UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal period ended June 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_______________________ to ______________________
Commission file number 0-8927
NEVADA GOLD & CASINOS, INC.
(Name of issuer in its charter)
Nevada 88-0142032
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3040 Post Oak Blvd.
Suite 675 Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 621-2245
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file the reports), and (2) has been subject to those
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
[ ] Yes [X] No
The number of common shares outstanding was 11,196,772 as of July 31, 2003
The Registrant hereby amends the following items, financial statements,
exhibits, or other portions of this Quarterly Report on Form 10Q/A for the
Quarterly Periods Ended June 30, 2003 and June 30, 2002 as set forth in the
attached pages and described in more detail in Note 2 to the consolidated
financial statements.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 (RESTATED)
AND MARCH 31, 2003................................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 (RESTATED) AND 2002 ................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 (RESTATED) AND 2002 ................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......... 24
ITEM 4. CONTROLS AND PROCEDURES............................................. 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................. 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 25
ITEM 5. OTHER INFORMATION................................................... 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2003 2003
------------ ------------
(Restated) (Unaudited)
(Audited)
ASSETS
CURRENT ASSETS
Cash and cash $ 2,707,343 $ 3,968,146
equivalents
Notes receivable 4,719,552 -
Accounts receivable 640,984 187,882
Other receivable 332,924 2,125
------------ ------------
TOTAL CURRENT ASSETS 8,400,803 4,158,153
------------ ------------
Joint ventures in equity investees:
Isle of Capri-Black Hawk, L.L.C. 11,260,997 8,633,782
Route 66 Casinos, L.L.C. 821,208 789,473
Restaurant Connections International, Inc. (RCI) - -
Sunrise Land and Minerals Corporation, land development 371,750 371,750
Investment in development projects:
Dry Creek Casino, L.L.C., enhancement contract 851,823 659,897
Gold Mountain Development, L.L.C., land development 3,135,265 3,065,281
Goldfield Resources, Inc., mining interest 480,812 480,812
Note receivable from Dry Creek Rancheria, net of current portion 29,042,321 28,334,437
Note receivable from affiliates, net of current portion and discount 4,650,751 6,150,552
Note receivable - other - 3,339,060
Deferred loan issue costs, net 1,531,397 1,544,433
Other assets 368,107 236,416
Furniture, fixtures, and equipment, net of accumulated depreciation of
$130,984 and $130,653 at June 30 and March 31, 2003, respectively 41,636 43,399
------------ ------------
TOTAL ASSETS $ 60,956,870 $ 57,807,445
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued 868,906 $ 882,388
liabilities
Accrued interest payable 347,384 314,829
Deferred tax liability 1,218,148 388,113
Current portion of long term debt 3,123,798 1,932,072
------------ ------------
TOTAL CURRENT LIABILITIES 5,558,236 3,517,402
------------ ------------
LONG TERM LIABILITIES
Deferred income 1,112,416 1,014,729
Notes payable, net of current portion and discount 33,054,173 34,207,276
------------ ------------
TOTAL LONG TERM LIABILITIES 34,166,589 35,222,005
------------ ------------
TOTAL LIABILITIES 39,724,825 38,739,407
------------ ------------
MINORITY INTEREST - DRY CREEK CASINO, L.L.C. 488,742 360,450
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock, $0.12 par value, 20,000,000 shares authorized, 11,190,272 and
11,149,772 shares issued and outstanding at June 30 and March 31, 2003, respectively 1,342,832 1,337,973
Additional paid in capital 15,428,184 15,201,794
Retained earnings 4,411,272 2,737,399
Accumulated other comprehensive loss (438,985) (569,578)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 20,743,303 18,707,588
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,956,870 $ 57,807,445
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
----------------------------
2003 2002
------------ ------------
(Restated)
REVENUES
Gaming Assets Participations:
Dry Creek Casino, L.L.C $ 300,458 $ -
Other income:
Royalty income 13,500 10,500
Lease income - 2,100
Gain on land sale - 28,267
Interest income 1,307,649 373,918
Miscellaneous income 15,645 18,547
------------ ------------
TOTAL REVENUES 1,637,252 433,332
------------ ------------
EXPENSES
General and administrative 159,805 122,609
Interest expense 1,017,419 325,347
Salaries 273,604 219,459
Legal and professional fees 314,026 46,737
Amortization of deferred loan issue costs 142,623 133,737
Write-off of capitalized development costs - 60,000
Other 22,208 22,867
------------ ------------
TOTAL EXPENSES 1,929,685 930,756
------------ ------------
EQUITY IN EARNINGS OF ISLE OF CAPRI-BLACK HAWK 2,833,347 2,558,380
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C 25,974 9,352
MINORITY INTEREST - DRY CREEK CASINO, L.L.C (53,292) (32,499)
------------ ------------
Income before federal income tax provision 2,513,596 2,037,809
Federal income tax provision - deferred (839,723) (789,004)
------------ ------------
NET INCOME $ 1,673,873 $ 1,248,805
============ ============
PER SHARE INFORMATION
Net income per common share - basic $ 0.15 $ 0.12
============ ============
Net income per common share - diluted $ 0.12 $ 0.09
============ ============
Basic weighted average number of
common shares outstanding 11,171,734 10,776,537
============ ============
Fully diluted weighted average number of
common shares outstanding 15,251,828 15,710,466
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
--------------------------
2003 2002
----------- -----------
(Restated)
CASH FLOWS - OPERATING ACTIVITIES:
Net income $ 1,673,873 $ 1,248,805
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 6,289 7,684
Consultant option expenses 77,500 -
Warrants issued and amortization of beneficial conversion
and costs associated with notes payable 185,931 197,445
Amortization of capitalized development cost 14,438 -
Amortization of deferred income (71,411) (8,300)
Write-off of capitalized development cost - 60,000
Equity in earnings of Isle of Capri-Black Hawk (2,833,347) (2,558,380)
Cash distribution from Isle of Capri-Black Hawk 404,000 1,186,000
Equity in earnings of Route 66 Casinos, L.L.C (25,974) (9,352)
Deferred tax expense 839,723 789,004
Minority interest - Dry Creek Casino, L.L.C 53,292 32,499
Changes in operating assets and liabilities:
Receivables and other assets (765,280) (395,212)
Accounts payable and accrued liabilities 27,417 (48,403)
----------- -----------
NET CASH PROVIDED BY (USED IN) BY OPERATING ACTIVITIES (413,549) 501,790
----------- -----------
CASH FLOWS - INVESTING ACTIVITIES:
Purchases of real estate and assets held for development (432,421) (552,125)
Purchase of furniture, fixtures and equipment (4,526) (7,629)
Advances on note receivable from Dry Creek Rancheria (4,089,855) (3,542,489)
Collection of note receivable - other 3,339,060 -
Advances on note receivable - affiliate - (1,025,213)
Collection of note receivable - affiliate 299,801 1,457,388
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (887,941) (3,670,068)
----------- -----------
CASH FLOWS - FINANCING ACTIVITIES:
Proceeds from debt - 3,231,380
Deferred loan issue costs (129,587) (63,832)
Dry Creek Casino, L.L.C. capital contribution 75,000 5,250
Common stock issued for cash, net of offering costs 99,959 304,120
Payments on debt (4,685) (7,661)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 40,687 3,469,257
----------- -----------
Net increase (decrease) in cash (1,260,803) 300,979
Beginning cash balance 3,968,146 1,021,913
----------- -----------
Ending cash balance $ 2,707,343 $ 1,322,892
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 1,012,344 $ 392,648
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
5
NEVADA GOLD & CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS
Nevada Gold & Casinos, Inc. was formed in 1977 and is primarily a
developer of gaming properties.
Isle of Capri Black Hawk, L.L.C.
We are a 43% non-operating owner of Isle of Capri Black Hawk, L.L.C.
("IC-BH") with Isle of Capri Casinos, Inc. ("Isle") In April 2003, IC-BH
completed the acquisition of the Colorado Central Station Casino and Colorado
Grande Casino from IGT for $84 million. Also, to replace its existing credit
facility, IC-BH entered into a new $210.6 million senior secured credit facility
to provide financing for the acquisition of the new casinos and for possible
future expansion. IC-BH now owns and operates three casinos in Colorado
(referred to collectively as the "Casinos"). Isle manages the casinos under an
agreement for a fee based upon a percentage of the casino's revenues and
operating profit. IC-BH's gaming properties are:
- the Isle of Capri - Black Hawk Casino and hotel located in Black
Hawk, Colorado;
- the Colorado Central Station Casino located in Black Hawk, Colorado;
and
- the Colorado Grande Casino located in Cripple Creek, Colorado.
The Isle of Capri - Black Hawk Casino has a 101,000-square-foot floor
plate, and is strategically located at the entrance to Black Hawk. The Casino
features 1,123 slot machines, 14 table games, three restaurants, an event
center, and a 1,100-space covered parking garage. A 237-room hotel is on top of
the casino.
Colorado Central Station Casino is located across the intersection of Main
Street and Mill Street from the Isle of Capri - Black Hawk Casino. Colorado
Central Station casino has a total facility area of 46,250 square feet, features
754 gaming machines, 15 table games, a full service restaurant, a buffet, two
casino bars, and 700 parking spaces.
Colorado Grande Casino is located at a primary intersection, near the
center of the Cripple Creek market. Colorado Grande Casino's gaming area totals
3,125 square feet and offers 219 gaming machines. Colorado Grande Casino does
not offer table play.
Dry Creek Casino, L.L.C.
Dry Creek Casino, L.L.C. (the "LLC"), of which we own 69%, was formed to
assist the Dry Creek Rancheria Band of Pomo Indians with the development and
financing of its River Rock Casino located approximately 70 miles north of the
San Francisco Bay area, in Sonoma County, California. The casino features 1,600
slot machines, 16 table games, and a restaurant. To date, we have made a $31.1
million loan to the LLC, which has loaned such funds to the River Rock Casino
project, and we have guaranteed equipment financing and operating leases of
approximately $14.6 million. Under the development and loan agreement, the LLC
began earning 20% of River Rock Casino's earnings before taxes, depreciation,
and amortization for five years, starting June 1, 2003.
Route 66 Casinos, L.L.C.
Route 66 Casinos, L.L.C. ("Route 66"), of which we are a 51% owner, was
formed to assist the Laguna Development Corporation (the "LDC"), a federally
chartered corporation which is wholly-owned by the Pueblo of Laguna tribe with
the design and development of a casino located in New Mexico ("Route 66
Casino"). In exchange for its service, Route 66 has the exclusive right to lease
gaming equipment to the LDC for a period of five years for the Route 66 Casino.
The gaming equipment agreements include a five-year contract for 1,250 gaming
devices to be placed in the Route 66 Casino, a one-year contract for 100 gaming
devices in Rio Puerco temporary casino, and a contract that runs through
February 2004 for 45 gaming devices in the existing Dancing Eagle Casino. We are
currently in arbitration and litigation with the other member of Route 66 as
discussed in Part II, Item 1.
In addition, we and/or our subsidiaries own interests in undeveloped real
estate, restaurant franchises, and gold mining claims.
6
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements included herein have been prepared by us,
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which are, in the opinion of
management, necessary to present a fair statement of the results for the interim
periods on a basis consistent with the annual audited consolidated financial
statements. All such adjustments are of a normal recurring nature. The results
of operations for the interim periods are not necessarily indicative of the
results to be expected for an entire year. Certain information, accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been omitted pursuant to such rules and regulations, although we believe that
all disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with our audited
consolidated financial statements included in our Annual Report on Form 10-K for
the year ended March 31, 2004.
CHANGES IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS - We have determined
that our investment in Route 66 Casinos, L.L.C. should be accounted for using
the equity method because our venture partner continues to control the operating
activities of the venture, even though such is, in the opinion of management, a
breach of the operating agreement. This accounting treatment will continue until
a final resolution of the dispute is reached. Accordingly, amounts previously
recorded as Route 66 Casinos, L.L.C - revenues, Route 66 Casinos, L.L.C. -
expenses, and minority interest - Route 66 Casinos, L.L.C. have been netted and
recorded as equity in earnings of Route 66, Casinos, L.L.C. and certain balance
sheet accounts have been netted and recorded as investment in Route 66 Casinos,
L.L.C.
Also, during the year ended March 31, 2004, and subsequent to the issuance
of the Company's financial statements as of March 31, 2003, it was determined
that the beneficial conversion feature of the Company's convertible credit
facility and certain warrants and options had not been appropriately valued and
accounted for. The following describes the appropriate accounting and the
changes made to the Company's financial statements as of and for the three
months ended June 30, 2003.
Credit Facility Conversion Feature and Certain Warrants. In the
fiscal year ended March 31, 1999, the Company entered into a $7 million credit
facility, which was amended in the fiscal year ended March 31, 2002 to increase
the facility to $13 million (the "Credit Facility"). A portion of the principal
balance of the Credit Facility was convertible into common stock from time to
time at the option of the holder. The intrinsic value of the conversion feature
of the Credit Facility normally is characterized as a beneficial conversion
feature. The Company determined the value of the beneficial conversion feature
of cumulative drawdowns under the Credit Facility to be an aggregate of $1.4
million and was recorded as an adjustment to additional paid in capital.
Principal of the Credit Facility was drawn down beginning in the fiscal year
ended March 31, 1999 and continuing through the fiscal year ended March 31,
2002. Accordingly, the Company discounted the balance of the Credit Facility as
of the date of each drawdown and are amortizing the beneficial conversion
feature associated with each drawdown from the date of each drawdown to the
maturity date of the Credit Facility.
In the fiscal years ended March 31, 2000, March 31, 2001 and March 31,
2002 multiple warrants were issued to a financial advisor instrumental in
securing the Credit Facility (collectively, the "Warrants"). Each Warrant was
immediately vested and exercisable upon issuance. The Company ascribed an
estimated fair value of the Warrants in the aggregate amount of $1.7 million and
was recorded as an adjustment to additional paid in capital. Accordingly, the
Company capitalized deferred loan issue costs as of the date of issuance of each
Warrant and such costs are being amortized from the date of each issuance to the
maturity date of the Credit Facility.
It was also determined that, in the calculation of the diluted weighted
average number of common shares outstanding, certain convertibility restrictions
imposed by the Credit Facility on the lender and certain exercise restrictions
imposed on the Warrants had been interpreted as more restrictive than they
actually were, resulting in an overstatement of diluted earnings per share
beginning in the fiscal year ended March 31, 2000.
Accordingly, the accompanying consolidated statements of operations and
cash flows for the quarter ended June 30, 2003 and the consolidated balance
sheet as of June 30, 2003 has been restated from amounts previously reported to
correct the accounting for these transactions. The Company has recorded a
beneficial conversion feature (debt discount) associated with its Credit
Facility and deferred loan issue costs associated with the Warrants.
Amortization of the debt discount is being accounted for using the effective
interest method and is being charged to interest expense. The deferred loan
issue costs are being amortized over the life of the Credit Facility on a
straight
7
line basis and are being charged to amortization of deferred loan issue cost
expenses.
For the three months ended June 30, 2003, interest expense increased by
$43,308 due to the amortization of the debt discount and deferred loan costs
expense increased by $69,569 due to the amortization of deferred loan issue
costs. Additionally for the three months ended June 30, 2003, the federal income
tax provision decreased by $23,654 related to the tax effect of the amortization
of deferred loan issue costs.
Certain Options and Warrants. In the fiscal years ending March 31, 2000,
March 31, 2001 and March 31, 2002, certain options and warrants were issued to
other advisors and consultants (collectively, the "Options"). The Options were
immediately vested and exercisable. The Company ascribed a fair value for the
Options in the aggregate amount of $910,000 and was recorded as an adjustment to
additional paid in capital. Costs related to these Options were expensed in the
period granted.
Certain Tax Benefits. The Company determined that certain tax benefits
associated with the exercise of common stock options and warrants that occurred
during the three months ended June 30, 2003 were not considered. As a result,
the amount of the deferred tax liability was overstated and the amount of
additional paid in capital and total stockholders' equity was understated as of
June 30, 2003 by $1.4 million.
The impact of the restatement is summarized as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2003
---- ----
(AS REPORTED) (RESTATED)
STATEMENT OF OPERATIONS
Route 66 Casinos, L.L.C. -
Revenues $ 145,516 $ -
Interest expense 974,111 1,017,419
Amortization of deferred
loan issue costs 73,054 142,623
Route 66 Casinos, L.L.C. -
expenses 94,586 -
Total expenses 1,911,394 1,929,685
Equity in Earnings of Route 66
Casinos, L.L.C - 25,974
Minority interests - Route 66
Casinos, L.L.C 24,956 -
Federal income tax provision 863,377 839,723
Net income 1,763,096 1,673,873
Net income per common
share - basic $ 0.16 $ 0.15
Net income per common
share - diluted $ 0.14 $ 0.12
Basic weighed average
Number of common shares
outstanding 11,171,734 11,171,734
Diluted weighed average
Number of common shares
Outstanding 13,079,936 15,251,828
8
JUNE 30,
--------------------------
2003 2003
(as reported) (restated)
BALANCE SHEET
Deferred loan issue costs $ 894,559 $ 1,531,397
Investment in Route 66 Casinos,
L.L.C. 1,295,960 821,208
Total assets 61,016,840 60,956,870
Deferred tax liability 3,315,077 1,218,148
Note payable, net of current
Portion 33,487,254 33,054,173
Minority interest - Route 66
Casinos, L.L.C. 696,808 -
Additional paid in capital 9,997,267 15,428,184
Retained earnings 6,675,341 4,411,272
Total stockholders' equity 17,576,455 20,743,303
Total liabilities and
stockholders' equity 61,016,840 60,956,870
All footnotes, where applicable, have been adjusted to conform to this
restatement.
BASIS OF PRESENTATION - These financial statements are consolidated for
all majority owned subsidiaries for all periods presented. Affiliated companies
in which we do not have a controlling interest or for which control is expected
to be temporary are accounted for using the equity method. All significant
intercompany transactions and balances have been eliminated in the financial
statements.
CASH AND CASH EQUIVALENTS - Interest-bearing deposits and other
investments, with original maturities of three months or less from the date of
purchase, are considered cash and cash equivalents.
EQUITY METHOD OF ACCOUNTING - Our investments in IC-BH, RCI and Route
66 Casinos, L.L.C. are accounted for using the equity method of accounting
because the investment gives us the ability to exercise significant influence,
but not control, over the investees. Significant influence is generally deemed
to exist where we have an ownership interest in the investee of between 20% and
50%, although other factors such as the degree of ultimate control,
representation on the investee's Board of Directors or similar oversight body
are considered in determining whether the equity method of accounting is
appropriate. Although we have an ownership interest of 51% in Route 66 Casinos,
L.L.C., we account for the investment in Route 66 Casinos, L.L.C. using the
equity method because the operating activities of the joint venture are
currently controlled by the minority venturer. We record our equity in the
income or losses of our investees using the same reporting periods presented
herein, except we report our equity in income and losses three months in arrears
for RCI and one month in advance for IC-BH, based upon their respective fiscal
year ends. Deferred tax assets or liabilities are recorded for allocated
earnings or losses of our equity investments that are not currently reportable
or deductible for federal income tax purposes.
IMPAIRMENT OF EQUITY INVESTEES - The Company reviews its investments in
equity investees for impairment whenever events or changes in circumstances
indicate that the carrying amount of the investment may not be recoverable.
Generally our equity investees are evaluated periodically by determining an
estimate of fair value derived from an analysis of undiscounted net cash flow,
replacement cost or market comparison, before interest, and if required the
Company will recognize an impairment loss equal to the difference between its
carrying amount and its estimated fair value. If impairment is recognized, the
reduced carrying amount of the asset will be accounted for as its new cost.
Should an impairment occur, the carrying value of our investment in an equity
investee would not be recorded below zero unless there are guaranteed
obligations of the investee or is otherwise committed to provided further
financial support. The process of evaluating for impairment requires estimates
as to future events and conditions, which are subject to varying market and
economic factors, such as reoccurring losses, permanent devaluation of the
underlying long-term assets and intangibles held by the equity investee and
softening industry trends that appear to be irreversible. Therefore, it is
reasonably possible that a change in estimate resulting from judgments as to
future events could occur which would affect the recorded amounts. As of June
30, 2003 management believes that no impairment exists based upon periodic
reviews. No impairment losses have been recorded for the three months ended June
30, 2003 and 2002.
MINING PROPERTIES AND CLAIMS - Historically, we have capitalized costs of
acquiring and developing mineral claims until the properties are placed into
production. At that time, costs will be amortized on a units-of-production
basis. These costs include the costs to acquire and improve the claims,
including land-related improvements, such as roads. We carry these costs on our
books at the lower of our basis in the claims, or the net realizable value of
the mineral reserves contained in the claims. Other mining properties are
recorded at their acquisition price. At June 30, 2003, management believes the
net realizable value of the mineral reserves is in excess of our cost in the
claims.
REAL ESTATE HELD FOR DEVELOPMENT - Real estate held for development
consists of undeveloped land located in and around Black Hawk, Colorado and
Nevada County, California. We have capitalized certain direct costs of
pre-development activities together with capitalized interest. Property held for
development is carried at the lower of cost or net realizable value.
CAPITALIZED DEVELOPMENT COSTS - Development costs are recorded on the cost
basis. The costs are amortized over their estimated useful life upon the
execution of a development contract. When accumulated costs
9
on a specific project exceed the net realizable value of such project or the
project is abandoned, the costs are charged to expense.
FURNITURE, FIXTURES, AND EQUIPMENT - We depreciate furniture, fixtures,
and equipment over their estimated useful lives, ranging from two to seven
years, using the straight-line method. Expenditures for furniture, fixtures, and
equipment are capitalized at cost. When items are retired or otherwise disposed
of, a gain or (loss) is recorded for the difference between net book value and
proceeds realized on the property. Ordinary maintenance and repairs are charged
to expense, and replacements and betterments are capitalized.
DEFERRED LOAN COSTS - Deferred loan costs are comprised of direct costs of
securing financing by the Company. These costs are amortized to expense on a
straight line basis over the underlying life of the debt instrument. At June 30,
2003, deferred loan costs are $1.5 million, net of accumulated amortization of
$1.5 million.
REVENUE RECOGNITION - We record credit enhancement fee income on the
accrual basis as earned. The dates on which credit enhancement fee income is
actually collected is on the 15th day of each following month. It is also
dependent upon the cash flow from River Rock Casino's operation. As of June 30,
2003, there was no delinquency in credit enhancement fee income. We record
revenues from interest income on notes receivable on the accrual basis as
earned. The dates on which interest income is actually collected is dependent
upon the terms of the particular note receivable agreement, and may not
correspond to the date such interest income is recorded. We record royalty
income on the accrual basis as earned. The dates on which royalty income is
actually collected is dependent upon the terms of the contract, and may not
correspond to the date such royalty income is recorded. The amounts of royalty
income that we may earn is dependent upon a Consumer Price Index which may
increase or decrease our royalty income each fiscal year. As of June 30, 2003,
there was no delinquency in royalty income.
INCOME TAXES - The asset and liability approach is used for financial
accounting and reporting for income taxes. Under this approach, deferred tax
assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to differences
between financial statement carrying amounts of assets and liabilities and their
respective tax basis.
EARNINGS PER SHARE DATA - Basic earnings per common share amounts are
calculated using the average number of common shares outstanding during each
period. Diluted earnings per share assumes the exercise of all stock options
having exercise prices less than the average market price of the common stock
using the "treasury stock method" and for convertible debt securities using the
"if converted method".
STOCK-BASED COMPENSATION - We have adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 - "Accounting for Stock Based
Compensation" as amended by FASB No. 148 "Accounting for Stock Based
Compensation - Transition and Disclosure - An Ammendment to FASB No. 123". Under
SFAS No. 123, we are permitted to either record expenses for stock options and
other employee compensation plans based on their fair value at the date of grant
or to continue to apply our current accounting policy under Accounting
Principles Board, ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," and recognize compensation expense, if any, based on the intrinsic
value of the equity instrument at the measurement date. We elected to continue
following APB No. 25 and when required, provide the pro forma provision of SFAS
No. 123.
USE OF ESTIMATES - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles 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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its investments in
land development projects for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with Statement of Financial Accounting Standards No.
144 ("SFAS No. 144"), "Accounting for the Impairment and Disposal of Long-Lived
Assets". If the carrying amount of the asset, including any intangible assets
associated with that asset, exceeds its estimated undiscounted net cash flow,
before interest, the Company will recognize an impairment loss equal to the
difference between its carrying amount and its estimated fair value. If
impairment is recognized, the reduced carrying amount of the asset will be
accounted for as its new cost. For a depreciable asset, the new cost will be
depreciated over the asset's remaining useful life. Generally, fair values are
estimated using discounted cash flow, replacement cost or market comparison
analyses. As of June 30, 2003, management believes that no impairment exists
based upon periodic reviews. No impairment losses have been recorded for the
three months ended June 30, 2003 and 2002.
CONCENTRATION OF RISK - We are dependent to a large extent upon IC-BH for
our earnings and cash flows from operations. Accordingly, we will be subject to
greater risks than a geographically diversified gaming operation, including, but
not limited to, risks related to local economic and competitive conditions,
complications caused by weather or road closure, road construction on primary
access routes, changes in local and state governmental laws and regulations
(including changes in laws and regulations affecting gaming operations and
taxes) and natural and other disasters.
Any decline in the number of visitors to the Black Hawk Market, a downturn
in the overall economy of the area served by the Black Hawk Market, a decrease
in gaming activities in the Black Hawk Market or an increase in competition
could have a material adverse effect on us.
We maintain cash accounts in major U.S. financial institutions. The terms
of these deposits are on demand to minimize risk. The balances of these accounts
occasionally exceed the federally insured limits, although no losses have been
incurred in connection with such cash balances.
10
SUBSTANTIAL LEVERAGE - In April 2003, IC-BH entered into a $210.6 million
senior secured credit facility, which replaced its prior credit facility. The
degree to which IC-BH is leveraged could have important consequences including,
but not limited to, the following: (a) its increased vulnerability to adverse
general economic and industry conditions; (b) the dedication of a substantial
portion of its operating cash flow to the payment of principal and interest of
indebtedness, thereby reducing the funds available for operations and further
development of IC-BH; and (c) its impaired ability to obtain additional
financing for future working capital, capital expenditures, acquisitions or
other general corporate purposes. To date, cash flow from the Isle of Capri -
Black Hawk Casino's operations has been more than sufficient to pay its debt
obligations.
We are highly leveraged with $36.6 million in corporate debt and lease
guarantees of approximately $14.6 million for the River Rock Casino project. We
also have guaranteed debt of $656,000 for an affiliated company that may mature
during the next fiscal year. To date, cash distributions from IC-BH and loan
repayments from the River Rock Casino project have been sufficient to satisfy
our current debt obligations. Also, the LLC began earning credit enhancement
fees from River Rock Casino for five years, starting in June 2003. However, if
the River Rock Casino project is closed due to pending litigation, governmental
inquiries or other reasons beyond our control, or if we are required to perform
on our outstanding guarantees, we may have insufficient cash flow to satisfy our
obligations without raising additional financing. There is no assurance that we
will be able to obtain additional financing if required, the failure of which
could have a material effect on our operations.
COMPREHENSIVE INCOME - Comprehensive income is a board concept of an
enterprise's financial performance that includes all changes in equity during a
period that arise from transaction and economic events from nonowner sources.
Comprehensive income is net income plus "other comprehensive income," which
consists of revenues, expenses, gains and losses that do not affect net income
under accounting principles generally accepted in the United States. Other
comprehensive income for us consists of adjustments to interest rate swaps, net
of tax.
Comprehensive income consisted of the following:
THREE MONTHS ENDED
JUNE 30,
--------------------------
2003 2002
----------- ------------
Net income $ 1,673,873 $ 1,248,805
Change in fair value of interest rate swaps 130,593 (300,060)
----------- -----------
Comprehensive income $ 1,804,466 $ 948,745
=========== ===========
The accumulated comprehensive loss reflected on the balance sheet at June
30, 2003 and March 31, 2003 consisted solely of the adjustments to interest rate
swaps, net of tax.
RECENT ACCOUNTING PRONOUNCEMENTS - In May 2003, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. We do not believe that the adoption of SFAS No. 150 will have a
significant impact on our financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement is effective for contracts entered into or modified after June 30,
2003.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal entity used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors in the entity do
11
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Certain of the disclosure requirements apply to all financial statements
issued after January 31, 2003, regardless of when the variable interest entity
was established. We did not participate in any applicable activities as of and
for the quarter ended June 30, 2003.
NOTE 3. ISLE OF CAPRI - BLACK HAWK, L.L.C.
We are a 43% non-operating owner of IC-BH with Isle. Financing for the
Isle of Capri - Black Hawk Casino was provided by the IC-BH debt offering of $75
million in 13% First Mortgage Notes. In December 2001, IC-BH refinanced the $75
million with a new $90 million credit facility that included two $40 million
term loans that were due in five years and a $10 million line of credit. The
average interest on this new credit facility was estimated to be 6% to 7%. In
the fourth quarter of fiscal 2002, IC-BH entered into three interest rate swap
agreements that effectively converted $40 million of its floating rate debt to a
fixed-rate basis for the next three years.
In April 2003, IC-BH completed the acquisition of the Colorado Central
Station Casino and Colorado Grande Casino from IGT for $84 million. Also, to
replace its existing credit facility, IC-BH entered into a new $210.6 million
senior secured credit facility to providing financing for the acquisition of the
new casinos and for possible future expansion. IC-BH now owns and operates three
casinos in Colorado.
Our 43% ownership of the IC-BH is accounted for using the equity method of
accounting. Our investment in IC-BH is stated at cost, adjusted for our equity
in the undistributed earnings or losses of the project. IC-BH's undistributed
earnings allocable to us through July 27, 2003 (IC-BH's quarter end) totaled
$2,833,347 which has been included in our statement of operations for the fiscal
year ended June 30, 2003. During our quarter ended June 30, 2003, we received
cash distributions of $404,000 from IC-BH and our basis in the project through
April 27, 2003 is $11,260,977.
The following is a summary of condensed financial information pertaining to
IC-BH as of July 27, 2003 and for the three months ended July 27, 2003:
ISLE OF CAPRI BLACK HAWK, L.L.C.
BALANCE SHEET (UNAUDITED)
(in Thousands)
July 27,
2003
---------
ASSETS
Current assets:
Cash and cash equivalents $ 19,001
Short-term investments 11,996
Accounts receivable - other 985
Accounts receivable - related parties 134
Deferred income taxes 414
Prepaid expenses 3,660
---------
TOTAL CURRENT ASSETS 36,190
Property and equipment, net 155,168
Deferred financing costs, net of accumulated amortization 3,287
Restricted cash 58
Goodwill and other intangible assets 35,407
Prepaid deposits and other 420
---------
TOTAL ASSETS $ 230,530
=========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 12,063
Accounts payable - trade 1,707
Accounts payable - related parties 3,503
Accrued liabilities:
Interest 1,287
12
Payroll and related expenses 5,382
Property, gaming and other taxes 4,640
Income taxes 466
Progressive jackpot and slot club awards 3,922
Other 1,321
---------
TOTAL CURRENT LIABILITIES 34,291
Long-term debt, less current maturities 157,053
Other liabilities 1,547
Deferred income taxes 329
---------
TOTAL LONG-TERM LIABILITIES 158,929
---------
TOTAL LIABILITIES 193,220
Members' equity:
Members' equity 38,857
Accumulated other comprehensive loss (1,547)
---------
TOTAL MEMBERS' EQUITY 37,310
---------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 230,530
=========
13
ISLE OF CAPRI BLACK HAWK, L.L.C.
INCOME STATEMENT (UNAUDITED)
(IN THOUSANDS)
Three Months Ended
--------------------------------------
July 27, 2003 July 28, 2002
Gross revenues $ 52,896 $ 32,362
Total operating expenses 41,083 23,748
-------- --------
Operating income 11,813 8,614
Interest expense, net (2,882) (1,469)
Depreciation and amortization (2,173) (1,195)
-------- --------
Income before income taxes 6,758 5,950
Income tax provision (169) -
-------- --------
Net income $ 6,589 $ 5,950
======== ========
The difference in carrying value of our investment in IC-BH and our equity
interest in IC-BH is primarily due to the fact that we originally contributed
appreciated property which was initially recorded by IC-BH at our fair market
value while we continued to carry the property at its original cost basis.
During IC-BH's quarter ended July 27, 2003, IC-BH recorded an other
comprehensive gain of $460,158 related to the interest rate swap transaction.
Our share of the other comprehensive gain was $130,593, net of taxes of $67,275.
NOTE 4. NOTES RECEIVABLE
NOTES RECEIVABLE - DRY CREEK RANCHERIA - At June 30, 2003, the LLC had
loans to the Dry Creek Rancheria Band of Pomo Indians totaling $32.6 million for
the development and financing of its River Rock Casino project. The loans
consist of a $23 million term loan and a $9.6 million construction advance loan.
The $23 million loan bears an interest rate of 12% per annum with interest due
only through August 2003 and will then be amortized over a four year period. The
$9.6 million construction advance loan bears an interest rate of 12% per annum.
River Rock Casino will use its excess cash flow as defined in the agreement to
repay this loan. The scheduled principal repayments under the terms of the $23
million term loan are as follows:
Year Ended
June 30,
- ----------
2004 $ 3,519,552
2005 5,210,907
2006 5,871,781
2007 6,616,469
2008 1,781,291
-----------
$23,000,000
===========
NOTES RECEIVABLE - AFFILIATES - Clay County Holdings ("CCH") is our
largest shareholder, beneficially owning 22% of our total outstanding common
stock. The President of CCH is a son-in-law of our CEO. We currently have the
option to acquire common stock of Service Interactive ("SI"). At June 30, 2003,
CCH owed us $3 million which amount bears an interest rate of 12% per annum, and
is payable by maker in a minimum amount of $150,000 plus accrued interest per
quarter until paid in full. At June 30, 2003, SI owed us $3 million which amount
bears an interest rate of 12% per annum, and is payable by maker in a minimum
amount of $150,000 plus accrued interest per quarter until paid in full. Both
notes are collateralized by a lien on Nevada Gold & Casinos, Inc. shares owned
by Clay County Holdings with $10 million of market equity value as of June 30,
2003. The outstanding balances of notes receivable from CCH and SI were reduced
by $150,000 and $150,000, respectively, during the quarter ended June 30, 2003.
NOTES RECEIVABLE - OTHER - During the quarter ended June 30, 2003, we have
received loan repayments of
14
$3.3 million from a third party for a loan, which bore an interest rate of 16%
per annum and matured on June 30, 2003.
NOTE 5. LONG-TERM DEBT
We have a $13 million long-term credit facility that bears interest at 11%
per annum, payable monthly, with principal maturing on December 24, 2005. The
credit facility is secured by our interest in the IC-BH Casino. Up to 54% of the
credit facility is convertible into shares of our restricted common stock at the
rate of $3.00 per share or 85% of the closing market price at the date of
conversion, whichever is less. This conversion is limited at any one time during
a 12 month period to an amount not to exceed 4.99% of our then total issued and
outstanding stock. As of June 30, 2003, we have drawn down the entire $13
million available under this credit facility.
Because the credit facility can be converted into the Company's common
stock at the lower of an exchange rate of $3.00 per share or 85% of the closing
market price of the Company's common stock at conversion, there existed a
beneficial conversion to holder of the credit facility when the credit facility
was originally executed. Accordingly, a beneficial conversion amount totaling
$1,392,157 was been recorded as a debt discount. During the quarters ended June
30, 2003 and 2002, amortization of the debt discount was $43,308 and $63,708,
respectively. The total of the unamortized debt discount at June 30, 2003 and
March 31, 2003 was $433,080 and $476,388, respectively.
We also have a $23 million five-year credit facility. This new credit
facility was used to satisfy the $23 million commitment Dry Creek Casino, L.L.C.
made to the River Rock Casino project. The $23 million long-term credit facility
bears interest at 12% with interest only payable through October 15, 2003 and
will then be amortized over four years starting on October 15, 2003. This credit
facility is secured by our interest in the IC-BH Casino, real property in the
vicinity of Black Hawk, Colorado and the note receivable from River Rock Casino
project. As of June 30, 2003, we have drawn down the entire $23 million
available under this credit facility. The scheduled principal payments under the
terms of the credit facility are as follows:
Year Ended
June 30,
- ----------
2004 $ 3,112,746
2005 5,159,314
2006 5,813,644
2007 6,550,960
2008 2,363,336
-----------
$23,000,000
===========
NOTE 6. FEDERAL INCOME TAXES
We have recorded a net deferred tax liability in connection with tax credit and
net loss carry forwards, compensation expense in connection with the issuance of
stock options, and for allocated earnings of our equity investments not
currently taxable for federal income tax purposes.
NOTE 7. EQUITY
The following is presented as a reconciliation of the numerators and
denominators of basic and diluted earnings per share computations, in accordance
with SFAS No. 128.
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to common stockholders $1,673,873 11,171,734 $ 0.15
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 2,260,448 (0.03)
Convertible debt 97,311 1,819,646 -
---------- ---------- --------
FULLY DILUTED EPS
15
Income available to common stockholders $1,771,184 15,251,828 $ 0.12
========== ========== ========
THREE MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------
Income (Numerator) Shares (Denominator) Per-Share Amount
------------------ -------------------- ----------------
BASIC EPS
Income available to common stockholders $1,248,805 10,776,537 $ 0.12
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 2,640,668 (0.03)
Convertible debt 124,526 2,293,261 -
---------- ---------- --------
DILUTED EPS
Income available to common stockholders $1,373,331 15,710,466 $ 0.09
========== ========== ========
As discussed in Note 5, we have a convertible debt security the holder of
which has the option to convert all or a portion of principal and accrued
interest into our common stock. In accordance with SFAS No. 128, the effects of
applying the if-converted method for the quarters ended June 30, 2003 and 2002
results in this convertible debt security being dilutive.
During the quarter end June 30, 2003, we granted 50,000 options to a third
party consultants and recorded consultant expenses of $77,500.
NOTE 8. SEGMENT REPORTING
We primarily operate in the gaming segment. The gaming segment consists of
IC-BH, Dry Creek Casino, L.L.C. and Route 66 Casinos, L.L.C.
Summarized financial information concerning our reportable segments is
shown in the following table. The "Other" column includes amounts not allocated
to the gaming segment such as corporate-related items, results of insignificant
operations such as real estate and mining.
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2003
--------------------------------------------------
Gaming Other Totals
--------------- ----------- -----------
Revenue $ 1,337,782 $ 299,470 $ 1,637,252
Segment profit (loss) 2,607,679 (94,083) 2,513,596
Segment assets 46,837,916 3,987,827 50,825,743
Investment in Isle of Capri Black Hawk, L.L.C 11,260,997 - 11,260,997
Investment in Route 66 Casinos,
L.L.C 821,208 - 821,208
Interest expense 1,017,419 - 1,017,419
Interest income 1,037,324 270,325 1,307,649
Equity in earnings of Isle of 2,833,347 - 2,833,347
Capri Black Hawk, L.L.C
Equity in earnings of Route 66
Casinos, L.L.C 25,974 - 25,974
16
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2002
--------------------------------------------------
Gaming Other Totals
--------------- ----------- -----------
Revenue $ 392,465 $ 40,867 $ 433,332
Segment profit (loss) 2,335,604 (297,795) 2,037,809
Segment assets 15,231,651 6,351,358 21,583,009
Investment in Isle of Capri Black Hawk, L.L.C 6,364,011 - 6,364,011
Investment in Route 66 Casinos,
L.L.C 666,449 - 666,449
Interest expense - 325,347 325,347
Interest income 150,346 223,572 373,918
Equity in earnings of Isle of 2,558,380 - 2,558,380
Capri Black Hawk, L.L.C
Equity in earnings of Route 66
Casinos, L.L.C 9,352 - 9,352
Reconciliation of reportable segment assets to our consolidated totals are as
follows:
JUNE 30,
-------------------------
2003 2002
----------- -----------
Assets
Total assets for reportable segments $50,825,743 $21,583,009
Cash not allocated to segments 2,707,343 1,322,892
Notes receivable not allocated to segments 5,850,751 7,061,557
Furniture, fixtures, & equipment not allocated to segments 41,636 57,060
Other assets not allocated to segments 1,531,397 1,686,315
----------- -----------
Total assets $60,956,870 $31,710,833
=========== ===========
NOTE 9. COMMITMENTS AND CONTINGENCIES
We have office space in Houston, Texas under a five-year term ending
December 31, 2006. The expected future minimum payments on the lease at June 30,
2003 are as follows:
Year Ended June 30, Amount
- ------------------- --------
2004 $ 78,622
2005 87,020
2006 87,020
2007 43,510
--------
$296,172
========
As of June 30, 2003, we have a total of $14.6 million in guarantees on
equipment financing and operating leases for the River Rock Casino project. The
guarantees supported equipment financing and operating leases. In the event of
the River Rock Casino's nonperformance under the terms of the equipment
financing and operating lease, our maximum potential future payments under these
guarantees will be equal to the carrying amount of the liabilities. Assuming
normal operations, we expect that all of our guarantees for the River Rock
Casino project will expire or be released within two years.
During the quarter ended June 30, 2003, our guarantees on debt of SI for
the performance of the payment obligations decreased from $1.3 million to
$656,000. In the event of SI's nonperformance under the terms of the obligation,
our maximum potential future payments under these guarantees will be equal to
the carrying amount of
17
the liabilities.
We indemnified our officers and directors for certain events or
occurrences while the director or officer is or was serving at our request in
such capacity. The maximum potential amount of future payments we could be
required to make under these indemnification obligations is unlimited; however,
we have a Directors and Officers liability insurance policy that limits our
exposure and enables us to recover a portion of any future amounts paid,
provided that such insurance policy provides coverage.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussions of our results of operations and financial
position should be read in conjunction with the financial statements and notes
pertaining to them that appear elsewhere in this Form 10-Q/A. Management is of
the opinion that inflation and changing prices, including foreign exchange
fluctuations, will have little, if any, effect on our financial position or
results of our operations.
The information in this discussion contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are based upon current expectations that involve risks
and uncertainties. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For example,
words such as, "may," "will," "should," "estimates," "predicts," "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects,"
"intends," and similar expressions are intended to identify forward-looking
statements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statement.
Factors that might cause or contribute to such a discrepancy include, but are
not limited to the risks discussed in our other SEC filings, including those in
our annual report on Form 10-K for the year ended March 31, 2004. These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement are based.
Changes in previously issued financial statements
We have determined that our investment in Route 66 Casinos, L.L.C. should
be accounted for using the equity method because our venture partner continues
to control the operating activities of the venture, even though such is, in the
opinion of management, a breach of the operating agreement. This accounting
treatment will continue until a final resolution of the dispute is reached.
Accordingly, amounts previously recorded as Route 66 Casinos, L.L.C. - revenues,
Route 66 Casinos, L.L.C. - expenses, and minority interest - Route 66 Casinos,
L.L.C. have been netted and recorded as equity in earnings of Route 66 Casinos,
L.L.C.
Also, during the year ended March 31, 2004, and subsequent to the issuance
of the Company's financial statements as of March 31, 2003, it was determined
that the beneficial conversion feature of the Company's convertible credit
facility and certain warrants and options had not been appropriately valued and
accounted for. The following describes the appropriate accounting and the
changes made to the Company's financial statements as of and for the three
months ended June 30, 2003.
Credit Facility Conversion Feature and Certain Warrants. In the fiscal
year ended March 31, 1999, the Company entered into a $7 million credit
facility, which was amended in the fiscal year ended March 31, 2002 to increase
the facility to $13 million (the "Credit Facility"). A portion of the principal
balance of the Credit Facility was convertible into common stock from time to
time at the option of the holder. The intrinsic value of the conversion feature
of the Credit Facility normally is characterized as a beneficial conversion
feature. The Company determined the value of the beneficial conversion feature
of cumulative drawdowns under the Credit Facility to be an aggregate of $1.4
million and was recorded as an adjustment to additional paid in capital.
Principal of the Credit Facility was drawn down beginning in the fiscal year
ended March 31, 1999 and continuing through the fiscal year ended March 31,
2002. Accordingly, the Company discounted the balance of the Credit Facility as
of the date of each drawdown and are amortizing the beneficial conversion
feature associated with each drawdown from the date of each drawdown to the
maturity date of the Credit Facility.
In the fiscal years ended March 31, 2000, March 31, 2001 and March 31,
2002 multiple warrants were issued to a financial advisor instrumental in
securing the Credit Facility (collectively, the "Warrants"). Each Warrant was
immediately vested and exercisable upon issuance. The Company ascribed an
estimated fair value of the Warrants in the aggregate amount of $1.7 million and
was recorded as an adjustment to additional paid in
18
capital. Accordingly, the Company capitalized deferred loan issue costs as of
the date of issuance of each Warrant and such costs are being amortized from the
date of each issuance to the maturity date of the Credit Facility.
It was also determined that, in the calculation of the diluted weighted
average number of common shares outstanding, certain convertibility restrictions
imposed by the Credit Facility on the lender and certain exercise restrictions
imposed on the Warrants had been interpreted as more restrictive than they
actually were, resulting in an overstatement of diluted earnings per share
beginning in the fiscal year ended March 31, 2000.
Accordingly, the accompanying consolidated statements of operations and
cash flows for quarters ended June 30, 2003 and the consolidated balance sheet
as of June 30, 2003 has been restated from amounts previously reported to
correct the accounting for these transactions. The Company has recorded a
beneficial conversion feature (debt discount) associated with its Credit
Facility and deferred loan issue costs associated with the Warrants.
Amortization of the debt discount is being accounted for using the effective
interest method and is being charged to interest expense. The deferred loan
issue costs are being amortized over the life of the Credit Facility on a
straight line basis and are being charged to amortization of deferred loan issue
cost expenses. For the three months ended June 30, 2003, interest expense
increased by $43,308 due to the amortization of the debt discount and deferred
loan costs expense increased by $69,569 due to the amortization of deferred loan
issue costs. Additionally for the three months ended June 30, 2003, the federal
income tax provision decreased by $23,654 related to the tax effect of the
amortization of deferred loan issue costs.
Certain Options and Warrants. In the fiscal years ending March 31, 2000,
March 31, 2001 and March 31, 2002, certain options and warrants were issued to
other advisors and consultants (collectively, the "Options"). The Options were
immediately vested and exercisable. The Company ascribed a fair value for the
Options in the aggregate amount of $910,000 and was recorded as an adjustment to
additional paid in capital. Costs related to these Options were expensed in the
period granted.
Certain Tax Benefits. The Company determined that certain tax benefits
associated with the exercise of common stock options and warrants that occurred
during the three months ended June 30, 2003 were not considered. As a result,
the amount of the deferred tax liability was overstated and the amount of
additional paid in capital and total stockholders' equity was understated as of
June 30, 2003 by $1.4 million.
Critical Accounting Policies
In December 2001, the SEC requested that companies discuss their most
"critical accounting policies" in the Management's Discussion and Analysis
section of their reports. The SEC indicated that a "critical accounting policy"
is one that is important to the portrayal of a company's financial condition and
operating results and requires management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations is
discussed throughout this section where such policies affect our reported and
expected financial results.
Use of Estimates
Our preparation of this report requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities, and that
effect the disclosure of contingent assets and liabilities. There is no
assurance that actual results will not differ from those estimates and
assumptions.
19
Equity Method of Accounting
Our investments in IC-BH, RCI and Route 66 Casinos, L.L.C. are
accounted for using the equity method of accounting because the investment gives
us the ability to exercise significant influence, but not control, over the
investees. Significant influence is generally deemed to exist where we have an
ownership interest in the investee of between 20% and 50%, although other
factors such as the degree of ultimate control, representation on the investee's
Board of Directors or similar oversight body are considered in determining
whether the equity method of accounting is appropriate. Although we have an
ownership interest of 51% in Route 66 Casinos, L.L.C., we account for the
investment in Route 66 Casinos, L.L.C. using the equity method because the
operating activities of the joint venture are currently controlled by the
minority venturer. We record our equity in the income or losses of our investees
using the same reporting periods presented herein, except we report our equity
in income and losses three months in arrears for RCI and one month in advance
for IC-BH, based upon their respective fiscal year ends. Deferred tax assets or
liabilities are recorded for allocated earnings or losses of our equity
investments that are not currently reportable or deductible for federal income
tax purposes.
Revenue Recognition of Income
We record credit enhancement fee income on the accrual basis as earned.
The dates on which credit enhancement fee income is actually collected is on the
15th day of each following month. It is also dependent upon the cash flow from
River Rock Casino's operation. As of June 30, 2003, there was no delinquency in
credit enhancement fee income. We record revenues from interest income on notes
receivable on the accrual basis as earned. The dates on which interest income is
actually collected is dependent upon the terms of the particular note
receivable agreement, and may not correspond to the date such interest income is
recorded. We record royalty income on the accrual basis as earned. The dates on
which royalty income is actually collected is dependent upon the terms of the
contract, and may not correspond to the date such royalty income is recorded.
The amounts of royalty income that we may earn is dependent upon a Consumer
Price Index which may increase or decrease our royalty income each fiscal year.
As of June 30, 2003, there was no delinquency in royalty income.
A substantial portion of our revenues for the quarter consisted of
interest income. We recognize revenues from interest income as such interest
accrues on outstanding note receivables. The dates on which interest income is
actually collected is dependent upon the terms of the particular debt agreement,
and may not correspond to the date such interest income is recorded. During the
quarter ended June 30, 2003, our largest debtor was the Dry Creek Casino,
L.L.C., which borrowed the funds to loan to the River Rock Casino. The interest
income on such loans will be repaid to us as debt repayments are made by the Dry
Creek Rnacheira Band of Pomo Indians to the Dry Creek Casino, L.L.C., as the
terms of our loan to the Dry Creek Casino, L.L.C. mirror its loans to the tribe.
As such, the ability of the tribe to repay the Dry Creek Casino, L.L.C. will
directly effect our ability to receive the interest income when due. Also,
credit enhancement fee income from River Rock Casino is currently being accrued,
and we anticipate that we will receive the payments by the end of the calendar
year.
Income Taxes
Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." An asset and liability approach is used for financial accounting and
reporting for income taxes. Under this approach, deferred tax assets and
liabilities are recognized based on anticipated future tax consequences, using
currently enacted tax laws, attributable to differences between financial
statement carrying amounts of assets and liabilities and their respective tax
basis.
General
We are primarily a developer of gaming properties. We reported net income
of $1.7 million for the quarter ended June 30, 2003 compared to net income of
$1.2 million for the quarter ended June 30, 2002.
Our 43% ownership of the IC-BH is accounted for using the equity method of
accounting. Our investment in the joint venture is stated at cost, adjusted for
our equity in the undistributed earnings or losses of the project. During the
quarter ended June 30, 2003, our allocable income from IC-BH through July 27,
2003, IC-BH's quarter end, totaled $2.8 million, compared to $2.6 million for
the same period in fiscal 2002. During the quarter, we received a cash
distribution of $404,000 from IC-BH and our basis in the project through July
27, 2003 is $11.3 million.
Our ownership of RCI is accounted for using the equity method of
accounting. Our investment in RCI is stated at cost, adjusted for our equity in
the undistributed earnings or losses of RCI. Our portion of RCI's undistributed
losses through March 31, 2003 totaled $17,000. In accordance with the equity
method of accounting, our investment account balance was reduced to zero and the
remaining allocated loss of $898,000 is not reflected in our financial
statements.
We own a majority interest in Dry Creek Casino, L.L.C. ("Dry Creek") of
69%. For financial reporting purposes, the assets, liabilities, and earnings of
Dry Creek are included in our consolidated financial statements. The interests
of the other members of Dry Creek have been recorded as minority interest
totaling $ 489,000 at June 30, 2003.
We have made loans to the Dry Creek Casino, L.L.C., which has in turn made
loans to the River Rock
20
Casino. We will be repaid these loans, as the Dry Creek Casino, L.L.C. is
repaid. Excluding, the repayments on these loans, as a member of the Dry Creek
Casino, L.L.C., we will also receive income from the River Rock Casino. This
income is referred to in this report as "credit enhancement fees" and equal 20%
of River Rock Casino's earnings before depreciation and amortization for a
period of five years.
Property held for development consists of undeveloped acreage and
improvements located in and around Black Hawk, Colorado, and Nevada County,
California. We have capitalized certain direct costs of pre-development
activities together with capitalized interest. Property held for development is
carried at the lower of cost or net realizable value.
Results of Operations
Comparison of the quarter ended June 30, 2003 and 2002
REVENUES. Revenues increased 278%, or $1.2 million, to $1.6 million for
the quarter ended June 30, 2003 compared to $1.2 million for the quarter ended
June 30, 2002. Our revenue primarily consists of the following income streams:
Gaming Assets Participations
DRY CREEK CASINO, L.L.C. Starting in June 2003, the Dry Creek
Casino, L.L.C. began earning a credit enhancement fee from River Rock
Casino which is equal to 20% of River Rock Casino's earnings before
depreciation and amortization. During the quarter ended June 30, 2003, the
credit enhancement fee income was $300,000, and is currently being
accrued, and we anticipate that we will receive payments by the end of the
calendar year.
Other Revenues
INTEREST INCOME. Our interest income consists primarily of interest
due on loans we have made in connection with the River Rock Casino
project. Interest income increased 250%, or $934,000, to $1.3 million for
the quarter ended June 30, 2003 compared to $374,000 for the quarter ended
June 30, 2002. The majority of the increase is attributable to the $25.4
million increase in the loans made in connection with the River Rock
Casino project over the comparable Quarter of the prior year. Commencing
in May 2003, we began receiving interest payments on our River Rock Casino
loans, and expect to receive principal on such loan in fiscal 2004. As
such, we expect interest income in the future to decrease in connection
with this project. In addition, if the Dry Creek Rancheria Band of Pomo
Indians refinances the loans it has received for the River Rock Casino
project, we may be repaid all or part of our outstanding loans, which will
significantly reduce our interest income in future periods.
ROYALTY INCOME. Royalty income increased 29% to $14,000 for the
quarter ended June 03, 2003 compared to $11,000 for the quarter ended June
30, 2002. This income is derived solely from our mining agreement with
Romarco Nevada, Inc. Based on our agreement with Romarco, we would receive
$58,000 for fiscal 2004. However, our agreement with Romarco is terminable
at any time, and as such there is no assurance we will receive these
revenues in the future.
EQUITY IN EARNINGS OF ISLE OF CAPRI BLACK HAWK. Equity in earnings
of IC-BH increased 11% to $2.8 million for the quarter ended June 30, 2003
compared to $ 2.6 million in the quarter ended June 30, 2002. The increase
is primarily attributable to an increase in pre-tax income from IC-BH as
the result of increased gaming revenue.
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C. Equity in earnings of
Route 66 Casinos, L.L.C. increased 178% to $26,000 for the quarter ended
June 30, 2003 compared to $9,000 in the quarter ended June 30, 2002. As
discussed in Part II, Item 1, we are in litigation and arbitration with
our co-member on this project, and as such, we have estimated these
amounts.
TOTAL EXPENSES. Total expenses increased 107%, or $1.0 million to
$1.9 million for the quarter ended June 30, 2003, compared to $931,000 in
the quarter ended June 30, 2002. The increase is due primarily to an
increase in general and administrative expenses, interest expense, other
expense, salaries, and legal and professional fees as discussed below:
21
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 30%, or $37,000, to $160,000 for the quarter ended June
30, 2003, compared to $123,000 in the quarter ended June 30, 2002. The
increase is primarily attributable to an increase in general office
expenditures such as office supplies and travel costs.
INTEREST EXPENSE. Interest expense increased 213%, or $692,000, to
$1.0 million for the quarter ended June 30, 2003, compared to $325,000 in
the quarter ended June 30, 2002 due to additional borrowings from our
credit facility during the fiscal year ended March 31, 2003. We expect
interest expense to decrease in the future, as we repay our $23 million
credit facility from proceeds received from loans made in connection with
the River Rock Casino project are repaid, we expect interest expense to
decrease.
SALARIES. Salaries increased 25%, or $54,000, to $274,000 for the
quarter ended June 30, 2003, compared to $219,000 in the quarter ended
June 30, 2002 due to a higher average number of employees.
LEGAL AND PROFESSIONAL FEES. Legal and professional fees increased
572%, or $267,000, to $314,000 for the quarter ended June 30, 2003,
compared to $47,000 in the quarter ended June 30, 2002 due to an increase
in legal fees related to allegations as discussed in Part II, Item 1.
AMORTIZATION OF DEFERRED LOAN ISSUE COSTS. Amortization of deferred
loan issue costs increased 7%, or $9,000, to $143,000 for the quarter
ended June 30, 2003, compared to $134,000 in the quarter ended June 30,
2002.
NET INCOME. Net income increased 34% or $425,000 to $1.7 million for
the quarter ended June 30, 2003 as compared to net income of $1.2 million
in the quarter ended June 30, 2002. This increase is primarily the result
of increases in revenues, equity in earnings of IC-BH and the credit
enhancement fee from River Rock Casino.
Liquidity and Capital Resources
OPERATING ACTIVITIES. Net cash used by operating activities during the
quarter ended June 30, 2003, amounted to $414,000, a decrease of $915,000, over
the $502,000 of net cash provided by operating activities during the quarter
ended June 30, 2002. The decrease is primarily due to a decrease of $782,000 in
cash distributions from IC-BH during the quarter ended June 30, 2003 to
$404,000. Such decrease is primarily due to IC-BH utilizing excess cash flow to
pay down debt.
INVESTING ACTIVITIES. Net cash used in investing activities during the
quarter ended June 30, 2003, amounted to $888,000, a decrease of $2.8 million,
over the $3.7 million of net cash used in investing activities in the quarter
ended June 30, 2002. The decrease is primarily due to a $3.3 million loan
repayment we received.
FINANCING ACTIVITIES. Net cash provided by financing activities during the
quarter ended June 30, 2003, amounted to $41,000, a decrease of $3.4 million,
over $3.5 million of net cash provided by financing activities in the quarter
ended June 30, 2002. The decrease was primarily due to the absence of borrowing
during the quarter ended June 30, 2003. During the quarter ended June 30, 2003,
we repaid $5,000 of our outstanding debt and we paid $130,000 for deferred loan
issue costs. During the quarter ended June 30, 2003, we issued 44,000 shares of
common stock upon the exercise of common stock options receiving aggregate
proceeds of $100,000.
We have a $13 million long-term credit facility that bears interest at 11%
per annum, payable monthly, with principal maturing during December 2005. The
$13 million credit facility is secured by our interest in the IC-BH Casino. Up
to 54% of the $13 million credit facility is convertible into shares of our
restricted common stock at the rate of $3.00 per share or 85% of the closing
market price at the date of conversion, whichever is less. This conversion is
limited in any one year period to an amount not to exceed 4.99% of our then
total issued and outstanding stock. As of June 30, 2003, we have drawn the
entire $13 million available under this credit facility.
We also have a $23 million credit facility that bears interest at 12% per
annum with interest only payable
22
through October 2003, and which will then be amortized over four years. We have
utilized the proceeds from this credit facility to fund loans to the Dry Creek
Casino, L.L.C., which were then loaned to the River Rock Casino project. This
$23 million credit facility is also secured by our interest in IC-BH, real
property in the vicinity of Black Hawk, Colorado and the note receivable from
the River Rock Casino project. As of June 30, 2003, we have drawn the entire $23
million available under this credit facility.
As of June 30, 2003, we had cash available of $2.7 million, and total
scheduled loan repayments of $4.7 million from Dry Creek Casino, L.L.C. and
affiliate companies for the next twelve months. Our current liabilities include
$3.1 million of the current portion of long-term debt, which relates to
repayments on our $23 million credit facility for the next twelve months. We
have primarily utilized these funds to make loans to the Dry Creek Casino,
L.L.C. The repayments due on the $23 million credit facility essentially mirror
the terms of our loan to the Dry Creek Casino, L.L.C. As we receive repayments
on our loans to the Dry Creek Casino, L.L.C., we intend to utilize these funds
to pay the current portion of the long-term debt due during the next twelve
months. As such, assuming Dry Creek Casino, L.L.C makes all required payments to
us, we will not be required to raise any funds to repay the preponderance of the
current portion of our long-term debt due during the next twelve months.
During the next twelve months, we expect to receive: (a) cash
distributions from IC-BH of approximately $4 million based on our current
estimates, (b) repayment of advances made to the Dry Creek Casino, L.L.C. for
the River Rock Casino project, and (c) loan repayments of $1.2 million from
affiliate companies. In addition, starting in June 2003, the Dry Creek Casino,
L.L.C. began earning its credit enhancement fee from River Rock Casino, and we
anticipate receiving payments by the end of the calendar year. As we have drawn
down the maximum amounts available under our current credit facilities, we will
be depending primarily on the monies received from IC-BH, the credit enhancement
fee to be paid to the Dry Creek Casino, L.L.C., and loan repayments of $1.2
million from affiliate companies to fund our operations for the next twelve
months.
We are highly leveraged with $36.6 million in corporate debt and lease
guarantees of approximately $14.6 million for the River Rock Casino project. We
also have guaranteed debt of $656,000 of an affiliated company that may mature
during the next fiscal year. To date, cash distributions from IC-BH and loan
repayments from the River Rock Casino project have been sufficient to satisfy
our current obligations. Also, the Dry Creek Casino, L.L.C. began earning a
credit enhancement fee from the River Rock Casino for five years, starting June
1, 2003. However, if the River Rock Casino project is closed due to pending
litigation, governmental inquiries or other reasons beyond our control, or if we
are required to perform on our outstanding guarantees, we may have insufficient
cash flow to satisfy our obligations without raising additional financing. In
addition, if the River Rock Casino is unable to make debt payments or payments
of the credit enhancement fees to the Dry Creek Casino, L.L.C. for any reason,
the Dry Creek Casino L.L.C. will be unable to make its required debt repayment
to us, which will affect our ability to repay our debt obligations. There is no
assurance that we will be able to obtain additional financing if required to
fund working capital needs or debt repayment obligations, the failure of which
could have a material effect on our operations.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 150, "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 clarifies the accounting for certain
financial instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in statements of
financial position. Previously, many of those financial instruments were
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. We do not
believe that the adoption of SFAS No. 150 will have a significant impact on our
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement is effective for contracts entered into or modified after June 30,
2003.
In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal entity used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors
23
that do not provide sufficient financial resources for the entity to support its
activities. FIN No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors in the
entity do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
consolidation requirements of FIN No. 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. Certain of the disclosure requirements apply to all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. We did not participate in any applicable
activities as of and for the quarter ended June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from credit risk
concentrations. We do not believe we are subject to material interest rate risk
or foreign currency risk.
We have utilized the majority of our credit facilities to make loans to
Dry Creek Casino, L.L.C., which has made loans to the River Rock Casino. If the
River Rock Casino is unable to make its debt payments to the Dry Creek Casino,
L.L.C. for any reason, the Dry Creek Casino L.L.C. will be unable to make its
required debt repayment to us, which will affect our ability to repay our credit
facilities. As discussed in Item 2 above, if the River Rock Casino project is
closed for any reason, we may have difficulty meeting our short-term and
long-term obligations. We currently believe that this is our primary credit
risk.
As our credit facilities are fixed interest rate instruments, an interest
rate change would not have any impact on our operations. Our interest in RCI is
dependent on RCI's valuation, which is subject to the value of the Real, the
Brazilian currency, which has been subject to rapid fluctuations. However, we do
not believe the results of RCI's operations have a material effect on our
financial operations.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with the Exchange Act, we carried out an evaluation, under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of June 30, 2003 to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. There has
been no change in our internal controls over financial reporting that occurred
during the three months ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During May 2002, we were named as a defendant in Case No. 2002-22278,
Corporate Strategies, Inc., vs. Nevada Gold & Casinos, Inc., in the 189th
Judicial District Court of Harris County, Texas. Corporate Strategies, Inc., has
alleged it is owed warrants to purchase 429,444 shares of common stock at an
average exercise price of $2.36 per share pursuant to a consulting agreement
entered into during December 1997. The plaintiff is seeking damages based on the
difference between the current market price of our common stock and the exercise
price of the warrants. Discovery has commenced and is ongoing. We are vigorously
defending the suit and we have asserted counterclaims against Corporate
Strategies, Inc., and third party claims against its current and former members,
Harold Finstad, Arthur Porcari, Stephen Porcari, and Martin R. Nathan, including
breach of contract, fraud, and rescission of the contract and warrants. During
February 2003, Martin R. Nathan filed a counterclaim to our counterclaim
asserting, among other actions, breach of contract, fraud, and violation of
securities laws, and is seeking monetary damages and the issuance of certain
securities. We are vigorously defending this counterclaim.
On September 27, 2002, we commenced an arbitration proceeding against
American Heritage, Inc. (d/b/a The Gillmann Group), a member with us in Route 66
Casinos, L.L.C. The arbitration was instituted when it became apparent The
Gillmann Group failed to honor its contractual obligations with respect to the
project. Route 66 Casinos, L.L.C. was formed to provide, among other services,
gaming equipment to the Pueblo of Laguna for the development of a casino to be
located 11 miles west of Albuquerque, New Mexico. In October 2002, we filed suit
in Texas to collect on a related note, pursuant to which The Gillman Group is in
default. This case is styled Case No. 2002-51378, Nevada Gold & Casinos, Inc. v.
American Heritage, Inc. d/b/a The Gillman Group, and Frederick Gillman. In a
related matter, The Gillmann Group and its principal filed a lawsuit based on
the same contract concerning Route 66 Casinos, L.L.C. in Nevada entitled Case
No. A457315, American Heritage, Inc., and Fred Gillmann v. Nevada Gold &
Casinos, Inc. and Route 66 Casinos, L.L.C. in the District Court, Clark County,
Nevada. The plaintiffs are attempting to revoke the Route 66 Casinos operating
agreement and have also alleged tort causes of action. While we believe that the
entirety of the dispute will be resolved in the arbitration proceeding based on
an arbitration agreement between the parties, there can be no assurance that the
process may not be adjudicated in court. The Nevada lawsuit is currently before
the Nevada Supreme Court in Case no. 40757, on a procedural issue concerning the
arbitration.
In January 2003, we were named as a defendant, along with several other
parties, including Dry Creek Casino, L.L.C. (collectively, the "defendants"), in
the Superior Court of California by Sonoma Falls Developer, L.L.C., Sonoma Falls
Manager, L.L.C., and Sonoma Falls Lender, L.L.C. ("Sonoma Falls"). Sonoma Falls
has alleged the defendants intentionally interfered with an agreement between
Sonoma Falls and the Dry Creek Rancheria Band of Pomo Indians (the "Tribe") and
that the defendants engaged in unlawful, unfair, and/or fraudulent business
acts. Sonoma Falls is seeking compensatory, consequential, and punitive damages,
including loss and disgorgement of profits. As part of our agreement with the
Tribe, we are an indemnified party with respect to this litigation. We intend to
vigorously defend the suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of this report:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Amended and Restated Articles of Incorporation of Nevada
Gold & Casinos, Inc. (filed previously as Exhibit 3.4 to the
company's Form 10-QSB, filed November 15, 1999)
Exhibit 3.2 Amended and Restated Bylaws of Nevada Gold & Casinos, Inc.
(filed previously as Exhibit 3.2 to the company's From 10-QSB,
Filed August 14, 2002)
Exhibit 4.1 Common Stock Certificate of Nevada Gold & Casinos, Inc.
(filed previously as Exhibit 4.1 to the company's Form
S-8/A, file no. 333-79867)
Exhibit 10.1 Amended and Restated Operating Agreement of Isle of
Capri Blackhawk LLC (filed previously as Exhibit 10.3 to the
company's Form 10-QSB, filed November 14, 1997)
Exhibit 10.2 Members Agreement dated July 29, 1997 by and between Casino
America of Colorado, Inc., Casino America, Inc., Blackhawk
Gold, Ltd., and Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 10.4 to the company's Form 10-QSB,
filed November 14, 1997)
Exhibit 10.3 License Agreement dated July 29, 1997 by and between
Casino America, Inc. and Isle of Capri Black Hawk LLC (filed
previously as Exhibit 10.5 to the company's Form 10-QSB,
filed November 14, 1997)
Exhibit 10.4 Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed
previously as Exhibit 10.1 to the company's Form S-8/A, file
no. 333-79867)
Exhibit 10.5 Form of Indemnification Agreement between Nevada Gold &
Casinos, Inc. and each officer and director (filed
previously as Exhibit 10.5 to the company's Form 10-QSB,
filed February 14, 2002)
Exhibit 31.1(*)Chief Executive Officer Certification Pursuant to
Section 13a-14 of the Securities Exchange Act.
Exhibit 31.2(*)Chief Financial Officer Certification Pursuant to
Section 13a-14 of the Securities Exchange Act.
Exhibit 32.1(*)Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 32.2(*) Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(*) filed herewith
(b) Reports on Form 8-K - On June 27, 2003, we filed a current report on
Form 8-K that included a press release
announcing our result for the fiscal year ended
March 31, 2003.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Nevada Gold & Casinos, Inc.
By: /s/ Christopher Domijan
-------------------------------------------
Christopher Domijan, Chief Financial Officer
Date: August 5, 2004
27
INDEX OF EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
Exhibit 3.1 Amended and Restated Articles of Incorporation of Nevada Gold &
Casinos, Inc. (filed previously as Exhibit 3.4 to the company's Form
10-QSB, filed November 15, 1999)
Exhibit 3.2 Amended and Restated Bylaws of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 3.2 to the company's From 10-QSB, Filed August
14,2002)
Exhibit 4.1 Common Stock Certificate of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 4.1 to the company's Form S-8/A, file no.
333-79867)
Exhibit 10.1 Amended and Restated Operating Agreement of Isle
of Capri Blackhawk LLC (filed previously as Exhibit 10.3 to the
company's Form 10-QSB, filed November 14, 1997)
Exhibit 10.2 Members Agreement dated July 29, 1997 by and between Casino America
of Colorado, Inc., Casino America, Inc., Blackhawk Gold, Ltd., and
Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.4 to
the company's Form 10-QSB, filed November 14, 1997)
Exhibit 10.3 License Agreement dated July 29, 1997 by and between Casino
America, Inc. and Isle of Capri Black Hawk LLC (filed previously as
Exhibit 10.5 to the company's Form 10-QSB, filed November 14, 1997)
Exhibit 10.4 Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed
previously as Exhibit 10.1 to the company's Form S-8/A, file no.
333-79867)
Exhibit 10.5 Form of Indemnification Agreement between Nevada Gold & Casinos,
Inc. and each officer and director (filed previously as Exhibit 10.5
to the company's Form 10-QSB, filed February 14, 2002)
Exhibit 31.1(*) Chief Executive Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act.
Exhibit 31.2(*) Chief Financial Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act.
Exhibit 32.1(*) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2(*) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(*) filed herewith
28