchange for entering into long-term contracts is amortized over the life of
the agreement.
Receivables and Credit
Policies
Accounts receivable are
carried at face value less an estimated allowance for doubtful accounts. The
carrying amount of receivables is reduced by a valuation allowance that
reflects managements best estimate of the amounts that will be
collected. Management reviews all trade receivable balances that exceed
30 days from the invoice date and, based on an assessment of the current
creditworthiness, estimates the portion, if any, of the balance that will not
be collected.
Net Income Per Share
Basic and Diluted
Net income per share is
computed by dividing the net income for the period by the weighted average
number of common shares outstanding during the period presented. Basic
earnings per share exclude the dilutive effect of options and warrants, while
diluted earnings per share include such effects only during years when the
Company reports net income.
Inventories
Inventories consist
principally of food and beverage products and gift shop merchandise.
Inventories are carried at cost, determined under the first-in, first-out
(FIFO) method.
Concentrations of Credit
Risk
The Companys cash
balances maintained in bank depositories periodically exceed federally insured
limits.
Advertising Costs
The Company expenses
advertising costs as incurred. Advertising expense for the years ended December 31,
2007 and 2006 was approximately $287,925 and $343,000, respectively.
Employee Benefit Plan
The Company has
established a defined contribution profit sharing plan for its eligible
employees. To be eligible, an employee must be 21 years of age and have
completed one year of service. Contributions to the plan are made at
F-9
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
the discretion of management,
based on results of operations from year to year. No discretionary
contributions were made during 2007 or 2006.
The Company has adopted a
401(k) retirement plan. The plan provides for employee pre-tax
salary deferrals of up to 100% of a participants compensation (not to exceed
federal limits) and a matching contribution by the Company dollar for dollar
up to 3% and fifty cents per dollar up to 5% of the participants compensation.
Employees are eligible for the plan if they have completed one year of service,
as defined in the plan, and are at least 21 years old. A participant is
fully-vested after one year of service, as defined in the plan. The
Companys matching contribution made and expensed for the years 2007 and 2006
was $134,789 and $109,383, respectively.
Property and Equipment
Property and equipment
are carried on the books at cost. Depreciation on property and equipment
is calculated using the straight-line method over their estimated useful lives,
which range from 3 to 10 years. Upon sale or retirement, the cost and
related accumulated depreciation are eliminated from the respective accounts,
and the resulting gain or loss is included in the income statement.
Repair and maintenance
charges, which do not increase the useful lives of the assets, are charged to
expense as incurred.
Depreciation expense was
$797,140 and $934,840 for the years ended December 31, 2007 and 2006,
respectively.
Leaseholds attributable
to the lease in Note 12 have been capitalized in accordance with generally
accepted accounting principles and are being amortized over the length of the
lease, 20 years, using the straight-line method.
Amortization expense for
these leaseholds was $725,340 for each of the years ended December 31,
2007 and 2006. Total accumulated amortization of these leaseholds
was $6,316,503 and $5,591,163 at December 31, 2007 and 2006, respectively.
Long-lived assets to be
held and used are tested for recoverability whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
When required, impairment losses on assets to be held and used are recognized
based on the fair value of the asset. Certain long-lived assets to be disposed
of by sale are reported at the lower of carrying amount or fair value less cost
to sell.
Income taxes
The Company accounts for
income taxes under the provisions of Statement of Financial Accounting
Standards No. 109,
Accounting for
Income Taxes (SFAS No. 109).
Under this method, the
Company determines deferred tax assets and liabilities based upon the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. The tax consequences of
events recognized in the current years consolidated financial statements are
included in determining income taxes currently payable. However, because tax
laws and financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, revenue, expenses, gains and
losses, differences arise between the amount of taxable income and pretax
financial income for a year and between the tax bases of assets or liabilities
and their reported amounts in the consolidated financial statements.
Because it is assumed
that the reported amounts of assets and liabilities will be recovered and
settled, respectively, a difference between the tax basis of an asset or a
liability and its reported amount in the balance sheet will result in a
F-10
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
taxable or a deductible
amount in some future years when the related liabilities are settled or the
reported amounts of the assets are recovered, hence giving rise to deferred tax
assets and liabilities. The Company must then assess the likelihood that deferred
tax assets will be recovered from future taxable income and, to the extent
management believes that recovery is not likely, they must establish a
valuation allowance. The Company recorded a 100 percent valuation
allowance against all deferred income tax assets as of December 31, 2007
and 2006. See Note 15.
Stock based compensation
Effective the beginning
of fiscal year 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS 123(R)),
Share-Based Payment
, which is a
revision of SFAS 123,
Accounting for
Stock-Based Compensation
. The Company implemented SFAS 123(R) using
the modified prospective method, which does not result in the restatement of
previously issued financial statements. In all prior periods, the Company
accounted for stock-based compensation awards to employees using the intrinsic
value method prescribed by APB Opinion No. 25 and, as such, recognized no
compensation cost for employee stock options, but rather disclosed the related
pro forma effect on net loss, see Note 13.
Operating segments
The Company has
segregated its activities into three operating segments based on operating and
management characteristics related to its sources of revenue or basis for
accumulating assets or expenses. The segments are defined as casino
operations, casino management for unrelated parties, and project development
activities. Separate operations are aggregated based on the above general
segment descriptions.
Legal defense costs
The Company does not
accrue for estimated future legal and related defense costs, if any, to be
incurred in the event of any pending or threatened litigation or other disputed
matters but rather, records such as period costs when the services are
rendered.
Other comprehensive
income
The Company does not have
amounts to be disclosed as other comprehensive income.
Reclassifications
Certain minor
reclassifications to previously reported amounts have been made to conform to
the current year presentation.
New accounting standards
Effective January 1,
2006, the company adopted SFAS No. 123(R) using the modified
prospective method. See Note 13 for information regarding stock-based
compensation.
The Company adopted
Statement of Financial Accounting Standards Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007, see Note 15.
F-11
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (FAS 157) which is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years.
This statement defines fair value, establishes a framework for measuring fair
value and expands the related disclosure requirements. The Company is
currently evaluating the potential impact of this statement. On February 12, 2008 a FASB Staff
Bulletin FSP FAS 157 -2 was issued which defers the effective date of FAS 157
to fiscal years beginning after November 15, 2008, and applies to
nonfinancial assets and nonfinancial liabilities.
In February 2007,
the FASB released SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities
Including
an amendment of FASB Statement No. 115
. This Statement permits entities to choose to
measure many financial instruments and certain other items at fair value. This
Statement is effective as of the beginning of an entitys first fiscal year
that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No. 157,
Fair Value Measurements. The Company is evaluating the impact of this
statement.
Management Financial
Plans
The Company has completed
two closings on an equity financing, see Note 10. The net proceeds from the
sale of securities were approximately $4 million. In connection with the financing agreement
entered into by North Metro, see Note 4, the Company was required to make additional
membership contributions to North Metro of approximately $2.35 million to North
Metro from January 1, 2007 to the time the loan closed on April 20,
2007. Due to the loss of management fees from the termination of our
management contract with the Cheyenne and Arapaho Tribes of Oklahoma (see Note
5) the Company secured additional debt financing in March 2008 (see Note
26) to fund our current operations including project development costs. The Company believes the amount of funds
received from the debt financing will be adequate to fund operations during the
2008 fiscal year; however the Company will have to seek additional debt or
equity financing for future operations.
NOTE 3
PROMOTIONAL ALLOWANCES
Revenue does not include
the retail amount of rooms, food, and beverage provided gratuitously to
customers, which was $1,197,558 and $1,155,521in 2007 and 2006, respectively.
NOTE 4
UNCONSOLIDATED
SUBSIDIARY
North
Metro Harness Initiative, LLC (North Metro)
Organization
:
North Metro (a development
stage Minnesota Limited Liability Company) was formed on June 16, 2003 for
the purpose of developing, owning, and operating a horse race track and card
room north of Minneapolis, Minnesota, in Anoka County. North Metro has
purchased land and obtained zoning, permitting and regulatory approvals for the
proposed operations. On June 8, 2004, Southwest Casino and Hotel
Corp. (Southwest) sold a 50% interest in the Company to MTR Harness Inc. (MTR),
a wholly owned subsidiary of MTR Gaming, Inc. for $10,000, and a
commitment to make additional contributions as discussed below.
Under the North Metro
Member Control Agreement dated June 8, 2004, MTR was required to
contribute $7,500,000, upon satisfaction of certain conditions and Southwest
was required to contribute $2,500,000. The
F-12
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
amounts contributed in
excess of the amounts agreed to under the Member Control Agreement were agreed
upon by Southwest and MTR as managing members of the Company. These
amounts were contributed on an equal basis.
As specified in the
Companys Member Control Agreement, membership interests include financial
rights, governance rights and voting rights. Voting rights are assigned
to members based on their proportionate voting interest. Financial rights
include allocation of net profits, losses and distributions. Governance
rights include all of a members rights other than financial rights and the
right to assign financial rights. A member of the Company may only assign
governance and voting rights to another party with the consent of the remaining
members, which consent may be withheld in any members sole and absolute
discretion. If a member assigns membership rights to another party and
the other member or members do not consent to the assignee becoming a
substitute member, the assignee will only be entitled to receive those
distributions and allocations that would have been made to the assigning member
and the assignee will not have any voting or governance rights. As of December 31,
2007, Southwest and MTR each hold 50% of the voting rights. Financial and governance rights are
determined in accordance with the Member Control Agreement dated June 8,
2004.
Net income, losses and
distributions are allocated on a 50/50 basis to members in accordance with the
member control agreement.
North Metros Member
Control Agreement requires North Metro to make tax distributions to members on
a quarterly and annual basis equal to 40% of the estimated taxable income of
the company for the applicable time period, with annual tax distributions
reduced by the amount of any quarterly tax distributions made during the tax
year. The tax distributions were reduced to 35% under the Credit
Agreement with Black Diamond, described below.
Tax distributions to the members shall be made in proportion to each
members respective share of the taxable income of North Metro.
North Metro was formally
organized as a limited liability company on June 16, 2003. Prior to
that date, agreements were consummated and amounts related to the business
purpose of the Company were directly incurred and paid by Southwest or entities
related to Southwest.
North Metro will do
business in Minnesota under the name Running Aces Harness Park.
Accounting
for North Metro
:
The Company evaluates
whether North Metro should be treated as a variable interest entity (VIE)
subject to consolidation during the applicable reporting periods under
Financial Accounting Standards Board Interpretation 46(R) -
Consolidation of Variable Interest Entities (as
amended
).
Due to contributions of
capital made by MTR as of October 20, 2005, in accordance with the North
Metro Member Control Agreement dated June 8, 2004, the Company no longer
provided financial support in excess of its 50 percent decision making power.
As of December 31, 2007, the Company has provided approximately 42 percent
of the financial support, but still retains its 50 percent decision making
power. Therefore, since October 20, 2005, the Company has accounted
for its investment in North Metro on the equity method. The Companys
investment in North Metro as of December 31, 2007 and 2006 was $7,218,720
and $5,054,020, respectively, which is recorded on the Companys consolidated
balance sheets.
As of December 31,
2007, the Company has contributed $7,320,974 in consideration of its membership
interests in North Metro. In addition, the Company has advanced
$1,656,051 for costs related to North Metro that the Company paid, and which
exceeded the Companys agreed pre-license capital contribution of $1,000,000,
before the Minnesota Racing Commission granted racing licenses to North
Metro. These advances, together with interest, will
F-13
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
only be paid out of first
available cash from operations (and then after certain distributions to the
members for income tax purposes). The pre-licensing advances to North
Metro are characterized as a membership preferred contribution made by the
Company under the North Metro Harness Initiative, LLC Member Control Agreement
dated June 8, 2004. The Company treats these payments as an
additional investment in North Metro. The Company has combined the
advances (accounted for as a membership preferred contribution) and its capital
contributions into an investment in an unconsolidated subsidiary on its
financial statements and has accounted for this investment and all North Metro
activity since October 20, 2005 under the equity method of accounting.
For the years ended December 31,
2007 and 2006, the Company has recorded a loss from this unconsolidated
subsidiary, net of tax benefit of $436,494 and $182,873.
The following represents summary financial information
for North Metro as of December 31, 2007 and 2006:
|
|
As of and For
|
|
As of and For
|
|
|
|
The Year
|
|
The Year
|
|
|
|
Ended
|
|
Ended
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
North Metro:
|
|
|
|
|
|
Total current assets
|
|
$
|
2,185,535
|
|
$
|
644,250
|
|
Total assets
|
|
51,556,814
|
|
15,587,187
|
|
Total current liabilities
|
|
4,903,259
|
|
1,084,062
|
|
Total liabilities
|
|
33,051,334
|
|
1,411,109
|
|
|
|
|
|
|
|
Results of operations:
|
|
|
|
|
|
Revenues
|
|
$
|
107,715
|
|
$
|
|
|
Lobbying expenses
|
|
133,992
|
|
126,000
|
|
License fees Minnesota Racing Commission
|
|
263,810
|
|
248,907
|
|
Other expenses
|
|
568,602
|
|
135,722
|
|
Total expenses
|
|
966,404
|
|
510,629
|
|
Other Income (Expense)
|
|
|
|
|
|
Interest Income
|
|
20,704
|
|
21,280
|
|
Interest Expense
|
|
(35,004
|
)
|
|
|
Net (loss)
|
|
$
|
(872,989
|
)
|
$
|
(489,349
|
)
|
|
|
|
|
|
|
Southwest Casino Corporation:
|
|
|
|
|
|
50% share of net (loss)
|
|
(436,494
|
)
|
(244,675
|
)
|
Net tax benefit
|
|
|
|
61,802
|
|
(Loss) of unconsolidated subsidiary net of tax
benefit
|
|
$
|
(436,494
|
)
|
$
|
(182,873
|
)
|
In
2006, North Metro formed a wholly-owned subsidiary that acquired a nearby motel
in December 2006 that North Metro continues to operate in 2007 and will be
used to house personnel involved in the care of horses at the track during the
racing season. The motel has 15 rooms available to rent.
Southwest did not record
a tax benefit related to North Metros losses during the year ended December 31,
2007, while Southwest did record a tax benefit during the year ended December 31,
2006, see Note 15.
At December 31,
2007, North Metros assets consisted principally of cash, land, construction in
progress and related deposits and financing costs. Liabilities consisted
primarily of construction payables and borrowings under its financing agreement
discussed below.
F-14
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
North Metro Financing
Agreement
On April 20, 2007,
North Metro entered into a Credit Agreement (the Credit Agreement) with Black
Diamond Commercial Finance, L.L.C. (Black Diamond) as agent and lender. Under
the terms of the Credit Agreement, North Metro will borrow $41.7 million to
construct, equip and open its harness racetrack and card room facility in
Columbus, Minnesota on the north side of the Minneapolis St. Paul
metropolitan area. As part of the loan
agreement the members of North Metro agreed to complete aggregate membership
contributions of $20.8 million prior to closing the loan. The total cost of the
project is expected to approximate $62 million. As of December 31,
2007, Southwest contributed $9.0 million of the total amount of $21.3 million
contributed by the members. Certain amounts related to non-construction
costs continue to be funded by the members (the Company contributed $250,000
subsequent to the loan closing thru the end of fiscal year 2007). These amounts are not considered to be material
to the total cost of the project. Under the Credit Agreement, the initial
advance of loan proceeds was followed by additional advances based on progress
in building and opening the racetrack and card room facility. During
construction, North Metro is making monthly payments of interest only based on
a floating index rate plus 4 percent or on a 1-month, 2-month or 3-month LIBOR
rate plus 6 percent, at North Metros option. After the project opens, interest
rates will reduce to the applicable index rate plus 2.5 percent or the
applicable LIBOR rate plus 4.5 percent, again at North Metros option. North
Metro must also pay a fee equal to 4.5% per annum on any unused portion of the
$41.7 million credit facility. Principal payments of $104,250 will be due on
the last day of each fiscal quarter beginning the first full quarter after the
project opening, as defined in the agreement. North Metro will also be required
to prepay the loan in an amount equal to 50 percent of the projects excess
cash flow for each fiscal year beginning with the fiscal year ended December 31,
2008, as defined in the agreement. Final payment equal to all outstanding
principal and accrued interest is due April 20, 2014.
North
Metro may prepay the loan, in whole or in part, at any time, subject to the
payment of certain fees and costs. The loan is secured by substantially all of
the assets of North Metro. The Credit Agreement does not provide for recourse
against the members of North Metro.
The Credit Agreement
contains standard affirmative and negative covenants regarding North Metro and
its wholly-owned subsidiary North Metro Hotel, LLC that restrict, among other
things, North Metros ability to dispose of assets, transfer or pledge equity
interests, incur indebtedness, and make investments or distributions. Financial
covenants applicable to North Metro include, among other things, limits on
capital expenditures after opening, minimum EBITDA requirements, satisfaction
of leverage ratio limits, and delivery of financial statements.
In addition to customary
and standard events of default included in the Credit Agreement, failure to
substantially complete (as defined in the Credit Agreement) construction of the
North Metro project by June 30, 2008, and failure to operate the card room
that is part of the North Metro project at any time after July 1, 2008,
would constitute a default under the Credit Agreement.
Additional Membership
Contribution, Pledge, Subordination and Sponsor Support Agreements of Southwest
While the Credit
Agreement does not provide for recourse against Southwest in the case of a
default by North Metro, Southwest has pledged its membership interest in North
Metro and North Metro pledged its membership interest in North Metro Hotel, LLC
as security for repayment of the loan under the terms of a Pledge Agreement
with Black Diamond (the Pledge Agreement).
Southwest also entered
into a Subordination Agreement with Black Diamond (the Subordination Agreement)
under which Southwest has agreed that repayment of a $1.65 million membership
preferred capital contribution to North Metro, which North Metro was to repay
to Southwest out of the first available revenue from operations, will be
subordinated to the payments due under the loan agreements.
F-15
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
In addition, Southwest
entered into a Sponsor Support Agreement (the Support Agreement) under which
Southwest may be required under certain circumstances to contribute additional
capital to North Metro if financings and equity investments are insufficient to
complete construction and open the facility.
The Company believes the financings and equity investments secured by
North Metro will be sufficient to construct and open the facility.
NOTE 5
TERMINATION OF
MANAGEMENT CONTRACT WITH THE CHEYENNE AND ARAPAHO TRIBES AND RELATED LITIGATION
Management and consulting
revenue of $3,566,109 and $5,865,680 included on the Consolidated Statement of
Operations for the year ended December 31, 2007 and 2006 relate to
revenues earned from the management agreement with the Cheyenne and Arapaho
Tribes of Oklahoma. As described below, the Cheyenne and Arapaho Tribes
contract with the Company has terminated and the Company has not and will not
receive any revenues from managing those casinos after August 17, 2007. In
addition, as described below, the remaining contract costs, recorded as an
intangible asset, on the Companys Consolidated Balance Sheet have been written
off.
On May 18, 2007, the
National Indian Gaming Commission (NIGC) approved Amendment No. 11 to
the Third Amended and Restated Gaming Management Agreement dated June 16,
1995 between the Company and the Cheyenne and Arapaho Tribes of Oklahoma (the Tribes).
Southwest continued to manage the Tribes Lucky Star Concho and Lucky Star
Clinton casinos under the terms of Amendment No. 11 until August 17,
2007.
The May 18, 2007
NIGC approval was based on a May 18, 2007 decision of the Cheyenne and
Arapaho Trial Court finding Amendment No. 11 valid under the Tribes
constitution. On May 21, 2007, the Governor of the Cheyenne and
Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Court
seeking to overturn the decision of the tribal Trial Court. On August 17,
2007, The Supreme Court reversed the Trial Court order and declared the
contract extension invalid. Also on August 17, 2007, the NIGC issued a
decision and order reversing its May 18, 2007 approval of the two-year
contract extension based on the tribal Supreme Court decision. Based on
the decision of the NIGC, tribal representatives took control of the casinos on
Sunday, August 19, 2007. On August 21, 2007, Southwest appealed
the decision of the NIGC to reverse its approval of the two-year contract
extension. On August 24, 2007, the NIGC rejected that appeal and
affirmed its decision. Southwest has not managed the casinos since August 17,
2007.
In connection with
obtaining the two-year extension on May 18, 2007, the Company incurred
approximately $438,000 of direct costs. The Company had accounted for
these costs as an intangible asset to be expensed over the two-year term of the
extension of the management contract beginning May 19, 2007. As a result
of the termination effective August 17, 2007 the remaining unamortized
costs of approximately $400,000 were expensed consistent with Statement of
Financial Accounting Standards No. 144
Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS #144)
and included as a separate line-item as an impairment loss on the Consolidated
Statement of Operations for the year ended December 31, 2007.
The Company accounted for
this contract and included the revenues and costs in its operating segment Casino
Management in accordance with Statement of Financial Accounting Standards No. 131
Disclosures about Segments of an
Enterprise and Related Information
(SFAS #131), see Note
18. The Company has also disclosed information about this major customer
in accordance with SFAS #131 paragraph #39. In connection with the
termination of this agreement, the Company applied Statement of Financial
Accounting Standards No. 142
Goodwill
and Other Intangible Assets
and SFAS #144 in recognizing the
impairment loss. The Company also considered SFAS #144 paragraph #41
relating to the reporting of discontinued operations and has determined that
this does not meet those requirements and has reported the transaction in
continuing operations.
The Company is involved
in litigation related to the management contract and its termination, see Note
24.
F-16
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
NOTE 6
CONSULTING AGREEMENT WITH PALACE RESORTS
In September 2007,
the Company entered into a consulting agreement to work with Palace Resorts in
developing and opening a casino at the Moon Palace Casino, Golf and Spa Resort,
now under construction in Punta Cana on the easternmost tip of the Dominican
Republic. Under the consulting
agreement, Southwest immediately began assisting Palace Resorts in all phases
of design, game selection, training and equipping the casino that will be part
of the 1,700-room resort scheduled to open in the last quarter of 2008. Southwest
receives $50,000 per month for 10 months, which began in October 2007.
Palace Resorts provides world-class resort vacations at all-inclusive
properties throughout Cancun, the Riviera Maya, Nuevo Vallarta, and Cozumel
with the new resort now under construction in Punta Cana, Dominican
Republic. The Company recognized
$150,000 of consulting revenue for the year ended December 31, 2007.
NOTE 7
SALE OF UNCLE SAMS CASINO
On June 25,
2007, the Company entered into an agreement with the landlord to purchase the
leased real property on which it operated Uncle Sams Casino in Cripple Creek,
Colorado. The purchase agreement provided that the Company would not be
obligated to purchase the real property unless the Company assigned its rights
under the purchase agreement to a third party. On June 26, 2007, the
Company entered into an agreement to assign its rights under the purchase
agreement and the operating lease. On July 29, 2007 the Company
closed Uncle Sams Casino and on July 31, 2007 the Company assigned its
rights under the purchase agreement and lease and received an assignment fee of
approximately $487,000. The Company recognized a gain of $477,407 on this
transaction that is recorded in the Consolidated Statement of Operations during
the year ended December 31, 2007 as a separate line item within Other
Income (Expense). The Company transferred the majority of the equipment
and slot machines to the Gold Rush and Gold Diggers casinos in the amount of
the net book value of approximately $58,000. Additionally, the Uncle Sams
employees were transferred to the Gold Rush and Gold Diggers casinos and the
customers were offered incentives to migrate their play at Uncle Sams to the
Gold Rush and Gold Diggers casinos.
The Company has recorded
the transaction involving Uncle Sams casino in continuing operations as the
Company reviewed SFAS #144 and determined that it did not meet the requirements
for accounting as discontinued operations. The transaction was
completed and recorded during the year ended December 31, 2007.
NOTE 8
SHORT-TERM NOTES PAYABLE
On April 16, 2007,
the Company entered into the Third Amendment to the Revolving Credit and Term
Loan Agreement with Crown Bank. The agreement has been amended to extend
the maturity date of the $450,000 revolving line of credit to April 30,
2008. The amendment did not alter the terms of the $2.5 million term loan
and the Company made the final payment on the term loan on April 30,
2007. Additionally, under the amendment, three principal officers of the
Company each agreed to increase their personal guarantees of the line of credit
from $100,000 to $150,000 plus expenses. As of December 31, 2007,
$450,000 is outstanding under the Revolving Credit facility.
The interest rate is
Prime +1%, and not less than 7.5%. As of December 31, 2007 the
interest rate is 8.25%. At December 31, 2007, the full amount of the
line was drawn and outstanding.
Subsequent to December 31, 2007, the line of credit was
repaid. See Note 26.
NOTE 9
EARNINGS PER SHARE
For all periods, basic
earnings (loss) per share is calculated by dividing earnings (loss) by the
weighted-average number of common shares outstanding. Diluted earnings
per share for the year ended December 31, 2006, reflect the effect of all
potentially dilutive common shares outstanding by dividing net earnings by the
weighted-average of
F-17
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
all common and
potentially dilutive shares outstanding. The Company had a net loss for
the year ended December 31, 2007; therefore a calculation of loss per
share on a fully diluted basis would be anti-dilutive, thus stock options and
warrants to purchase 8,446,102 common shares were not included in the
calculation of loss per share for 2007, but were outstanding at December 31,
2007, see Notes 13 and 14. Additional
options and warrants were granted subsequent to December 31, 2007. See Note 26.
The following is a
reconciliation of basic and diluted earnings per share:
Year
ended December 31, 2006:
|
|
Net Earnings
(Numerator)
|
|
Weighted Average
Equity
(Denominator)
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
1,157,211
|
|
19,675,779
|
|
$
|
.06
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options and Warrants
|
|
|
|
975,552
|
|
|
|
|
|
$
|
1,157,211
|
|
20,651,331
|
|
$
|
.06
|
|
Options and warrants to
purchase 1,395,000 shares of common stock at an exercise price of $1.00 per
share, options to purchase 675,000 shares at $0.65 and options to purchase
50,000 shares of common stock at an exercise price of $0.75 per share were not
included in the computation of diluted earnings per share for the year ended December 31,
2006 because the exercise price was greater than the average market price of
common shares during the period. All of these options were outstanding as
of December 31, 2006.
NOTE 10
STOCKHOLDERS EQUITY
The Company has
authorized the issuance of up to 75,000,000 shares of common stock with a par
value of $.001 and up to 30,000,000 shares of undesignated preferred stock with
a par value of $0.001 per share with preferences and designations determined by
the Board of Directors. As of December 31, 2007, there were no
shares of preferred stock designated or outstanding. Each share of common
stock is entitled to one vote on all matters submitted to shareholders.
Under the terms of a gaming license held by a subsidiary of the Company, the
Company has amended its Articles of Incorporation to provide that all shares of
common stock are subject to redemption, at the discretion of the Board of
Directors, at fair market value if an owner is determined to be a disqualified
holder. A disqualified holder is a stockholder whose ownership of Company
stock or refusal to provide information to the Company or any applicable gaming
authorities may result in the disapproval, modification or non-renewal of any
contract, license or franchise related to the Companys gaming operations.
During the years ended December 31,
2007 and 2006, the company issued the following shares of common stock:
Year
Ended December 31, 2007
On January 24, 2007
and February 26, 2007, Southwest Casino Corporation (Southwest) entered
into a Securities Purchase Agreement (SPA) with certain institutional and
other accredited investors, as defined in Rule 501 of Regulation D
promulgated under the Securities Act of 1933, as amended, under which Southwest
sold in a private placement an aggregate of 7.44 million shares of its common
stock with accompanying warrants to purchase an
F-18
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
aggregate of 2.98 million
shares of its common stock, at a purchase price of $0.55 per share of common
stock. The warrants are exercisable for a period of five years, beginning six
months after the date of issuance, at an exercise price of $0.61 per share. The
number of shares issuable upon exercise of the warrants and the exercise price
of the warrants are adjustable in the event of stock splits, combinations and
reclassifications, but not in the event of the issuance by Southwest of
additional securities, unless such issuance is pursuant to a rights offering or
pro rata distribution to all security holders except the investors.
The securities that were
issued in this private placement were not registered under the Securities Act
of 1933 but did include registration rights in accordance with the terms of a
Registration Rights Agreement dated January 24, 2007 and February 26,
2007 between Southwest and the investors.
Under this agreement, Southwest agreed to register the resale of the
shares sold in the private placement, including shares issuable upon exercise
of the warrants on a registration statement that became effective on May 11,
2007. Under the Securities Purchase Agreement, Southwest and the investor
parties have made other covenants and representations and warranties regarding
matters that are customarily included in financings of this nature. If
certain of its obligations are not met, Southwest has agreed to make pro-rata
cash payments as liquidated damages to each investor.
The private placement
resulted in net proceeds to Southwest of approximately $3.94 million, after the
deduction of approximately, $150,000 of direct offering expenses. The placement
agent agreed to accept the cash portion of its placement agent fee in common
stock and warrants on the same terms as the investors, which resulted in the
placement agent receiving approximately 517,000 shares of common stock and
warrants to purchase an aggregate of approximately 207,000 additional shares of
common stock. In addition, the placement agent received a warrant to purchase
approximately 277,000 shares of common stock, which is exercisable for a period
of five years, beginning six months after the date of issuance, at an exercise
price of $1.00 per share.
The following officers
and directors of Southwest participated in the private placement on the same
terms as the other investors: James B. Druck, Chief Executive Officer and
Director; Thomas E. Fox, President and Chief Operating Officer and entities in
which Mr. Fox holds an ownership interest; Jeffrey S. Halpern, Vice
President of Government Affairs; Gus A. Chafoulias, Director; and David H.
Abramson, Director. Other than with respect to the SPA, there are no material
relationships between Southwest and any of the other investors in the private
placement.
On December 27,
2007, the Company issued 150,000 shares upon exercise of warrants to purchase
150,000 shares of common stock and the receipt of $30,000 in cash.
In October 2007, the
Company issued 24,510 shares of common stock in connection with a financing
transaction that did not occur. The
shares were valued at $12,500 (also the Company paid and expensed an additional
$12,500), see Note 21.
In January 2007, the
Company redeemed 357,000 shares, see Note 23.
Year
Ended December 31, 2006
On February 16,
2006, the Company issued 100,000 shares upon exercise of warrants to purchase
100,000 shares of common stock and the receipt of $12,000 in cash.
NOTE 11
OPERATING LEASES
On May 1, 1998, the
Company entered into a five-year agreement to lease property located in Cripple
Creek, Colorado. The lease started the first day of the month that Uncle
Sams began operations, April 9, 1999, and terminated on March 31,
2004. The lease required payments of $12,000 per month. During February 2004,
the
F-19
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
Company extended the
lease for an additional five years. The new lease payments are $14,000 per
month, expiring March 2009. The
lease agreement includes provisions whereby the Company had the option to
purchase the property for $2,000,000 plus 50% of the increase in the fair
market value of the building as of the expiration of the initial
term. In July 2007, the Company
assigned its rights under the purchase agreement and lease agreement with the
lessor to a third-party, see Note 7.
The
Company also leases office space for corporate offices. The lease expires
December 31, 2009. Rent expense was
approximately $215,300 and $284,400 for the years ended December 31, 2007
and 2006, respectively. Future operating
lease payments (base rent) required as of December 31, 2007 are as
follows:
2008
|
|
$
|
110,000
|
|
2009
|
|
110,000
|
|
Total
|
|
$
|
220,000
|
|
NOTE
12 LONG-TERM OBLIGATIONS
Capital Lease
On April 9,
1999, the Company entered into a 20-year capital lease for the land and
buildings relating to The Gold Rush Hotel and Casino and Gold Diggers
Casino. The amount capitalized is based upon:
Present value of $53,437 monthly payments for 20
years
|
|
$
|
5,799,170
|
|
Principal due on assumed obligations of outstanding
debts
|
|
8,707,661
|
|
|
|
$
|
14,506,831
|
|
Under
this capital lease, the Company is required to make additional rent payments if
the net income from the Gold Rush and Gold Diggers casinos exceeds certain
thresholds stated in the lease. Under the terms of this lease the Company
is permitted to allocate a portion of its general overhead expenses to these
operations when calculating net income for purposes of determining additional
rent due. To date, the Company has not been required to make additional rent
payments.
Future minimum lease
payments required under the capital leases as of December 31, 2007, are as
follows:
2008
|
|
$
|
1,524,273
|
|
2009
|
|
1,265,651
|
|
2010
|
|
1,111,783
|
|
2011
|
|
1,077,766
|
|
2012
|
|
923,396
|
|
Thereafter
|
|
5,031,146
|
|
Total minimum lease payments
|
|
10,934,015
|
|
Less amount representing interest
|
|
(3,681,462
|
)
|
Present value of minimum lease payments
|
|
7,252,553
|
|
Less current portion
|
|
890,859
|
|
Long-term portion
|
|
$
|
6,361,694
|
|
Crown
Bank Term Loan and IGT Note
On October 20,
2005, the Company entered into a term loan to borrow $2.5 million. The
loan was secured by the majority of the Companys assets. The interest
rate was Prime +1%, not less than 7.5%, and the loan was due April 30,
2007. The loan required twelve equal monthly principal payments of
$208,333 beginning April 1, 2006.
F-20
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
The
loan was guaranteed by twelve shareholders of the Company, including three
principal officers.
In October 2006, the
Company entered into an amendment of its term loan with Crown Bank. The
agreement was amended to allow the Company to repay the remaining principal in
seven equal payments beginning November 1, 2006 through April 30,
2007 as opposed to the original agreement under which the Company would have
been required to repay the remaining principal in five equal principal payments
through March 1, 2007. The
final payment was made in accordance with the amendment in April 2007. As of December 31, 2007 and 2006 the principal
balance outstanding was $0 and $744,049.
On December 23,
2005, the Company negotiated a loan of $460,324 to pay off outstanding payables
in connection with the installation of a player tracking system at our three
casinos in Cripple Creek, Colorado. The loan is for a term of 48 months
with interest equal to the prime rate (7.25% at December 31, 2007). As of December 31, 2007 and 2006 the
principal balance outstanding was $239,752 and $354,833.
Future minimum principal
payments required as of December 31, 2007 are:
2008
|
|
$
|
115,081
|
|
2009
|
|
115,081
|
|
2010
|
|
9,590
|
|
|
|
|
|
Total:
|
|
$
|
239,752
|
|
NOTE
13 STOCK OPTIONS
Stock option plans:
On July 15, 2004,
Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino and
Hotel Corp. 2004 Stock Incentive Plan that had been adopted by the companys
Board of Directors effective June 1, 2004. Under the terms of the
reorganization completed July 22, 2004, Southwest Casino Corporation
assumed the rights and obligations of Southwest Casino and Hotel Corp. under
this plan. The plan permits Southwest Casino Corporation to issue
incentive awards to all employees of Southwest Casino Corporation or any of its
subsidiaries and any non-employee directors, consultants or independent
contractors of the Company or any of its subsidiaries. Incentive awards under
the plan include incentive options under Section 422 of the Internal
Revenue Code of 1986, non-statutory stock options that do not qualify for incentive
option treatment, stock appreciation rights, restricted stock awards,
performance units and stock bonuses. The plan was amended with
shareholder approval in June 2007, increasing the number of shares of
Southwest Casino Corporation common stock reserved for issuance under the plan
from 1,500,000 to 3,000,000. As of December 31, 2007, 925,000
options were issued and are outstanding.
In addition to the
assumption of the 2004 Stock Incentive Plan, Southwest Casino Corporation
assumed outstanding non-plan options to acquire shares of Southwest Casino and
Hotel Corp. common stock as part of its reorganization. The Company
assumed obligations in the form of stock options to issue 1,575,000 shares of
its common stock at a weighted average exercise price of $.62 per share.
F-21
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
Valuation and Expense
Information under SFAS 123(R)
SFAS 123(R) requires
companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Companys consolidated statement of operations.
SFAS 123(R) supersedes the Companys previous accounting under the
provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation
(SFAS 123). As permitted by
SFAS 123, the Company measured compensation cost for options granted
before January 1, 2006, in accordance with Accounting Principles Board
Opinion (APB) No. 25,
Accounting
for Stock Issued to Employees
and related interpretations.
Accordingly, before January 1, 2006 no accounting recognition was given to
stock options granted at fair market value until they were exercised. Upon
exercise, net proceeds, including tax benefits realized, were credited to
equity.
The Company adopted
SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of January 1, 2006,
the first day of the Companys fiscal year 2006.
Options
are granted to employees and directors at prices equal to the market value of
the stock on the dates the options are granted. The options granted have terms
of 5 to 10 years from the grant date and granted options typically vest
quarterly over a one to three year period. The fair value of each option
is amortized into compensation expense over the period the option vests.
We have estimated fair value of all stock options as of the date of grant
applying the Black-Scholes pricing valuation model. The application of
this valuation model involves assumptions that are judgmental and sensitive in
the determination of compensation expense. The key assumptions used in
determining the fair value of options during the year ended December 31,
2006 were:
|
|
Year Ended
December 31, 2006
|
|
Expected price volatility
|
|
105% - 112
|
%
|
Risk-free interest rate
|
|
4.42% - 5.05
|
%
|
Weighted average expected life in years
|
|
10 years
|
|
Dividend yield
|
|
0
|
%
|
Pre-vesting forfeiture rate
|
|
0
|
%
|
Weighted-average Fair value
|
|
$
|
0.61
|
|
|
|
|
|
|
No options were granted
during the year ended December 31, 2007.
Historical
information was the primary basis for the selection of the expected volatility,
expected dividend yield, and the expected lives of the options. The
risk-free interest rate was selected based upon yields of U.S. Treasury issues
with a term equal to the expected life of the option being valued. SFAS
123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Pre-vesting forfeitures were estimated to be zero for the year
ended December 31, 2006 based primarily on historical experience. If
pre-vesting forfeitures occur in the future, the Company will record the
benefit related to those forfeitures as the forfeitures occur.
F-22
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
Status of options:
|
|
Options
Outstanding
|
|
Weighted
Average Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Balance at December 31, 2005
|
|
1,775,000
|
|
$
|
0.64
|
|
|
|
|
|
Granted (1)
|
|
725,000
|
|
$
|
0.66
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
Granted
|
|
|
|
$
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
5.1 years
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
2,310,417
|
|
$
|
0.65
|
|
4.8 years
|
|
$
|
|
|
(1) - See Note 19
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value, based on Southwest Casino Corporation closing stock price of
$0.364 on December 31, 2007, that the option holders would have received had
all option holders exercised their options as of that date. As of December 31, 2007, the Companys
unrecognized share-based compensation related to stock options was
approximately $131,000. This cost is
expected to be expensed over a weighted average period of less than one
year. The Company recognized
compensation expense during the years ended December 31, 2007 and 2006 of
$173,416 and $166,703, respectively.
Subsequent to December 31,
2007, additional options were granted under the 2004 Stock Incentive Plan. See Note 26.
On November 10,
2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 (FSP 123(R)),
Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards. FSP 123(R)-3 permits the Company to elect from
alternative transition methods for calculating the pool of tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of
FAS 123(R). No tax benefit has been recorded on the share based
compensation expense for the years ended December 31, 2007 and 2006.
F-23
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
NOTE 14
WARRANTS
Status of warrants:
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding as of December 31, 2005
|
|
2,087,500
|
|
$
|
0.51
|
|
Granted
|
|
0
|
|
|
|
Exercised
|
|
(100,000
|
)
|
0.12
|
|
Cancelled
|
|
(150,000
|
)
|
0.20
|
|
Warrants outstanding as of December 31, 2006
|
|
1,837,500
|
|
$
|
0.56
|
|
Granted
|
|
4,258,602
|
|
0.64
|
|
Exercised
|
|
(150,000
|
)
|
0.20
|
|
Cancelled
|
|
0
|
|
|
|
Warrants outstanding as of December 31, 2007
|
|
5,946,102
|
|
$
|
0.63
|
|
As part of the July 22,
2004 reorganization, Southwest Casino Corporation assumed outstanding warrants
of Southwest Casino and Hotel Corp. (predecessor parent company which was
reorganized in July 2004 with the new parent being Southwest Casino
Corporation a public entity, see Note 1) to acquire 1,187,500 shares of the
Companys common stock of which warrants to purchase 387,500 shares with a weighted
average exercise price of $0.80 per share remained outstanding as of December 31,
2007. These warrants expire at various times through July 2009.
At December 31,
2007 and 2006, the Company had 5,946,102 and 1,837,500 shares of common stock
reserved for the exercise of warrants that have been granted in connection with
debt and equity offerings and in lieu of cash payment for services
provided. The Company received $30,000 and $12,000 during 2007 and 2006,
respectively on the exercise of warrants. The warrants expire at various times
through 2012. The Company has not computed any value or recognized any
expense for those warrants where the conditions to exercise were considered
unlikely to occur.
Sale of
Unregistered Securities
In connection with the
Securities Purchase Agreement (SPA) entered into on January 24, 2007 and
February 26, 2007, the Company issued warrants to purchase 2,975,293
shares of common stock to investors and warrants to purchase and an additional
483,309 shares of common stock to the placement agent, see Note 10.
Investor Relations
Services and Financial Consulting Services
On January 17, 2007,
the Company entered into two agreements with Strategic Growth International, Inc.
(SGI) regarding investor relations and financial consulting services. As part
of these agreements, the Company issued to SGI warrants to purchase 800,000
shares of Southwest common stock at a price of $0.63 per share that are
F-24
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
exercisable for two years
from the date of the agreements.
Beginning January 17, 2008, SGI will have the right to require
Southwest to file a registration statement covering those shares.
Southwest has the right
to terminate the agreement at the end of any month of its term during the
second year of the agreement. Southwest also agreed to indemnify SGI against
certain claims that may arise in connection with the services provided by SGI
under the agreements.
The Company reviewed EITF
96-18
Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services
in determining the fair value of the
warrants. The Company valued the warrants based upon the consideration
received. The warrants have been valued at $220,000, which is being amortized
to consulting expense and additional paid in capital quarterly over the term of
the service agreements. For the year ended December 31, 2007,
$105,417 has been expensed.
The following is a
description of each agreement:
·
Investor Relations Services:
Under the terms of a letter agreement accepted January 17,
2007, Southwest retained SGI to assist the company as an investor relations
advisor and develop a comprehensive financial relations program designed to
achieve increased awareness of Southwest and its business and enhanced
liquidity in the public market for the Companys stock.
Southwest agreed
to pay SGI $10,000 per month for a period of two years for these investor
relations services. Southwest also agreed to reimburse SGIs reasonable
accountable expenses incurred in connection with these services. In addition,
Southwest issued to SGI a warrant to purchase 100,000 shares of Southwest
common stock, see terms of warrant described above.
·
Financial Consulting Services:
Southwest also
entered into an agreement with SGI for financial consulting services on January 17,
2007 (the Consulting Agreement). Under the Consulting Agreement, SGI will
assist Southwest in developing a strategy to raise additional capital for
gaming projects the company is pursuing and for general working capital. SGI
will also help Southwest arrange and conduct meetings with potential sources of
capital and advise Southwest regarding the terms of any proposed financing
arrangements.
Southwest
is to pay SGI $8,000 per month for 24 months for the financial consulting
services provided under this agreement, however, SGI agreed to waive the
monthly fee in exchange for a warrant to purchase 700,000 shares of Southwest
common stock, see terms of warrant discussed above.
The
Company will also be required to pay an additional consulting fee of $100,000
or $200,000 if SGI assists the Company in completing equity or debt financing,
respectively, that meets standards stated in the agreement. In addition, if the Company issues warrants
as part of such a debt financing, it will also issue warrants to purchase
100,000 shares of its common stock to SGI, on the same terms as the warrants
issued as part of debt financing.
F-25
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
NOTE
15 PROVISION FOR INCOME TAXES
|
|
2007
|
|
2006
|
|
Current
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
(683,701
|
)
|
State
|
|
|
|
(88,479
|
)
|
Total Current
|
|
|
|
(772,180
|
)
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
|
|
|
89,764
|
|
State
|
|
|
|
11,616
|
|
Total Deferred
|
|
|
|
101,380
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
(670,800
|
)
|
|
|
|
|
|
|
|
|
A reconciliation of the
income tax provision with amounts determined by applying the federal statutory
rate to income before income taxes is as follows:
|
|
2007
|
|
2006
|
|
Federal statutory income tax rate
|
|
34.0
|
%
|
(34.0
|
)%
|
State and local income tax rate
|
|
4.4
|
%
|
(4.4
|
)%
|
Change in valuation allowance
|
|
(38.4
|
)%
|
5.0
|
%
|
Effective Tax Rate
|
|
|
%
|
(33.4
|
)%
|
F-26
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
The net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
are reflected in deferred income taxes. Significant components of the Companys
deferred tax liabilities as of December 31, 2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
|
Current deferred tax assets (liabilities)
|
|
$
|
|
|
$
|
|
|
Non-current deferred tax assets:
|
|
|
|
|
|
Operating loss and contribution carryforwards
|
|
1,718,000
|
|
1,473,000
|
|
Property and Equipment
|
|
418,000
|
|
329,000
|
|
Alternative minimum tax carryforward
|
|
58,000
|
|
58,000
|
|
Total Deferred
|
|
2,194,000
|
|
1,860,000
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
(2,194,000
|
)
|
(1,860,000
|
)
|
Net Deferred Tax Asset
|
|
$
|
|
|
$
|
|
|
Property and equipment
deferred tax asset includes the development and pre-opening expenses
capitalized for tax purposes in connection with the development of the
racetrack and card room.
As of December 31,
2007, the Company has federal and state net operating loss carryforwards of
approximately $4.5 million. These operating losses expire between 2021 and
2027. The Internal Revenue Code limits the availability of net operating
loss carryforwards to offset future taxable income if there has been a change
of ownership as defined in Section 382 of the Internal Revenue
Code. Such a change of ownership could be triggered by sales of the
Companys securities by the Company or its shareholders. Additionally,
the excess of the alternative minimum tax (AMT) over regular federal income
tax is a tax credit, which can be carried forward indefinitely to reduce future
federal income tax liability. At December 31, 2007, the Company has
available $58,000 of AMT credit carryforward. The income tax rate does
not correspond to statutory tax rates due to the difference in the valuation
allowance for deferred tax assets.
The Company adopted
Statement of Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007.
Interpretation No. 48 clarifies the accounting for uncertain tax positions
in accordance with SFAS 109, Accounting for Income Taxes. Pursuant to
Interpretation No. 48, the Company is required to recognize in its
financial statements the largest tax benefit of a tax position that is more-likely-than-not
to be sustained on audit, based solely on the technical merits of the position
as of the reporting date. Only tax positions that meet the more-likely-than-not
threshold at that date may be recognized. The term more-likely-than-not
means a likelihood of more than 50 percent.
The Company accounts for
interest and penalties (if any) as interest expense in the Statement of
Operations.
The Company does not have
any unrecorded tax benefits as of January 1, 2007 or December 31,
2007.
F-27
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
The
Companys tax returns for the tax years 2003 through 2006 remain subject to
examination by major tax jurisdictions. However, as the Company has net
operating losses from prior years these tax returns can also be examined once
these net operating losses are utilized in future tax filings.
Management evaluated its
probable ability to utilize deferred tax assets arising from net operating loss
carry forwards, deferred tax assets and other ordinary items and determined
that a valuation allowance was appropriate as of December 31, 2007 and
2006 based upon the uncertainty and ultimate termination of the Companys
management contract with the Cheyenne and Arapaho Tribes, see Note
5. As a result of this evaluation, a tax benefit was reduced by a
comparable valuation allowance for the year ended December 31, 2007.
As of December 31, 2007 and 2006 the Companys deferred tax asset is zero.
At December 31,
2003, the Company established a deferred tax asset relating to net operating
losses. As of December 31, 2005, management evaluated all evidence
and determined that a portion of the deferred tax assets relating to net operating
losses would be utilized in 2006 based upon forecasted income for the Company
in 2006. During the year ended December 31, 2006, the Company
recorded a tax provision to reduce the previously established deferred tax
asset.
NOTE 16
RELATED PARTY TRANSACTIONS
In addition to $140,000
of unpaid bonuses to officers, see Note 24, the Company has a liability to
certain officers and stockholders for unpaid compensation and expenses of
$122,467 as of December 31, 2007 and 2006, relating to periods prior to December 31,
2003. At its meeting on April 26,
2006, the independent members of the Companys Board of Directors approved
one-time payments to James Druck, CEO, Thomas Fox, President, and Jeffrey
Halpern, Vice President of Government Affairs, as partial repayments of the
Companys outstanding liabilities for their unpaid salaries, the majority of
which is from years before 1998. The Board approved payments of $50,000
to Mr. Druck and Mr. Halpern and $10,000 to Mr. Fox. The
Company made these payments to Mr. Halpern on April 28, 2006 and Mr. Druck
and Mr. Fox on May 15, 2006.
James B. Druck, Chief
Executive Officer and Director; Thomas E. Fox, President and Chief Operating
Officer; Jeffrey S. Halpern, Vice President of Government Affairs; Gus A.
Chafoulias, Director; and David H. Abramson, Director each participated in
our private placement of common stock with accompanying warrants that closed on
January 24 and February 26, 2007. See Note 10.
During the year ended December 31,
2006, the Company paid Berc & Fox Limited $17,950 for tax and
accounting services. North Metro paid Berc & Fox Limited $975
during the years ended December 31, 2006 for tax services. The
operations of Berc & Fox were acquired in January 2007 by Virchow
Krause, Ltd. Thomas Fox, our President, is a shareholder and officer in
Berc & Fox Limited. In 2007, as
a result of the sale of Berc & Fox Limited, certain furniture and
equipment were acquired from Berc & Fox Limited by the Company in the
amount of $25,000. This amount is included
in accounts payable at December 31, 2007.
Subsequent to the year ended December 31, 2007 this furniture and
equipment was sold to North Metro for $25,000.
As of December 31,
2007 the Company has a receivable due from North Metro of approximately $41,000
for reimbursement of salary, benefits and travel. This amount was subsequently paid to the
Company by North Metro.
During the year ended December 31,
2007, the Company paid Jennifer Sparlin Druck $1,000 for entertainment services
at the Gold Rush Palladium. No amounts were paid during 2006. Ms. Druck
is the wife of James Druck, an officer of the Company.
F-28
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
NOTE 17 PROJECT DEVELOPMENT COSTS
The Company continues to pursue additional gaming
opportunities and as a result continues to incur project development
expenses. For the years ended December 31, 2007 and 2006,
development expenses were $374,384 and $290,623.
NOTE 18 SEGMENTED INFORMATION
The Company has grouped its operations into three
segments, Casino Operations, Casino Management and Project Development.
The segment Casino Operations includes the Companys operations in Cripple
Creek, Colorado where the Company operates two casinos and an outdoor amphitheatre.
In July 2007 the Company disposed of a casino, see Note 7. The
segment Casino Management relates to our management and consulting
business. The segment Project Development relates to the Companys
investments in projects under development including any acquisition efforts.
These include North Metro; see Note 4, and other development activities and
their related specific costs. Corporate expenses are included as a
reduction in Casino Management income. Corporate expenses have not been
allocated to Casino Operations or Project Development.
F-29
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Segmented information related to the year ended December 31,
2007 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
15,820,631
|
|
$
|
3,716,109
|
|
$
|
|
|
$
|
19,536,740
|
|
Interest
revenue
|
|
131
|
|
3,290
|
|
|
|
3,421
|
|
Interest
expense
|
|
794,714
|
|
82,871
|
|
|
|
877,585
|
|
Depreciation &
amortization
|
|
1,505,089
|
|
276,481
|
|
|
|
1,781,570
|
|
Impairment
loss, see Note 5
|
|
|
|
400,435
|
|
|
|
400,435
|
|
Segmented
profit (loss) before income taxes
|
|
753,554
|
|
(823,003
|
)
|
(1,424,250
|
)
|
1,493,699
|
|
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
Gain
on disposition of casino (included in above segment profit (loss) before
income taxes), see Note 7
|
|
477,407
|
|
|
|
|
|
477,407
|
|
Write-off
of acquisition and financing costs (included in above segment profit (loss)
before income taxes), see Note 21
|
|
|
|
|
|
613,372
|
|
613,372
|
|
Loss
of unconsolidated subsidiary, net of tax benefit (included in above segment
profit (loss) before income taxes), see Note 4
|
|
|
|
|
|
436,494
|
|
436,494
|
|
Investment
in unconsolidated subsidiary, see Note 4
|
|
|
|
|
|
7,218,720
|
|
7,218,720
|
|
Total
segmented assets
|
|
12,294,773
|
|
378,874
|
|
7,221,720
|
|
19,895,367
|
|
Expenditures
for segmented assets
|
|
342,771
|
|
24,609
|
|
2,601,194
|
|
2,968,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND
2006
Segmented information related to the year ended December 31,
2006 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
15,609,228
|
|
$
|
5,865,680
|
|
$
|
|
|
$
|
21,474,908
|
|
Interest
Revenue
|
|
659
|
|
2,190
|
|
|
|
2,849
|
|
Interest
Expense
|
|
844,465
|
|
359,831
|
|
|
|
1,204,296
|
|
Depreciation &
amortization
|
|
1,646,473
|
|
523,517
|
|
|
|
2,169,990
|
|
Segmented
profit (loss) before income taxes
|
|
91,007
|
|
2,210,500
|
|
(473,496
|
)
|
1,828,011
|
|
Income
tax expense (benefit)
|
|
30,487
|
|
737,672
|
|
(97,359
|
)
|
670,800
|
|
Loss
of unconsolidated subsidiary, net of tax benefit (included in above segment
profit (loss) before income taxes)
|
|
|
|
|
|
182,873
|
|
182,873
|
|
Investment
in unconsolidated subsidiary
|
|
|
|
|
|
5,054,020
|
|
5,054,020
|
|
Total
segmented assets
|
|
12,942,003
|
|
833,926
|
|
5,079,020
|
|
18,854,949
|
|
Expenditures
for segmented assets
|
|
417,948
|
|
9,707
|
|
1,000,326
|
|
1,427,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses are included as a reduction in
Casino Management income. Corporate expenses have not been allocated to
Casino Operations or Project Development.
During the years ended December 31, 2007 and 2006
we recognized revenues of $3,566,109 and $5,865,680, respectively, included in
the operating segment Casino Management which related to our management
contract with the Cheyenne and Arapaho Tribes of Oklahoma which terminated
effective August 17, 2007, see Note 5.
NOTE 19 BOARD OF DIRECTORS
On January 10, 2006, as part of the Companys
compensation for independent members of its Board of Directors, Southwest
granted non-qualified options to purchase 150,000 shares of its common stock at
a price of $0.65 per share to each of the four independent members of its Board
of Directors. These options vest in 12 equal installments on the last day
of each fiscal quarter of the company over the next three years and remain
exercisable for 10 years. If a directors service on the Southwest Board
terminates due to mandatory retirement, the option will continue to vest and
remain exercisable for the full 10 years. If a directors service
terminates due to death or disability, the option will remain exercisable, to
the extent vested at the time service terminated, for 12 months. If a
directors service terminates for any other reason, the option will remain
exercisable, to the extent vested at the time service terminated, for 90 days.
If a change in control of Southwest occurs, as defined in the Companys 2004
Stock Incentive Plan, the option will immediately vest in full and remain
exercisable for the entire 10-year term.
Subsequent to December 31, 2007, additional
options were granted. See Note 26.
F-31
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
On January 10, 2006, the Board of Directors
established an Audit Committee and elected David Abramson, Jim Holmes, and
Gregg Schatzman to serve on the Committee. The Board of Directors elected
David Abramson as Chair of its Audit Committee. Mr. Abramson
received an option to purchase 75,000 shares of common stock, on the same terms
as described in the preceding paragraph, in consideration of his service as
Audit Committee Chair.
On February 1, 2006, the Board of Directors
established a Compensation Committee and a Nominating Committee. On November 5,
2007 the Board broadened the Nominating Committees responsibilities and
renamed it Governance and Nominating Committee. The Board elected Gus Chafoulias
and David Abramson as its members and elected Gus Chafoulias as its Chair. The
Board elected Jim Holmes and Gregg Schatzman to serve on the Compensation
Committee and elected Gregg Schatzman as its Chair.
NOTE 20 FAIR VALUE OF FINANCIAL
INSTRUMENTS
The Company believes it is not practical to estimate
the fair value of its investment in North Metro because there is no established
market for these securities and it is inappropriate to estimate future cash
flows because they are dependent on the ability of North Metro to develop,
construct and then generate earnings from the operation of its proposed harness
track and card room. There were no other financial instruments with
significant differences between the carrying amount and the fair value due to
the short maturity of the instruments.
NOTE 21 ACQUISITION AND FINANCING
COSTS
On December 18, 2006, Southwest Eagle, LLC (Southwest
Eagle), a wholly-owned subsidiary of Southwest Casino Corporation, entered
into an Asset Purchase Agreement and a long-term lease with Pinnacle Casinos
and Resorts, LLC (Pinnacle). Under the Asset Purchase Agreement,
Southwest Eagle had agreed to acquire the operating assets and lease the real
property of the Double Eagle Hotel and Casino and Gold Creek Casino in Cripple
Creek, Colorado (collectively, the Double Eagle).
On April 13, 2007, Southwest Casino Corporation
and its wholly-owned subsidiary Southwest Eagle notified Pinnacle that
Southwest had elected to terminate the Asset Purchase Agreement between Southwest
Eagle and Pinnacle dated December 18, 2006 and all related agreements.
Southwest terminated the Asset Purchase Agreement in
response to notice Southwest received on April 10, 2007 from Pinnacle that
the separate Stock Purchase Agreement under which Pinnacle was to acquire all
of the outstanding capital stock of Colorado Casino Resorts, Inc. (CCRI),
the owner of the Double Eagle, had terminated in accordance with its terms when
Pinnacle did not make a required payment. Because Pinnacle was unable to complete
its proposed acquisition of the CCRI stock in accordance with the Stock
Purchase Agreement, as amended, Pinnacle was also unable to perform its
obligations under the Asset Purchase Agreement with Southwest Eagle. The
Company incurred $126,650 of transaction costs specific to this acquisition.
The Company also incurred financing costs with a
lender in the amount of approximately $461,722. These financing
costs were initially associated with the financing of the Companys efforts to
acquire the Double Eagle, which ceased effective June 30, 2007, but
negotiations then continued for alternate financing. As a result of the termination of the
management agreement with the Cheyenne and Arapaho Tribes of Oklahoma,
effective August 17, 2007, the financing contemplated with this lender did
not occur and the arrangement was terminated.
In October 2007, the Company incurred additional
financing costs of $25,000, see Note 10.
F-32
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The Company wrote-off amounts related to the
acquisition described above and financing costs of $613,372 included as a
separate line item within Other Income (Expense) in the Consolidated Statement
of Operations for the year ended December 31, 2007.
NOTE 22 SETTLEMENT
AGREEMENT
On February 15, 2006, the Company entered into a
Settlement and Release Agreement with MBC Global, LLC. Under the terms of
the Settlement and Release Agreement, the Company paid MBC $66,000 that the
Company had previously agreed it owed to MBC under a terminated advisory
services agreement and the Company and MBC released each other from all claims
raised in an arbitration proceeding initiated by MBC in September 2005.
The Company did not release MBC from any potential liability related to its
actions on behalf of the Company in its 2004 sale of convertible notes and corporate
reorganization, and MBC did not release any rights to indemnification it may
have under the terminated advisory agreement.
NOTE 23 REDEMPTION OF SECURITIES
The Company redeemed 357,000 shares of common stock in
accordance with Article XI of the Companys Articles of Incorporation
effective January 22, 2007. The shares were redeemed at a price of
$0.90 per share based upon the closing stock price of the Companys common
stock as reported on January 22, 2007. The Company recorded the
redemption as a reduction to stockholders equity for the buy back of
shares. The shares of common stock are included in Treasury Stock in the
Consolidated Statements of Changes in Stockholders Equity as of December 31,
2007.
NOTE 24 COMMITMENTS AND CONTINGENCIES
In 2004, the Company purchased player tracking
software and slot accounting software from IGT. On December 29,
2005, the Company entered into an agreement with IGT to finance $460,324 of the
purchase price for this system over 48 months with interest rate equal to the
prime rate, which was 7.25% at December 31, 2007 (see Note 12). In
addition, the Company agreed to purchase additional software for $200,000,
which will allow the Company to offer bonusing to its customers. The
purchase is contingent upon IGT receiving necessary approvals for the bonusing
system from the Colorado Division of Gaming.
Under the Companys employment agreements with James
B. Druck, CEO, Thomas E. Fox, President and COO, and Jeffrey S. Halpern, Vice
President of Government Affairs, which were effective July 1, 2004, these
executives can elect to continue their employment in a reduced capacity, with
continuing medical benefits and a salary equal to their base pay at the time of
termination for 12 months and not less than $25,000 after 12 months if the
Company terminates the executives employment without cause or in connection
with a change in control of the Company (as defined in the employment
agreement) or if the executive terminates his employment with the Company for
good cause (as defined in the employment agreement). The initial term of
these agreements expired July 1, 2006, after which the agreement renewed
and will continue to renew automatically for additional one-year terms unless
terminated.
The Company has entered into employment agreements
with certain other key employees of the Company. The agreements provide for
certain benefits to the employee as well as severance if the employee is
terminated without cause or due to a constructive termination as defined in the
agreements. The severance amounts depend upon the term of the agreement
and can be up to six months of base salary and bonus.
F-33
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
Bonuses:
On March 27, 2007 the board of directors approved
performance bonuses to officers and employees of the Company in the amount of
$385,000, which amount was recorded as an expense effective that date. Of
that amount, the Company has paid $210,000 during the year ended December 31,
2007. Bonuses in the amount of $175,000 were to be paid on or after July 1,
2007 when management determines the Company has sufficient financial resources
for payment. Unpaid bonuses in the amount of $175,000 are reflected as a
liability at December 31, 2007.
Legal
Matters:
Alleged
Breach of Gaming Management Agreement
On July 24, 2007,
the Governor of the Cheyenne and Arapaho Tribes of Oklahoma delivered notice to
Southwest that on July 13, 2007 he had initiated an arbitration proceeding
against Southwest for alleged breach of the Third Amended and Restated Gaming
Management Agreement under which Southwest then managed two casinos for the
Tribes. On November 2, 2007,
Southwest filed a counterclaim in this proceeding alleging a breach of the
Gaming Management Agreement by the tribal Governor. The three-member
arbitration panel for this proceeding was appointed in February 2008. A scheduling conference with the arbitration
panel occurred on March 11, 2008.
Preliminary pleading documents are to be submitted to the arbiters
during April 2008.
In the arbitration
demand, the Governor alleged that Southwest breached the management agreement
by interfering with or attempting to influence internal affairs or governmental
decisions of the Tribes in connection with Southwests efforts to extend its
gaming management relationship with the Tribes, which terminated on August 17,
2007. The Governor sought termination of the agreement and $10 million in
damages. Southwest does not believe it
has improperly interfered with or attempted to influence internal governmental
decisions of the Tribes and Southwest intends to vigorously defend itself in
this arbitration proceeding. Under its Gaming Management Agreement with the
Tribes, Southwest was permitted to oppose, publicly or privately, any action by
the Tribes that Southwest believes is not in the best interest of the Tribal
gaming operations. Southwest believes that all of the actions it has taken on
behalf of the gaming operations it managed or as part of its efforts to extend
its gaming management relationship with the Tribes are consistent with that
provision.
In its counterclaim,
Southwest alleges that the Governor of the Tribes breached the Management
Agreement by refusing to negotiate in good faith for an extension and expansion
of the gaming management relationship between Southwest and the Tribes. Southwest asserts that the Management
Agreement required the Tribes to negotiate this extension and expansion after
Southwest led the Tribes successful efforts to negotiate and enter into a
compact for expanded gaming with the State of Oklahoma in April 2005.
The Company does not expect any material adverse
consequence from this action. Accordingly, no provision has been made in the
financial statements for any such losses.
Theft and Distribution of
Surveillance Video from Lucky Star Clinton casino
On August 24, 2007,
Southwest Casino and Hotel Corp., as exclusive manager of the Lucky Star
casinos of the Cheyenne and Arapaho Tribes of Oklahoma filed a lawsuit against
Doris Thunderbull, Darrell Flyingman, in his individual capacity, and John Does
No. 1 and 2 alleging theft (conversion) of confidential surveillance video
from the Lucky Star Clinton casino and subsequent copyright infringement and
defamation in connection with the posting of the stolen video on the website
YouTube.com and widespread distribution of DVDs containing the video by
mail. Southwest initially sought an emergency temporary restraining order
barring further distribution of the video. That request was denied on August 27,
2007 and Southwest withdrew its request for restraining order on September 24,
2007. Southwest continues to pursue claims for conversion, copyright
infringement, and tortuous interference with contract, defamation, and
conspiracy against the defendants.
On January 14, 2008,
the Mr. Flyingman, as Governor of the Tribes, filed a declaratory judgment
action in Cheyenne and Arapaho Trial Court asserting that the Tribes, not
Southwest owned the surveillance footage and the copyright in it. Southwest filed an answer to the complaint
asserting the tribal court did not have jurisdiction and a motion to compel
arbitration of the matter on February 15, 2008.
F-34
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
On February 13,
2008, the Federal District Court issued a stay of the proceedings before the
Federal Court pending resolution of the Tribal court proceeding.
Other:
The Company is involved in various claims, legal
actions and complaints arising in the ordinary course of business. In the
opinion of management, any losses that may occur from these matters are
adequately covered by insurance or are provided for in our financial statements,
and the ultimate outcome of these other matters will not have a material effect
on our financial position or results of operations.
NOTE 25 MANAGEMENT CONTRACT WITH
OTOE-MISSOURIA TRIBE OF INDIANS
Southwest entered into a Gaming Management Agreement with
the Otoe-Missouria Tribe of Indians under which Southwest was to manage the
Tribes Seven Clans Paradise Casino in Red Rock, Oklahoma, on March 24,
2006. The Otoe-Missouria Tribe submitted the Gaming Management Agreement
to the National Indian Gaming Commission, which must approve it before it can
be effective, on April 10, 2006. In response to comments from
the NIGC, Southwest and the Tribe submitted a revised agreement to the NIGC in August 2006.
The NIGC provided additional comments on and requested additional changes to
the management agreement on September 15, 2006. The Tribe did not
respond to the NIGC or to Southwests efforts to complete a revised management
agreement.
On July 11, 2007, the NIGC delivered a letter to
Southwest and the Chairman of the Tribe requesting that we submit a revised
management agreement or withdraw the request for approval of the current
agreement within 30 days. Southwest met with representatives of the Tribes
Economic Development Authority (OMDA) on August 6, 2007 and discussed
the status of the management agreement. The OMDA told the Company they do
not intend to go forward with the management agreement and as such the Company
has withdrawn the request for NIGC review of this management agreement. The
Company continues to seek reimbursement from the Otoe-Missouria of expenses
incurred by Southwest while working with the Tribe in 2006. In accordance with Statement of Financial
Accounting Standards No. 5
Accounting for
Contingencies
the potential reimbursement if it is received will be
recorded in the period it is received.
NOTE 26 SUBSEQUENT EVENTS
Crown Bank Loan
:
On March 7, 2008,
the Company entered into a series of eight promissory notes with Crown Bank of
Minneapolis, Minnesota. Under the Notes,
Crown Bank loaned the Company an aggregate $1.55 million. Each of the Notes accrues interest at a
floating rate of prime plus 1.5 percent with a minimum interest rate of 7.0
percent (currently 7.0%). Under the
Notes, the Company will make monthly payments of interest only until January 11,
2009. Beginning February 11, 2009,
the Company will repay the outstanding principal balance and accrued interest
in 12 equal monthly installments with the final payment due January 11,
2010. The Company may prepay any outstanding
amounts under the Notes at any time without premium or penalty.
Each of the Notes is
co-signed by a shareholder of the Company.
Each of these co-signers is fully obligated to Crown Bank and
individually liable for the principal amount and any accrued and unpaid
interest and costs outstanding under the co-signed note. As a condition to entering into the Notes,
Crown Bank required James Druck, Chief Executive Officer, Thomas Fox, President
and Chief Operating Officer, and Jeffrey Halpern, Vice President of Government
Affairs of the Company to increase their previously existing $150,000 personal
guarantees of the Companys outstanding $450,000 line of credit to $250,000 and
extend those guarantees to cover both the line of credit and the promissory
notes through their respective repayment terms.
F-35
Table
of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
The promissory notes
contain customary events of default, including, without limitation, payment
defaults, insolvency or bankruptcy, death or incompetency of a co-signer,
business termination, misrepresentation, monetary judgment defaults and other
material changes.
In consideration of
co-signing the promissory notes or increasing and extending personal guarantees
to cover the promissory notes, the Company issued five-year fully exercisable
warrants to purchase an aggregate of 2,300,000 shares of its common stock at an
exercise price of $0.39 per share to the shareholder co-signers and Mr. Druck,
Mr. Fox and Mr. Halpern. Each
co-signer received a warrant to purchase one share of Southwest Casino
Corporation common stock for each $1.00 in principal amount of the promissory
note co-signed by that shareholder. In
consideration of the increase in the amount and extension of the term of their
respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern each
received warrants to purchase one share of Southwest Casino Corporation common
stock for each $1.00 of guarantee, or 250,000 shares. The $0.39 per share exercise price of these
warrants represented the average closing market price of one share of Southwest
Casino Corporations common stock over the 5 trading days preceding the closing
of the loan transaction. Warrant holders
also received the right to have the shares of Southwest Casino Corporation
common stock purchasable upon exercise of their warrants included in any
registration statement that Southwest Casino Corporation may file in the future
(piggy-back rights) under the terms of a separate Registration Rights
Agreement dated March 7, 2008.
In further consideration
of co-signing the promissory notes, the Company also entered into a Pledge
Agreement with the co-signers and guarantors under which it pledged its shares
of Southwest Casino and Hotel Corp. to the co-signers and guarantors to secure
any liabilities or obligations they may incur under the promissory notes. The co-signers and guarantors right to
recovery under the Pledge Agreement is limited to the actual costs paid by the
co-signers or guarantors and subject to a prior security interest in the
membership interests of North Metro Harness Initiative, LLC that Southwest
Casino & Hotel owns, as well as the terms of the North Metro Harness
Initiative, LLC Member Control Agreement.
The Company, the
co-signers, and Messrs. Druck, Fox and Halpern also entered into a
Contribution Agreement dated March 7, 2008. Under the Contribution Agreement, the Company
agreed to reimburse to any co-signer or guarantor any amount paid in connection
with the promissory notes for reason other than Southwests inability to
pay. If Southwest is unable to repay the
notes, each of the co-signers and Mr. Druck, Mr. Fox and Mr. Halpern
agreed in the Contribution Agreement to indemnify each other so that any
payments made by co-signers or guarantors will be made in proportion to the
original principal amount of the promissory note co-signed or personal
guarantee given to the total amount of all promissory note and loan guarantees.
The Company intends to
use the proceeds from the loan transaction for general working capital,
including additional membership contributions to North Metro Harness
Initiative, LLC if required under the terms of the construction financing for
that facility or agreed to between the members of North Metro Harness
Initiative. The Company has reserved
from the proceeds of the loan $96,875 to make the estimated interest-only
payments due under the notes through January 11, 2009. The Company will record the transaction in
the first quarter of fiscal year 2008, which will include a valuation of the
warrants given in connection with the debt financing. The Company is in the process of valuing the
warrants.
Other:
During January and February 2008,
the Company pursued a financing alternative to the Crown Bank loan discussed
above. The Company was unable to agree upon the terms with the lender and
the company ultimately chose not to continue negotiations with the lender. The
Company incurred costs in connection with this financing of approximately
$200,000 that will be expensed during the first quarter of fiscal year 2008.
Option grant to
employees, directors and consultant
:
On March 20, 2008,
the Board of Directors awarded options to purchase an aggregate of 1,192,500
shares of the Companys common stock to executive officers and employees of the
Company. All of the options were granted
under the Companys 2004 Stock Incentive Plan.
The options have a 10-year term and an exercise price $0.48 per
F-36
Table of Contents
SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2007 AND 2006
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 $0.48 per share, the closing
market price for one share of the Companys common stock on the date of
grant. The options become exercisable in
equal installments on the last day of each fiscal quarter beginning on the last
day of the fourth quarter of 2008 (the first quarter after the options granted
to our independent directors on January 10, 2006 are fully vested), over a
three-year period.
The Board of Directors
awarded two non-qualified options to purchase 50,000 shares of Southwest common
stock each to a consultant to the company on March 20, 2008. These options are also granted under the
companys 2004 Stock Incentive Plan, have a 10-year term, and an exercise price
of $0.48 per share. These options become
exercisable upon Southwests achievement of certain goals related to the
services provided by the consultant to Southwest.
The Company is in the
process of valuing the options granted March 20, 2008 and will disclose
and begin to recognize that value in its financial statements for the first
quarter of 2008.
Crown Bank Line of
Credit:
As a result of securing
the financing described above, the Company repaid the $450,000 outstanding
under the line of credit from Crown Bank on March 25, 2008, see Note 8.
F-37
Table of Contents
SOUTHWEST
CASINO CORPORATION
Consolidated
Balance Sheets
March 31, 2008 (Unaudited)
and December 31, 2007
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,630,104
|
|
$
|
1,892,401
|
|
Accounts Receivable
|
|
34,529
|
|
54,582
|
|
Accounts Receivable - Related Parties
|
|
21,671
|
|
41,572
|
|
Inventories
|
|
133,705
|
|
141,041
|
|
Prepaid Expenses and Other Current Assets
|
|
959,910
|
|
679,583
|
|
Total Current Assets
|
|
$
|
2,779,919
|
|
$
|
2,809,179
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
Leasehold Improvements
|
|
15,423,385
|
|
15,389,750
|
|
Furniture and Equipment
|
|
5,301,053
|
|
5,280,282
|
|
Accumulated Depreciation
|
|
(11,191,638
|
)
|
(10,835,938
|
)
|
Net Property and Equipment
|
|
$
|
9,532,800
|
|
$
|
9,834,094
|
|
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
|
|
Other Assets
|
|
379,283
|
|
33,374
|
|
Investment in Unconsolidated Subsidiary
|
|
6,946,289
|
|
7,218,720
|
|
Total Other Assets
|
|
$
|
7,325,572
|
|
$
|
7,252,094
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
19,638,291
|
|
$
|
19,895,367
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
Accounts Payable
|
|
$
|
557,848
|
|
$
|
659,284
|
|
Accounts Payable - Related Parties
|
|
|
|
25,000
|
|
Accrued Expenses
|
|
963,206
|
|
1,085,797
|
|
Accrued Liabilities - Related Parties
|
|
122,467
|
|
122,467
|
|
Notes Payable
|
|
|
|
450,000
|
|
Current Portion of Long-Term Liabilities
|
|
1,269,849
|
|
1,005,940
|
|
Accrued Interest Payable
|
|
61,664
|
|
55,465
|
|
Total Current Liabilities
|
|
$
|
2,975,034
|
|
$
|
3,403,953
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
Long-Term Liabilities Net of Current Portion
|
|
$
|
7,515,568
|
|
$
|
6,486,365
|
|
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
Preferred Stock, $.001 Par Value; 30,000,000 Shares Authorized
|
|
$
|
|
|
$
|
|
|
Common Stock, $.001 Par Value 75,000,000 Shares Authorized, 27,817,953
and 27,460,953 Shares Issued and Outstanding at March 31, 2008 and
December 31, 2007
|
|
27,819
|
|
27,819
|
|
Additional Paid-in Capital
|
|
22,015,813
|
|
21,496,064
|
|
Accumulated Deficit
|
|
(12,573,643
|
)
|
(11,196,534
|
)
|
|
|
9,469,989
|
|
10,327,349
|
|
Less Treasury Stock (357,000 shares redeemed)
|
|
(322,300
|
)
|
(322,300
|
)
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
9,147,689
|
|
10,005,049
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
$
|
19,638,291
|
|
$
|
19,895,367
|
|
See Notes to Unaudited Consolidated Financial Statements
F-38
Table of
Contents
SOUTHWEST
CASINO CORPORATION
Consolidated Statements of Operations
(Unaudited)
For
the Three Months Ended March 31, 2008 and 2007
|
|
For the three months
|
|
For the three months
|
|
|
|
ended March 31, 2008
|
|
ended March 31, 2007
|
|
|
|
|
|
|
|
NET REVENUES
|
|
|
|
|
|
Casino
|
|
$
|
3,501,331
|
|
$
|
3,381,392
|
|
Food & Beverage/Hotel
|
|
89,883
|
|
99,455
|
|
Management and Consulting
|
|
150,000
|
|
1,629,823
|
|
Other
|
|
36,530
|
|
31,559
|
|
|
|
3,777,744
|
|
5,142,229
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Casino
|
|
$
|
2,787,730
|
|
$
|
2,852,643
|
|
Food & Beverage/Hotel
|
|
325,965
|
|
309,700
|
|
Corporate Expense
|
|
906,968
|
|
1,303,585
|
|
Project Development Costs
|
|
|
|
168,276
|
|
Entertainment
|
|
8,207
|
|
15,405
|
|
Depreciation and Amortization
|
|
365,314
|
|
540,633
|
|
|
|
4,394,184
|
|
5,190,242
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
$
|
(616,440
|
)
|
$
|
(48,013
|
)
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest Income
|
|
$
|
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
|
)
|
|
|
Other
|
|
(3,861
|
)
|
|
|
|
|
(422,238
|
)
|
(246,880
|
)
|
|
|
|
|
|
|
Loss before income taxes, loss
in earnings of unconsolidated subsidiaries
|
|
(1,038,678
|
)
|
(294,893
|
)
|
|
|
|
|
|
|
Income taxes
|
|
|
|
|
|
Loss of Unconsolidated Subsidiaries, Net of Tax Benefit
|
|
(338,431
|
)
|
(120,171
|
)
|
|
|
|
|
|
|
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
F-39
Table of
Contents
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
F-40
Table of Contents
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
F-41
Table of Contents
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 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:
F-42
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
|
|
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:
F-43
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
·
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 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.
F-44
Table of Contents
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 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.
F-45
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
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.
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
F-46
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
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
|
)
|
F-47
Table of Contents
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.
F-48
Table of Contents
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 percent origination fee of $15,500
that resulted in net proceeds of $1,534,500 to the Company. Each of the Notes accrues interest at a
floating rate of prime plus 1.5 percent, with a minimum interest rate of 7.0
percent (currently 7.0%). 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
F-49
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
MARCH 31, 2008
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.
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.
F-50
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
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.
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.
F-51
Table of Contents
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2008
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.
F-52
Table of Contents
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2008
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.
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
F-53
Table of Contents
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2008
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. 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, 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,
F-54
Table of Contents
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 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 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
F-55
Table
of Contents
SOUTHWEST
CASINO CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH
31, 2008
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
percent 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 credits 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.
F-56
Table of
Contents
You
should rely only on the information contained in this prospectus. We have not, and the selling stockholders
have not, authorized anyone to provide you with information different from that
contained in this prospectus. The
selling stockholders are offering to sell securities and seeking offers to buy
securities only in jurisdictions where offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date on its cover, regardless of the time of
delivery of this prospectus or any sale of the securities.
PROSPECTUS
SOUTHWEST CASINO CORPORATION
12,663,389 SHARES OF
COMMON STOCK
Table of Contents
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM 13.
OTHER EXPENSES OF ISSUANCE AND
DISTRIBUTION
The following table sets forth expenses, incurred or
expected to be incurred by us in connection with the registration of the
securities being offered by the selling shareholders. Items marked with an asterisk (*) represent
estimated expenses. We have agreed to
pay all the costs and expenses of this registration. Selling stockholders will not pay any part of
these expenses.
SEC Registration Fee
|
|
$
|
376.00
|
|
Legal Fees and Expenses
|
|
20,000.00
|
|
Accounting Fees and Expenses
|
|
9,500.00
|
|
Printing
|
|
500.00
|
|
Miscellaneous
|
|
1,000.00
|
|
Total
|
|
$
|
31,376.00
|
|
ITEM 14.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Nevada Law
Section 78.7502 of the General Corporation Law of
the State of Nevada (the NGCL) provides that a Nevada corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, other than an action by or
in the right of the corporation, by reason of the fact that he or she is or was
a director, officer, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation or enterprise,
against expenses, including attorneys fees, judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit, or proceeding if he or she acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful.
Section 78.7502 of the NGCL further provides that
a Nevada corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgments in its
favor by reason of the fact that such person acted in any of the capacities set
forth above, against expenses actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she
acted under similar standards as set forth above. However, no indemnification may be made in
respect of any claim, issue, or matter as to which such person shall have been
adjudged to be liable to the corporation unless, and only to the extent that
the court in which such action or suit was brought shall determine that despite
the adjudication of liability, but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to be indemnified for such
expenses which the court deems proper.
Sections 78.7502, 78.751, 78.752, of the NGCL
further provide that:
|
·
|
|
to the extent a director or officer of a corporation
has been successful on the merits or otherwise in the defense of any action,
suit, or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith;
|
|
|
|
|
|
·
|
|
indemnification provided for by
Sections 78.751; 78.752, and Chapter 208, L. 97 shall not be
deemed exclusive of any other rights to which the indemnified party may be
entitled; and
|
|
|
|
|
|
·
|
|
the corporation may purchase and maintain insurance
on behalf of such person against any liability asserted against him or her
incurred by him or her in any such capacity or arising out of his or her
status as
|
II-1
Table
of Contents
|
|
|
such, whether or not the corporation would have the
power to indemnify him or her against such liabilities under such Section 78.751;
78.752, and Chapter 208, L. 97.
|
Section 78.037 of the NGCL provides that a
corporation in its original certificate of incorporation or an amendment
thereto, validly approved by stockholders, may eliminate or limit personal
liability of members of its Board of Directors or governing body for monetary
damages for breach of a directors fiduciary duty. However, no such provision may eliminate or
limit the liability of a director for breaching his or her duty of loyalty,
failing to act in good faith, engaging in intentional misconduct, or knowingly
violating a law, paying a dividend, or approving a stock repurchase or
redemption which was illegal, or obtaining an improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty. The Registrants
Articles of Incorporation, as amended, contain such a provision.
Our Articles of Incorporation, as amended,
specifically provide that our directors will not be liable for monetary damages
for breach of their fiduciary duty as directors to the fullest extend permitted
by Nevada law. Our Articles of
Incorporation, as amended, also require us to indemnify our officers and
directors against any liability to the fullest extent permitted by Nevada law.
Indemnification Agreements
Southwest
has entered into written indemnification agreements with its directors and
executive officers under which Southwest has agreed to provide to any person
who is or was a director, officer, employee or agent of Southwest or is or was
serving at the request of Southwest as a director, officer, employee or agent
of the corporation, partnership, joint venture, trust or enterprise, the
indemnity against expenses of a suit, litigation or other proceedings which is
specifically permissible under applicable law.
ITEM 15.
RECENT SALES OF UNREGISTERED
SECURITIES
During
the preceding three years, we completed the following sales of unregistered
securities in reliance upon exemptions from registration under Section 4(2) of
the Securities Act of 1933 as amended (the Act) or, under exemptions from
registration under provided in Regulation D promulgated under the Act. No underwriter participated in, nor did we
pay any commissions or fees to any underwriter in connection with any of these
transactions. None of the transactions involved a public offering. We believe that each person had knowledge and
experience in financial and business matters, which allowed them to evaluate
the merits and risk of the receipt of our securities. We believe that each person was knowledgeable
about our operations and financial condition.
June 2008 Private Placement
On June 17, 2008,
Southwest Casino Corporation entered into a Securities Purchase Agreement with
certain institutional and other accredited investors, as defined in Rule 501
of Regulation D promulgated under the Securities Act of 1933, as amended,
pursuant to which Southwest sold in a private placement an aggregate of
2,693,589 shares of its common stock with accompanying warrants to purchase
2,154,873 shares of its common stock at a price of $0.65 per unit, with each
unit consisting of one share of common stock and a warrant to purchase .8
shares of common stock. The warrants are exercisable for a period of five
years at an exercise price of $0.85 per share. Southwest received net
proceeds from this offering of approximately $1,644,336.00, after the deduction
of estimated offering expenses.
The Securities Purchase Agreement provides that if
Southwest determines to file a registration statement for its equity
securities, participants in this offering will have the right to request
inclusion of their common stock and shares of common stock issuable upon
exercise of their warrants in the registration statement (piggy-back
registration rights).
March 2008 Warrant Offering
On March 7, 2008,
Southwest Casino and Hotel Corp. entered into a series of eight promissory
notes with Crown Bank of Minneapolis, Minnesota. Under the promissory
notes, Crown Bank loaned Southwest Casino & Hotel an aggregate $1.55
million. Each of the eight promissory notes is co-signed by a shareholder
of Southwest Casino Corporation. Each of these co-signers is fully
obligated to Crown Bank and individually liable for the principal
II-2
Table
of Contents
amount and any accrued
and unpaid interest and costs outstanding under the co-signed note. As a
condition to entering into the Notes, Crown Bank required each of James Druck,
Chief Executive Officer, Thomas Fox, President and Chief Operating Officer, and
Jeffrey Halpern, Vice President of Government Affairs of Southwest Casino
Corporation to increase their previously existing $150,000 personal guarantees
of Southwest Casino & Hotels outstanding $450,000 line of credit to
$250,000 and extend those guarantees to cover both the line of credit and the
eight promissory notes through their respective repayment terms.
In consideration of
co-signing the promissory notes, on March 10, 2008 Southwest Casino
Corporation issued five-year fully exercisable warrants to purchase an
aggregate of 2,300,000 shares of its common stock at an exercise price of $0.39
per share to the shareholder co-signers. Each co-signer received a
warrant to purchase one share of Southwest Casino Corporation common stock for
each $1.00 in principal amount of the promissory note co-signed by that
shareholder. In consideration of the increase in the amount and extension
of the term of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase one share of Southwest Casino Corporation
common stock for each $1.00 of guarantee, or 250,000 shares. The $0.39
per share exercise price of these warrants represented the average closing market
price of one share of Southwest Casino Corporations common stock over the 5
trading days preceding the closing of the loan. Warrant holders also
received the right to have the shares of Southwest Casino Corporation common
stock purchasable upon exercise of their warrants included in any registration
statement that Southwest Casino Corporation may file (piggy-back rights)
under the terms of a separate Registration Rights Agreement.
January 2007 Private Placement
On January 24,
2007, Southwest entered into a Securities Purchase Agreement with certain
institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, under
which Southwest sold in a private placement an aggregate of 4,792,391 shares of
its common stock and warrants to purchase an aggregate of 1,916,961 shares of
its common stock, at a purchase price of $0.55 per unit. The warrants are exercisable for a period of
five years, beginning six months after the date of issuance, at an exercise
price of $0.61 per share. The number of
shares issuable upon exercise of the warrants and the exercise price of the
warrants are adjustable in the event of stock splits, combinations and
reclassifications, but not in the event of the issuance by Southwest of
additional securities, unless such issuance is pursuant to a rights offering or
pro rata distribution to all security holders except the investors.
The
securities that were issued in this private placement were not registered under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements of the Securities Act. Pursuant to the terms of a Registration
Rights Agreement dated January 24, 2007 between Southwest and the
investors, Southwest has agreed to register the resale of the shares sold in
the private placement, including shares issuable upon exercise of the warrants,
on a registration statement to be filed by Southwest with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. Southwest has
agreed to use its commercially reasonable efforts to file the registration
statement with the SEC within 30 days after the closing of the private
placement, to cause such registration statement to be declared effective by the
SEC within the earlier of 120 days after the closing (or, in the event, of a
review by the SEC, 150 days after closing) or the 5th business day following
the date on which Southwest is notified by the SEC that the SEC will not review
the registration statement or that the SEC has no further comments on the
registration statement and to cause such registration statement to remain
effective for the required registration period.
Pursuant to the Securities Purchase Agreement, Southwest and the
investor parties have made other covenants and representations and warranties
regarding matters that are customarily included in financings of this
nature. If certain of its obligations
are not met, Southwest has agreed to make pro-rata cash payments as liquidated
damages to each investor.
On February 26, 2007, we had a second closing of
our January 2007 private placement in which we entered into a Securities
Purchase Agreement with certain institutional and other accredited investors,
as defined in Rule 501 of Regulation D promulgated under the Securities
Act of 1933, as amended, pursuant to which we sold in a private placement an
aggregate of 2,659,342 shares of our common stock and warrants to purchase an
aggregate of 1,063,740 shares of our common stock, at a purchase price of $0.55
per unit. These investors are entitled
to the same registration rights as the January 2007 investors.
II-3
Table of Contents
The
private placement is expected to result in net proceeds to Southwest of
approximately $4,000,000, after the deduction of estimated offering
expenses. The placement agent agreed to
accept the cash portion of its placement agent commission in common stock and
warrants on the same terms as the investors, which resulted in the placement
agent receiving 503,054 shares of common stock and warrants to purchase an aggregate
of 201,222 shares of common stock. In
addition, the placement agent received a warrant to purchase 276,679 shares of
common stock, which is exercisable for a period of five years, beginning six
months after the date of issuance, at an exercise price of $1.00 per share.
The
following officers and directors of Southwest participated in the private
placement on the same terms as the other investors: James B. Druck, Chief
Executive Officer and Director; Thomas E. Fox, President and Chief Operating Officer;
Jeffrey S. Halpern, Vice President of Government Affairs; Gus A. Chafoulias,
Director; and David H. Abramson, Director.
Other than with respect to the Securities Purchase Agreement, there are
no material relationships between Southwest, on the one hand, and any of the
other investors in the private placement, on the other hand.
October 2005 Warrant Offering
On October 20,
2005, Southwest Casino Corporation issued warrants to purchase 1,100,000 shares
of common stock at a price of $0.50 per share and 150,000 shares of common
stock at a price of $0.58 per share in connection with a $2.5 million term loan
and $450,000 revolving line of credit provided to Southwest Casino and Hotel
Corp. by Crown Bank. The $2.5 million
term loan is secured, in part, by the guaranties of 12 Southwest Casino
Corporation shareholders. As a condition
to entering into the Loan Agreement, James Druck, Chief Executive Officer,
Thomas Fox, President and Chief Financial Officer, and Jeffrey Halpern, Vice
President of Government Affairs of Southwest Casino Corporation, were required
by Crown Bank to become three of the 12 shareholder guarantors. Mr. Druck, Mr. Fox and Mr. Halpern
each personally guaranteed $100,000 of this borrowing. Under the shareholder guaranties, each guarantor
is individually liable for a portion of the $2.5 million term loan and the
aggregate amount guaranteed by all of the shareholder guarantors equals $2.5
million. As further required by Crown
Bank, the guaranties of Mr. Druck, Mr. Fox and Mr. Halpern also
apply to the revolving line of credit, while the guaranties of other
shareholders do not.
In
consideration for these shareholder guaranties, Southwest issued five-year
fully exercisable warrants to purchase an aggregate of 1,250,000 shares of its
common stock at an exercise price of $0.50 per share to the non-affiliate
shareholders and $0.58 per share to Mr. Druck, Mr. Fox and Mr. Halpern. Each guarantor received a warrant to purchase
one share of Southwest Casino Corporation common stock for each $2.00 of term
loan guaranteed by that shareholder. In
consideration of their respective guarantees, Mr. Druck, Mr. Fox and Mr. Halpern
each received warrants to purchase 50,000 shares of Southwest Casino
Corporation common stock. The $0.58 per
share exercise price of the Warrants held by Mr. Druck, Mr. Fox and Mr. Halpern
represented the average closing market price of one share of Southwest Casino
Corporations common stock over the 10 trading days immediately preceding the
closing of the loan transaction. Warrant
holders also received the right to have the shares of Southwest Casino
Corporation common stock purchasable upon exercise of their warrants included
in any registration statement that Southwest Casino Corporation may file in the
future under the terms of a separate registration rights agreement.
The
warrants were issued by Southwest Casino Corporation in reliance upon
exemptions from the registration requirements under the Securities Act of 1933,
as amended, including Regulation D and Section 4(2), and applicable state
securities laws. With regard to the
reliance upon the exemptions under Regulation D and Section 4(2) under
the Securities Act, Southwest Casino Corporation made certain inquiries of the
shareholder guarantors to establish that the issuance of the warrants qualified
for these exemptions from the registration requirements. No underwriting commissions or discounts were
paid with respect to the issuance of the Warrants.
ITEM 16.
EXHIBITS
The exhibits and index required by Item 601 of
Regulation S-K are attached.
II-4
Table of Contents
ITEM 17.
UNDERTAKINGS
The
undersigned registrant hereby undertakes:
1.
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of this registration statement, or most recent post-effective amendment, which,
individually or in the aggregate, represent a fundamental change in the
information set forth in this registration statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation From the low or high end of the estimated maximum
offering range may be reflected in the form of prospects filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in the volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the Calculation of Registration Fee
table in the effective registration statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in this registration statement or any material change to
such information in the registration statement.
2. For the purpose of determining any liability
under the Securities Act, each such post-effective amendment will be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
3. To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of the offering.
4. Each prospectus filed by the registrant
pursuant to Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was deemed part of
and included in the registration statement.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration
statement or prospectus that is part of the registration statement will, as to
a purchase with a time of contract or sale prior to such effective date,
supersede or modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made in any such
document immediately prior to such effective date.
5. For determining liability of the registrant
under the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(a)
Any preliminary prospectus or prospectus of the undersigned registrant relating
to the offering required to be filed pursuant to Rule 424 (Sec. 230. 424);
(b)
Any free writing prospectus relating to the offering prepared by or on behalf
of the undersigned registrant or used or referred to by the undersigned
registrant;
(c)
The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant or its
securities provided by or on behalf of the undersigned registrant; and
(d)
Any other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
II-5
Table of Contents
Undertaking pursuant to
Item 512(h) of Regulation S-K:
The undersigned registrant hereby undertakes that, for
the purpose of determining liability under the Securities Act to any purchaser:
Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the provisions above, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities, other than the
payment by us of expenses incurred or paid by one of our directors, officers,
or controlling persons in the successful defense of any action, suit or
proceeding, is asserted by one of our directors, officers, or controlling
persons in connection with the securities being registered, we will, unless in
the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Securities
Act, and we will be governed by the final adjudication of such issue.
II-6
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements of filing on Form S-1 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis, State of Minnesota on August
4, 2008.
|
Southwest Casino Corporation
|
|
|
|
By
|
/s/ JAMES B. DRUCK
|
|
|
James B. Druck
|
|
|
Chief Executive Officer (Principal Executive
Officer)
|
Pursuant to the requirements of the Securities Act of
1933, this registration statement has been signed by the following persons in
the capacities indicated, on August 4, 2008.
Name and Signature
|
|
Title
|
|
|
|
/s/ JAMES B. DRUCK
|
|
Director and Chief Executive Officer (Principal Executive
|
James B. Druck
|
|
Officer)
|
|
|
|
/s/ THOMAS E. FOX
|
|
President and Chief Operating Officer (Principal Financial
|
Thomas E. Fox
|
|
and Accounting Officer)
|
|
|
|
*
|
|
Director
|
David H. Abramson
|
|
|
|
|
|
*
|
|
Director
|
Gus A Chafoulias
|
|
|
|
|
|
*
|
|
Director
|
Jim Holmes
|
|
|
|
|
|
*
|
|
Director
|
Gregg P. Schatzman
|
|
|
*By:
|
/s/ JAMES B. DRUCK
|
|
|
James B. Druck
|
|
As Attorney-in-Fact
|
II-7
Table of Contents
SOUTHWEST CASINO CORPORATION
EXHIBIT INDEX TO REGISTRATION
STATEMENT ON FORM S-1
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
2.1
|
|
Agreement and Plan of Reorganization, dated
July 14, 2004, by and among Lone Moose Adventures, Inc., Lone Moose
Acquisition Corporation. Southwest Casino and Hotel Corp. certain of the
shareholders of Lone Moose.
|
|
Incorporated by reference to Exhibit 2.1 in the
Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
2.2
|
|
Asset Purchase Agreement, dated July 14, 2004,
by and among Lone Moose Adventures, Inc., Christopher B. Glover and
Michael C. Brown
|
|
Incorporated by reference to Exhibit 2.2 in the
Current Report on Form 8-K filed August 6, 2004
|
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Southwest Casino
Corporation, as amended
|
|
Incorporated by reference to Exhibit 3.1 in the
Quarterly Report on Form 10-QSB filed November 14, 2005.
|
|
|
|
|
|
3.2
|
|
Bylaws of Lone Moose Adventures, Inc. (now Southwest
Casino Corporation)
|
|
Incorporated by reference to Exhibit 3.2
contained in Lone Mooses Registration Statement on Form SB-2 (File
No.333-88810)
|
|
|
|
|
|
4.1
|
|
Assumption Agreement, dated July 22, 2004, by
and between Southwest Casino Corporation (f/k/a Lone Moose
Adventures, Inc.) and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
4.2
|
|
Registration Rights Agreement, dated June 29,
2004, by and among Lone Moose Adventures, Inc., David C. Merrell and
Jenson Service, Inc.
|
|
Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
4.3
|
|
Warrant, dated July 22, 2004, between Southwest
Casino Corporation and MBC
|
|
Incorporated by reference to Exhibit 4.3 to the
Annual Report on Form 10-KSB filed March 31, 2006.
|
|
|
|
|
|
4.4
|
|
Registration Rights Agreement, dated June 29,
2004, by and among Southwest Casino and Hotel Corp. and the 8% convertible
demand note holders
|
|
Incorporated by reference to Exhibit 4.5 to the
Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
4.5
|
|
Form of Warrant, dated October 20, 2005,
between Southwest Casino Corporation and non-affiliate guarantors
|
|
Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
4.6
|
|
Form of Warrant, dated October 20, 2005,
between Southwest Casino Corporation and James B. Druck, Thomas E. Fox, and
Jeffrey S. Halpern as loan guarantors
|
|
Incorporated by reference to Exhibit 4.6 to the
Annual Report on Form 10-KSB filed March 31, 2006.
|
|
|
|
|
|
4.7
|
|
Form of Registration Rights Agreement, dated
October 20, 2005, between Southwest Casino Corporation and
warrantholders.
|
|
Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K filed October 26, 2005.
|
E-1
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
4.8
|
|
Form of Option
Agreement, dated January 10, 2006, between Southwest Casino Corporation
and each of David Abramson, Gus Chafoulias, Jim Holmes and Gregg Schatzman,
independent members of Southwests Board of Directors
|
|
Incorporated by
reference to Exhibit 4.8 to the Annual Report on Form 10-KSB filed
March 31, 2006.
|
|
|
|
|
|
4.9
|
|
Option Agreement dated January 10, 2006 between
Southwest and David H. Abramson, Chairman of the Audit Committee of the Board
of Directors
|
|
Incorporated by reference to Exhibit 4.9 to the
Annual Report on Form 10-KSB filed March 31, 2006.
|
|
|
|
|
|
4.10
|
|
Form of Series A Common Stock Warrant
dated as of January 24, 2007 issued by Southwest Casino Corporation to
each of the purchaser party to the Securities Purchase Agreement
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report to Form 8-K filed January 30, 2007.
|
|
|
|
|
|
4.11
|
|
Form of Registration Rights Agreement dated as
of January 24, 2007 by and among Southwest Casino Corporation and the
purchaser named therein
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report to Form 8-K filed January 30, 2007.
|
|
|
|
|
|
4.12
|
|
Form of Series A Common Stock Warrant
dated as of February 26, 2007 issued by Southwest Casino Corporation to
each of the purchaser party to the Securities Purchase Agreement
|
|
Incorporated by reference to Exhibit 10.47 to
the registration on Form SB-2 filed February 28, 2007.
|
|
|
|
|
|
4.13
|
|
Form of Registration Rights Agreement dated as
of February 26, 2007 by and among Southwest Casino Corporation and the
purchasers named therein
|
|
Incorporated by reference to Exhibit 10.48 to
the registration on Form SB-2 filed February 28, 2007.
|
|
|
|
|
|
4.14
|
|
Form of Warrant issued March 10, 2008 by
Southwest Casino Corporation
|
|
Incorporated by reference to Exhibit 4.1 to the
Current Report to Form 8-K filed March 13, 2008.
|
|
|
|
|
|
4.15
|
|
Form of Registration Rights Agreement, dated
March 10, 2008, between Southwest Casino Corporation and non-affiliate
guarantors and James B. Druck, Thomas E. Fox, Jeffrey S. Halpern and Gus A.
Chafoulias
|
|
Incorporated by reference to Exhibit 4.2 to the
Current Report to Form 8-K filed March 13, 2008.
|
|
|
|
|
|
4.16
|
|
Form of Warrant dated June 16, 2008 issued
by Southwest Casino Corporation to each of the purchasers party to the
Securities Purchase Agreement
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report to Form 8-K filed June 23, 2008.
|
|
|
|
|
|
5.1
|
|
Opinion of Oppenheimer, Wolff & Donnelly
LLP
|
|
Previously filed
|
|
|
|
|
|
10.1
|
|
2004 Stock Incentive Plan
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report to Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.2
|
|
Option Agreement dated July 1, 2004, between
Southwest Casino and James B. Druck
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.3
|
|
Option Agreement dated July 1, 2004, between
Southwest Casino and Jeffrey S. Halpern
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed August 6, 2004.
|
E-2
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
10.4
|
|
Option Agreement dated July 1, 2004, between
Southwest Casino and Thomas E. Fox
|
|
Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.5
|
|
Third Amended and Restated Gaming Management
Agreement dated June 16, 1995 between The Cheyenne and Arapaho Tribes of
Oklahoma and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 10.5 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.6
|
|
Amendment No. 2 to Third Amended and Restated
Gaming Management Agreement dated June 5, 1999 between The Cheyenne and
Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 10.6 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.7
|
|
Amendment No. 3 to Third Amended and Restated
Gaming Management Agreement dated November 13, 2000 between The Cheyenne
and Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 10.7 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.8
|
|
Amendment No. 7 to Third Amended and Restated
Gaming Management Agreement dated September 4, 2003 between The Cheyenne
and Arapaho Tribes of Oklahoma and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 10.8 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.9
|
|
Member Control Agreement of North Metro Harness
Initiative, LLC, dated June 8, 2004
|
|
Incorporated by reference to Exhibit 10.10 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.10
|
|
BLN Office Park Lease,
dated August 10, 2004, between Southwest Casino and Hotel Corp. and BLN
Office Park Associates.
|
|
Previously filed
|
|
|
|
|
|
10.11
|
|
Lease dated March 1999, by and between Cripple
Creek Development Corp. d/b/a Gold Rush Hotel & Casino, Blue
Building Development, Inc. d/b/a Gold Diggers Casino, Mark Brockley,
Annesse Brockley, Gold Rush I, LLC and Southwest Casino and Hotel Corp., as
amended
|
|
Incorporated by reference to Exhibit 10.11 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.12
|
|
Employment Agreement, dated effective July 1,
2004, between Southwest Casino and Hotel Corp. and James B. Druck
|
|
Incorporated by Reference to Exhibit 10.13 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.13
|
|
Employment Agreement, dated effective July 1,
2004, between Southwest Casino and Hotel Corp. and Jeffrey S. Halpern
|
|
Incorporated by Reference to Exhibit 10.14 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.14
|
|
Employment Agreement, dated effective July 1,
2004, between Southwest Casino and Hotel Corp. and Thomas E. Fox
|
|
Incorporated by reference to Exhibit 10.15 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.15
|
|
Form of Indemnification Agreements by and
between Southwest Casino and Hotel Corp. and each of James B. Druck, Jeffery
S. Halpern, Thomas E. Fox and Brian L. Foster
|
|
Incorporated by reference to Exhibit 10.17 to
the Current Report on Form 8-K/A filed October 5, 2004.
|
E-3
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
10.16
|
|
Indemnification Agreement, dated June 29, 2004,
by and between Lone Moose Adventures, Inc. and David C. Merrell
|
|
Incorporated by reference to Exhibit 10.18 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.17
|
|
Introduction Agreement, dated June 29, 2004, by
and between Lone Moose Adventures, Inc. and Jenson Services, Inc.
|
|
Incorporated by reference to Exhibit 10.19 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.18
|
|
Lease, dated May 1, 1998, by and between Lois
L. Woods and Southwest Casino and Hotel Corp., as amended
|
|
Previously filed
|
|
|
|
|
|
10.19
|
|
Commitment Letter, dated October 14, 2003, by
and between Southwest Casino and Hotel Corp. and Oppenheimer & Co.
Inc.
|
|
Incorporated by reference to Exhibit Incorporated
by reference to Exhibit 10.21 to the Current Report on Form 8-K
filed August 6, 2004.
|
|
|
|
|
|
10.20
|
|
Member Control Agreement, dated June 14, 2004,
by and between SW Missouri, LLC and Southwest Casino and Hotel Corp.
|
|
Incorporated by reference to Exhibit 10.22 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.21
|
|
Operating Agreement of Southwest Missouri Gaming,
LLC dated June 16, 2004.
|
|
Incorporated by reference to Exhibit 10.23 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.22
|
|
Management Agreement dated June 16, 2004 by and
among Southwest Missouri Gaming, LLC, Robert E. Low and W Missouri, LLC.
|
|
Incorporated by reference to Exhibit 10.24 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.23
|
|
Stipulation and Agreement, dated June 17, 2004,
by and among Southwest Casino and Hotel Corp., and the Colorado Division of
Gaming
|
|
Incorporated by reference to Exhibit 10.25 to
the Current Report on Form 8-K filed August 6, 2004.
|
|
|
|
|
|
10.24
|
|
Revolving Credit and Term Loan Agreement, dated
October 20, 2005, between Southwest Casino and Hotel Corp. and Crown
Bank
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.25
|
|
Guaranty by Corporation, dated October 20,
2005, by Southwest Casino and Hotel Corp. for the benefit of Crown Bank
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.26
|
|
Security Agreement, dated October 20, 2005,
between Southwest Casino Corporation and Crown Bank
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.27
|
|
Stock Pledge Agreement, dated October 20, 2005,
between Southwest Casino Corporation and Crown Bank
|
|
Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.28
|
|
Security Agreement, dated October 20, 2005,
between Southwest Casino and Hotel Corp. and Crown Bank
|
|
Incorporated by reference to Exhibit 10.5 to
the Current Report on Form 8-K filed October 26, 2005.
|
E-4
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
10.29
|
|
Membership Interest Pledge Agreement, dated
October 20, 2005 between Southwest Casino and Hotel Corp. and Crown Bank
(50% North Metro Harness Initiative, LLC)
|
|
Incorporated by reference to Exhibit 10.6 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.30
|
|
Membership Interest Pledge Agreement, dated
October 20, 2005 between Southwest Casino and Hotel Corp. and Crown Bank
(Gold Rush I, LLC, Southwest Casino Deadwood, LLC and SW Missouri, LLC)
|
|
Incorporated by reference to Exhibit 10.7 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.31
|
|
Stock Pledge Agreement, dated October 20, 2005,
between Southwest Casino and Hotel Corp. and Crown Bank (Southwest
Entertainment, Inc.)
|
|
Incorporated by reference to Exhibit 10.8 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.32
|
|
Form of Personal Guaranty by James Druck,
Thomas Fox and Jeffrey Halpern, officers of Southwest Casino Corporation,
dated October 20, 2005, for the benefit of Crown Bank
|
|
Incorporated by reference to Exhibit 10.9 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.33
|
|
Form of Personal Guaranty by non-affiliates
dated October 20, 2005 for the benefit of Crown Bank
|
|
Incorporated by reference to Exhibit 10.10 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.34
|
|
Form of Personal Guaranty by Trust dated
October 20, 2005 for the benefit of Crown Bank
|
|
Incorporated by reference to Exhibit 10.11 to
the Current Report on Form 8-K filed October 26, 2005.
|
|
|
|
|
|
10.35
|
|
Form of
Indemnification Agreements by and between Southwest Casino Corporation and
each of David H. Abramson, Gus A. Chafoulias, Jim Holmes and Gregg P.
Schatzman, independent members of Southwests Board of Directors
|
|
Incorporated by
reference to Exhibit 10.35 to the Annual Report on Form 10-KSB
filed March 31, 2006.
|
|
|
|
|
|
10.36
|
|
Gaming Management Agreement, dated March 24,
2006, between Southwest Casino and Hotel Corp. and the Otoe-Missouria Tribe
of Indians (not effective until approved by the National Indian Gaming
Commission)
|
|
Incorporated by reference to Exhibit 10.36 to
the Annual Report on Form 10-KSB filed March 31, 2006.
|
|
|
|
|
|
10.37
|
|
Employment Agreement between Southwest and Tracie L.
Wilson dated June 29, 2006
|
|
Incorporated by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-QSB filed August 14, 2006.
|
|
|
|
|
|
10.38
|
|
Stock Option Agreement between Southwest and Tracie
L. Wilson dated June 29, 2006
|
|
Incorporated by reference to Exhibit 10.2 to
the Quarterly Report on Form 10-QSB filed August 14, 2006.
|
|
|
|
|
|
10.39
|
|
Asset Purchase Agreement dated December 18,
2006 by and among Southwest Eagle, LLC, Richard F. Fabiano, Frank R.
Spadafore, Dorian N. Lange and Pinnacle Casinos and Resorts, LLC, and
Colorado Casino Resorts, Inc., Double Eagle Resorts, Inc. and Gold
Creek Ventures, LLC
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed December 21, 2006.
|
|
|
|
|
|
10.40
|
|
Lease dated December 20, 2006 by and between
Pinnacle Casinos and Resorts, LLC, Colorado Casino Resorts, Inc. and
Southwest Eagle, LLC
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed December 21, 2006.
|
E-5
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
10.41
|
|
Form of Securities Purchase Agreement dated as
of January 24, 2007 by and among Southwest Casino Corporation and the
purchasers named therein
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed January 30, 2007.
|
|
|
|
|
|
10.42
|
|
Amended and Restated Lease dated January 31,
2007 by and between Pinnacle Casinos and Resorts, LLC, Colorado Casino
Resorts, Inc. and Southwest Eagle, LLC
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed January 31, 2007.
|
|
|
|
|
|
10.43
|
|
Right of Access and Use Agreement dated
January 31, 2007 by and between Pinnacle Casinos and Resorts, LLC,
Colorado Casino Resorts, Inc. and Southwest Eagle, LLC
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed January 31, 2007.
|
|
|
|
|
|
10.44
|
|
Form of Securities Purchase Agreement dated as
of February 26, 2007 by and among Southwest Casino Corporation and the
purchasers named therein
|
|
Incorporated by reference to Exhibit 10.46 to
the registration on Form SB-2 filed February 28, 2007.
|
|
|
|
|
|
10.45
|
|
Credit Agreement dated April 20, 2007 by and
among North Metro Harness Initiative, LLC and other persons party hereto
designated as loan parties and Black Diamond Commercial Finance, L.L.C. and
the other financial institutions party hereto as Lenders
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed April 24, 2007
|
|
|
|
|
|
10.46
|
|
Pledge Agreement dated April 20, 2007 between
Southwest Casino & Hotel Corp. and Black Diamond Commercial Finance,
L.L.C.
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed April 24, 2007
|
|
|
|
|
|
10.47
|
|
Sponsor Support Agreement dated April 20, 2007
by and among Southwest Casino & Hotel Corp., Southwest Casino
Corporation and Black Diamond Commercial Finance, L.L.C.
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed April 24, 2007
|
|
|
|
|
|
10.48
|
|
Subordination Agreement dated April 20, 2007 by
and among Southwest Casino & Hotel Corp., North Metro Harness
Initiative, LLC and Black Diamond Commercial Finance, L.L.C.
|
|
Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed April 24, 2007
|
|
|
|
|
|
10.49
|
|
Form of Promissory Note dated as of
January 11, 2008 by Southwest Casino & Hotel Corp. in favor of
Crown Bank.
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed on March 13, 2008
|
|
|
|
|
|
10.50
|
|
Contribution Agreement dated March 7, 2008 by
and among Southwest Casino Corporation and each of the co-signers or
guarantors named therein.
|
|
Incorporated by reference to Exhibit 10.2 to
the Current Report on Form 8-K filed on March 13, 2008
|
|
|
|
|
|
10.51
|
|
Stock Pledge Agreement dated March 7, 2008
among Southwest Casino Corporation, co-signers and guarantors
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed on March 13, 2008
|
|
|
|
|
|
10.52
|
|
Form of Amended and Restated Personal Guaranty
by James Druck, Thomas Fox, and Jeffrey Halpern, officers of Southwest Casino
Corporation, dated March 7, 2008, for the benefit of Crown Bank
|
|
Incorporated by reference to Exhibit 10.4 to
the Current Report on Form 8-K filed on March 13, 2008
|
E-6
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
10.53
|
|
Stock Option Agreement between Southwest and James
B. Druck dated March 20, 2008
|
|
Incorporated by reference to Exhibit 10.53 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.54
|
|
Stock Option Agreement between Southwest and Thomas
E. Fox dated March 20, 2008
|
|
Incorporated by reference to Exhibit 10.54 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.55
|
|
Stock Option Agreement between Southwest and Jeffrey
S. Halpern dated March 20, 2008
|
|
Incorporated by reference to Exhibit 10.55 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.56
|
|
Stock Option Agreement between Southwest and Tracie
L. Wilson dated March 20, 2008
|
|
Incorporated by reference to Exhibit 10.56 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.57
|
|
Form of Option Agreement dated March 20,
2008 between Southwest and each of the independent members of our Board of
Directors.
|
|
Incorporated by reference to Exhibit 10.57 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.58
|
|
Stock Option Agreement dated January 10, 2006
between Southwest and David H. Abramson, Chairman of the Audit Committee of
the Board of Directors.
|
|
Incorporated by reference to Exhibit 10.58 to
the Annual Report on Form 10-KSB filed March 31, 2008.
|
|
|
|
|
|
10.59
|
|
Form of Securities Purchase Agreement dated as
of June 17, 2008 by and among Southwest Casino Corporation and the
purchasers named therein
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed June 23, 2008.
|
|
|
|
|
|
10.60
|
|
Form of Lock-Up Agreement dated June 17,
2008 by and among Southwest Casino Corporation and certain directors and
executive officers
|
|
Incorporated by reference to Exhibit 10.3 to
the Current Report on Form 8-K filed June 23, 2008.
|
|
|
|
|
|
10.61
|
|
Modification and Extension of Consulting Agreement
between Southwest Casino Corporation and Operadora Dominicana Macao, S.A.
dated June 25, 2008
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed July 1, 2008.
|
|
|
|
|
|
10.62
|
|
Amendment No. 2 to Credit Agreement by and
among North Metro Harness Initiative, LLC, other Loan Parties, Lenders, and
Black Diamond Commercial Finance, L.L.C. as Agent, dated July 1, 2008
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed July 8, 2008.
|
|
|
|
|
|
10.63
|
|
Limited Guaranty by and among Southwest Casino
Corporation, Southwest Casino and Hotel Corp. and Black Diamond Commercial
Finance, L.L.C. as Agent, dated July 1, 2008.
|
|
Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed July 8, 2008.
|
|
|
|
|
|
14.1
|
|
Code of Conduct and Ethics
|
|
Incorporated by reference to Exhibit 14.1 to
the Current Report on Form 8-K filed December 21, 2007.
|
|
|
|
|
|
14.2
|
|
Southwest Casino Corporation Code of Conduct and
Ethics effective December 20, 2007
|
|
Incorporated by reference to Exhibit 14.1 to
the Current Report on Form 8-K filed December 24, 2007.
|
E-7
Table
of Contents
Exhibit
No.
|
|
Exhibit*
|
|
Method of Filing
|
|
|
|
|
|
16.1
|
|
Letter on change in certifying public accountant
|
|
Incorporated by reference to Exhibit 16.1 to
the Current Report on Form 8-K filed September 13, 2004.
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries of Southwest Casino Corporation
|
|
Incorporated by reference to Exhibit 21.1 to
the Annual Report on Form 10-KSB filed March 31, 2006.
|
|
|
|
|
|
23.1
|
|
Consent of Independent Auditors
|
|
Filed herewith.
|
|
|
|
|
|
23.2
|
|
Consent of Oppenheimer, Wolff & Donnelly
(included in Exhibit 5.1)
|
|
Previously filed.
|
24.1
|
|
Power of Attorney
|
|
Previously filed.
|
*Pursuant to Item 601(b)(2) of Regulation S-K,
the registrant agrees to furnish, supplementally, a copy of any exhibit or
schedule omitted from any filed exhibit to this report to the
Securities and Exchange Commission upon request.
E-8
Southwest Casino (CE) (USOTC:SWCC)
Historical Stock Chart
From May 2024 to Jun 2024
Southwest Casino (CE) (USOTC:SWCC)
Historical Stock Chart
From Jun 2023 to Jun 2024