U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended September 30, 2001
[ ] 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: 000-29443
VIVA GAMING & RESORTS INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0873132
------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 108, 3611 S. Lindell Road, Las Vegas, Nevada 89103-1241
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number (702) 739-1769
--------------
Suite 1400, 400 Burrard Street, Vancouver, BC V6C 3G2
- -----------------------------------------------------
(Former address and former fiscal year end, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 29,317,700 as of November 8, 2001.
VIVA GAMING & RESORTS INC.
Form 10-QSB for the quarter ended September 30, 2001
TABLE OF CONTENTS AND INFORMATION REQUIRED IN REPORT
Page
----
PART I Financial Information (unaudited):
Item 1. Condensed and Consolidated:
Balance Sheet as of September 30, 2001 3
Statements of Operations for the nine months ended September
30, 2001 and September 30, 2000 and for the period from
December 9, 1997 (inception) to
September 30, 2001 4
Statements of Operations for the three months ended
September 30, 2001 and September 30, 2000 5
Statements of Stockholders' Equity for the period
from December 9, 1997 (inception) to September 30, 2001 6
Statements of Cash Flows for the nine months ended September
30, 2001 and September 30, 2000 and for the period from
December 9, 1997 (inception) to
September 30, 2001 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of
Operation 14
PART II Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Condensed and Consolidated Balance Sheet
(Unaudited)
September 30, 2001
================================================================================
Assets
Current assets
Cash $ 545,585
Accounts receivable, net 521,467
Inventory 35,207
Prepaid expenses and other current assets 103,646
------------
Total current assets 1,205,905
Property and equipment, net 2,252,583
Intangibles, net 9,804,560
Other assets 156,155
------------
$ 13,419,203
============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 1,689,140
Construction contracts payable 301,785
Notes and advances from stockholders and officers 3,375,162
Notes payable 50,000
------------
Total current liabilities 5,416,087
------------
Commitments and Contingencies
Stockholders' equity
Share capital
Authorized
10,000,000 preferred shares with $0.10 par value
100,000,000 common shares with $0.001 par value
Issued and outstanding
11,492,700 common shares 11,493
Additional paid-in capital 10,356,757
Common stock to be issued 3,889,149
Deficit accumulated during the development stage (6,228,211)
Accumulated other comprehensive (loss) (26,072)
------------
Total stockholders' equity 8,003,116
------------
$ 13,419,203
============
The Accompanying Notes are an Integral
Part of These Financial Statements
3
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Condensed and Consolidated Statements of Operations
(Unaudited)
================================================================================
Period from
December 9, 1997
Nine Months Ended September 30, (inception) to
------------------------------ Sept. 30,
2001 2000 2001
----------- ----------- -----------
Revenue $ -- $ -- $ --
Operating Expenses
Consultants 487,030 461,412 1,273,273
Depreciation and amortization 226,443 36,058 340,330
Finance fees -- 229,793 83,133
Legal and accounting 454,206 146,671 717,275
Payroll and related costs 447,357 201,800 1,035,758
Office and administration 765,469 197,138 1,083,978
Regulatory, transfer and fees 8,650 17,605 46,957
Stock based compensation 214,250 20,550 910,250
Travel, entertainment and promotion 123,696 137,902 396,539
----------- ----------- -----------
Total operating expenses 2,727,101 1,448,929 5,887,493
----------- ----------- -----------
(Loss) from operations (2,727,101) (1,448,929) (5,887,493)
----------- ----------- -----------
Other income (expenses)
Gain (Loss) on sale of subsidiary (487,331) 49,413 542,068
Equity investment in subsidiary -- (603,254) (603,254)
Loss on sale of property and equipment (15,462) -- (18,273)
Foreign exchange (83,272) (7,842) (114,150)
Interest income 43,063 -- 55,549
Interest expense (288,861) (27,509) (343,266)
Minority interest -- 11,400 64,921
Purchased preacquisition loss 75,687 -- 75,687
----------- ----------- -----------
Total other income (expenses) (756,176) (577,792) (340,718)
----------- ----------- -----------
Net (loss) $(3,483,277) $(2,026,721) $(6,228,211)
=========== =========== ===========
Net (loss) per share - Basic and Diluted $ (0.39) $ (0.29) $ (0.91)
=========== =========== ===========
Weighted average shares
of common stock outstanding 9,008,253 7,043,730 6,843,256
=========== =========== ===========
The Accompanying Notes are an Integral
Part of These Financial Statements
4
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Condensed and Consolidated Statements of Operations
(Unaudited)
================================================================================
Three Months Ended Sept. 30,
------------------------------
2001 2000
----------- -----------
Revenue $ -- $ --
------------ ----------
Operating Expenses
Consultants 328,963 231,113
Depreciation and amortization 75,755 34,675
Finance fees -- 178,693
Legal and accounting 338,893 38,816
Payroll and related costs 119,861 49,091
Office and administration 242,315 83,679
Eegulatory, transfer and fees 733 8,492
Stock based compensation (312,250) 20,550
Travel, entertainment and promotion 8,974 15,169
----------- -----------
Total operating expenses 803,244 660,278
----------- -----------
(Loss) from operations (803,244) (660,278)
----------- -----------
Other income (expenses)
Gain on sale of subsidiary -- 49,413
Equity interest in subsidiary -- (603,254)
Foreign exchange (144,855) (12,494)
Interest income 670 --
Interest expense (143,019) (27,508)
Minority interest -- 11,400
----------- -----------
Total other income (expense) (287,204) (582,443)
----------- -----------
Net (loss) $(1,090,448) $(1,242,721)
=========== ===========
Net (loss) per share - Basic and Diluted $ (0.12) $ (0.17)
=========== ===========
Weighted average shares
of common stock outstanding 9,469,330 7,157,400
=========== ===========
The Accompanying Notes are an Integral
Part of These Financial Statements
5
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Condensed and Consolidated Statements of Stockholders' Equity
(Unaudited)
================================================================================
Deficit
Accumulated Accumulated Total
Common Unearned Additional During thee Other Stockholders'
Stock to be Consulting Paid-in Developmet Comprehensive Equity
Shares Amount Issued Fees Capital Stage Income (Deficit)
----------------------------------------------------------------------------------------------------
Initial capitalization
June 30, 1998 for cash $3,750,000 $ 3,750 $ -- $ -- $ 108,750 $ -- $ -- $ 112,500
Net (loss) (189,710) (189,710)
----------------------------------------------------------------------------------------------------
Balance as of December 31,
1998 3,750,000 3,750 -- -- 108,750 (189,710) -- (77,210)
Shares issued for:
Settlement of accounts
payable 2,750,000 2,750 -- -- 107,250 -- -- 110,000
Consulting services 200,000 200 -- -- 199,800 -- -- 200,000
Consulting services 40,000 40 60,000 (60,000) 39,960 -- -- 40,000
Stock options granted to
non-employees for services -- -- -- -- 675,450 -- -- 675,450
Net (loss) (1,103,398) -- (1,103,398)
----------------------------------------------------------------------------------------------------
Balance as of December 31,
1999 6,740,000 6,740 60,000 (60,000) 1,131,210 (1,293,108) -- (155,158)
Shares issued for:
Private placement 324,000 324 -- -- 1,349,676 -- -- 1,350,000
Private placement fee 29,400 29 -- -- 122,471 -- -- 122,500
Consulting services 70,000 70 (60,000) 60,000 79,930 -- -- 80,000
Exercise of warrants 4,000 4 -- -- 24,996 -- -- 25,000
Private placement commissions -- -- (294,500) -- -- (294,500)
Consulting services 40,000 40 -- -- 24,960 -- -- 25,000
Acquisition of subsidiary 1,500,000 1,500 -- -- 3,733,500 -- -- 3,735,000
Stock options granted to
non-employees for services -- -- -- -- 20,550 -- -- 20,550
Comprehensive Income
Cumulative translation
adjustment -- -- -- -- -- -- (9,372) (9,372)
Net (loss) (1,451,826) -- (1,451,826)
----------
Total comprehensive income (1,461,198)
---------------------------------------------------------------------------------------------------
Balance as of December 31,
2000 8,707,400 8,707 -- -- 6,192,793 (2,744,934) (9,372) 3,447,194
Stock based compensation -- -- -- (188,250) -- -- -- (188,250)
Shares issued for:
Consulting services 235,300 236 -- -- 402,264 -- -- 402,500
Acquisition of subsidiary 2,550,000 2,550 -- -- 3,949,950 -- -- 3,952,500
Conversion of notes and
interest payable -- -- 3,589,149 -- -- -- -- 3,589,149
Private placement -- -- 300,000 -- -- -- -- 300,000
Comprehensive Income
Cumulative translation
adjustment -- -- -- -- -- -- (16,700) (16,700)
Net (loss) -- -- -- -- -- (3,483,277) -- (3,483,277)
-----------
Total comprehensive income (3,499,977)
---------------------------------------------------------------------------------------------------
Balance as of September 30,
2001 11,492,700 $ 11,493 $3,889,149 -- $10,356,757 $(6,228,211) $(26,072) $ 8,003,116
====================================================================================================
The Accompanying Notes are an Integral
Part of These Financial Statements
6
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Condensed and Consolidated Statements of Cash Flows
(Unaudited)
================================================================================
Period from
December 9, 1997
(inception)
to
Nine Months Ended Sept. 30, September 30,
2001 2000 2001
----------- ----------- -----------
Cash used in operating activities $(2,156,950) $(1,415,573) $(4,305,200)
----------- ----------- -----------
Cash used in investing activities
Acquisition of property and equipment (1,952,965) (11,563) (1,975,823)
Acquisition of other long-term assets (389,754) (6,335) (834,983)
Acquisition of and investment in subsidiaries -- (796,383) (796,383)
Increase in construction payable 301,785 -- 301,785
Cash receipt for note receivable 847,669 -- 847,669
Cash flows for acquisitions -- (511,314) --
----------- ----------- -----------
Cash used in investing activities (1,193,265) (1,325,595) (2,457,735)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from the issuance of common stock 300,000 1,203,000 1,493,000
Advances to stockholder -- -- (115,366)
Repayment from stockholder advance -- -- 115,366
Proceeds from notes payable -- 1,000,000 1,262,500
Repayment of notes payable -- -- (112,500)
Advance from stockholders and officers 3,743,094 823,163 5,081,388
Repayment of stockholders and officers advances (134,388) (245,408) (389,796)
----------- ----------- -----------
Cash provided by financing activities 3,908,706 2,780,755 7,334,592
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash & Equivalents (16,700) -- (26,072)
----------- ----------- -----------
Increase in cash 541,791 39,587 545,585
Cash and cash equivalents:
Beginning of period 3,794 3,290 --
----------- ----------- -----------
End of period $ 545,585 $ 42,877 $ 545,585
=========== =========== ===========
The Accompanying Notes are an Integral
Part of These Financial Statements
7
VIVA GAMING & RESORTS INC.
(A Development Stage Company)
Notes to Condensed and Consolidated Financial Statements
(Unaudited)
================================================================================
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Nature of Business
These financial statements include the accounts of Viva Gaming & Resorts Inc.
(the "Company") and its wholly owned Mexican subsidiary corporation, Viva Gaming
& Resort de Mexico, S.A. de C.V. ("Viva Mexico").
Principals of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiary. All material intercompany transactions and balances have been
eliminated upon consolidation
Reclassifications
Certain amounts in the prior year's financial statements have been reclassified
to conform to the current year's presentations.
NOTE 2: GOING CONCERN
The financial statements have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company reported a net loss
of $6,228,211 since inception to September 30, 2001. At September 30, 2001, the
Company had negative working capital of $4,210,182. In October 2001, the Company
borrowed an additional $217,956 at an interest rate of 10% payable within one
year. The Company is also currently negotiating additional borrowings. Although
the Company has raised this additional capital, the Company's continued
existence is dependent upon its ability to successfully market and sell its
services. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the outcome
of this uncertainty.
The value and ultimate recoverability of the Company's investment in Viva Mexico
and its plans to develop operating revenues are subject to the ability to
utilize electronic gaming devices which is subject to the Federal Law of Gaming
and Lotteries under the jurisdiction of Secretaria de Gobernacion. If the
Company is unsuccessful in obtaining a permit from Secretaria de Gobernacion or
receiving a favorable court ruling for its business methods, Viva Mexico would
be unable to operate as planned and would have difficulty in receiving value
from its investment. (Also see Notes 9 and 10).
8
NOTE 3: INTERIM FINANCIAL DATA
The accompanying unaudited condensed and consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments that, in the opinion of management, are necessary for the fair
presentation of the results of operations for the interim periods have been made
and are of a recurring nature unless otherwise disclosed herein. The results of
operations for the nine-month period ended September 30, 2001 are not
necessarily indicative of the results that will be realized for a full year. For
further information, refer to the financial statements and notes thereto
contained in the Company's Annual Report on Form 10-KSB.
NOTE 4: ACQUISITIONS AND VENTURES
Viva Mexico entered into a Venture Agreement with a director of Viva Mexico (the
"Holder") assigning the Holder's rights in certain licenses and permits. In
September 2001, the Company acquired from the minority stockholders of Viva
Mexico their holdings of 1,785,000 shares of Viva Mexico's common stock
representing the remaining 35.7% interest therein in exchange for 2,550,000
restricted shares of the Company's common stock. The acquisition increased the
Company's ownership in Viva Mexico to 100% and has been based on the share price
of the Company on the date of the transaction.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". In accordance with these recent pronouncements, no amortization is
recorded for certain intangibles acquired after June 30, 2001. Instead,
intangibles will be reviewed at least annually for impairment. The Company's
intangibles acquired through the initial 64.3% acquisition of Viva Mexico in
August 2000 will continue to be amortized until January 1, 2002 at which point
they will be reviewed for impairment. (Also see Note 10).
NOTE 5: STOCK OPTIONS
Under the 1999 Stock Option Plan ("Revised Plan"), 2,500,000 shares of common
stock are reserved for the grant of incentive stock options, non-qualified stock
options, or stock appreciation rights to officers, directors, employees, and
consultants of the Company, its subsidiaries, and affiliates. The committee,
designated by the Board of Directors, establishes the term of the stock option,
but no incentive stock option is exercisable more than ten years after the date
the stock option is granted.
Pursuant to the Revised Plan, the Company has outstanding 250,000 non-qualified
stock options, and 100,000 stock appreciation rights to certain consultants and
independent contractors. The stock options are immediately exercisable through
December 28, 2001 and enable the holders to purchase shares of the Company's
common stock at exercise prices ranging from $1.50 to $4.25 per share. The stock
appreciation rights permit the holder, upon surrendering all of the related
stock options, to receive cash, common stock, or a combination thereof, in an
amount equal to the aggregate number of options surrendered multiplied by the
difference between the market price and the option price.
9
For the nine months ended September 30, 2001, the Company recorded stock
compensation expense of $402,500 resulting from the exercise of stock options to
non-employees and $(188,250) resulting from the revaluation of amended stock
options.
A summary of the status of the Company's stock options as of September 30, 2001
and the changes in the nine months since December 31, 2000 is presented below:
Outstanding Exercisable
------------------------------------------- --------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Outstanding at Contractual Exercise at Sept. 30, Exercise
Sept. 30, 2001 Life Price 2001 Price
-----------------------------------------------------------------------
Non-Qualified
stock option
$1.50 - $4.25 250,000 .24 $ 2.39 250,000 $ 2.39
September 30, 2001
-----------------------------------
Weighted Average
Shares Exercise Price
--------- -------------------
Outstanding at beginning of year 1,500,000 $ 2.49
Granted -- --
Repriced - original options (775,000) 2.37
Repriced - repriced options 775,000 0.63
Exercised (350,000) 1.03
Forfeited or cancelled (900,000) 1.58
----------
Outstanding at September 30, 2001 250,000 $ 2.39
========== ========
NOTE 6: RELATED PARTY TRANSACTIONS (also see Note 10: Subsequent Events)
During the period January 1, 2001 to September 30, 2001, certain administrative
activities of Viva Mexico were performed by a shareholder. The outstanding
balance for these activities at September 31, 2001 was $146,541. Construction
services for Viva Mexico totaling $1,029,448 were performed by the same
shareholder during the same period. The Company also rents office space from an
entity controlled by the Company's president at a monthly rate of $3,920. The
total outstanding balance for services or reimbursements as of September 30,
2001 was $481,100, which was included in accounts payable and accrued
liabilities.
A director of the Company is also counsel to a law firm that represents the
Company. The outstanding balance due to the law firm is $180,394 as of September
30, 2001.
As at September 30, 2001, the Company had notes payable due to directors and
certain shareholders in the aggregate amount of $3,375,162.
The Company has receivables of $144,647 as a result of advances to shareholders.
Certain officers and directors of the Company are also officers and directors of
Phoenix Leisure, Inc. ("Phoenix"). Phoenix has provided funding and management
10
to Viva (see Note 7: Notes Payable). One of the directors of the Company also
serves as a director and president of Phoenix. Another director of the Company
serves as an employee of Phoenix and an officer of the Company is also an
officer of Phoenix.
On July 10, 2001, the Company and Viva Mexico entered into a management
agreement with Viva Management LLC to provide management and administrative
services in consideration of an annual fee (payable quarterly) equal to 4% of
the consolidated gross revenues generated by the business of the Company. The
current members of Viva Management LLC include Phoenix and three directors of
the Company.
NOTE 7: NOTES PAYABLE (also see Note 10: Subsequent Events)
In April 2001, the Company began borrowing against a convertible promissory note
("Convertible Grid Note") from Phoenix for its Mexican development due, together
with interest thereon at the rate of 10% per annum, in April 2002. The
convertible promissory note is convertible at the option of the holder in
denominations of not less than $10,000, into fully paid shares of the Company's
common stock at the lesser of $0.20 per share or the market price per share. The
Company borrowed $1,000,822 against this note during the quarter ended September
30, 2001.
TRANSACTIONS THAT CLOSED ON OCTOBER 12, 2001:
On July 10, 2001, the Company entered into agreements with officers,
directors and investors to convert certain notes payable into equity shares
of Viva Gaming and Resorts Inc. and release collateral in Viva Mexico
shares. Notes payable aggregating $3,051,000 were converted to 14,250,000
shares of the Company to be issued, as well as a stock purchase of
1,500,000 shares to be issued for a cash payment of $300,000. Certain
accounts payable due to shareholders were also eliminated as part of this
transaction.
On July 10, 2001, as part of the above transaction, the Company
consolidated its promissory note for $500,000 with the remaining amount of
a convertible promissory note into a $560,998 unsecured promissory note to
a director with no stated interest rate, due July 10, 2002.
Also on July 10, 2001, as part of the above transaction, the Company
entered into an agreement with Phoenix, upon the delivery of gaming
equipment to Viva Mexico, whereby:
(a) Phoenix purchased 2,500,000 shares of the Company's common stock for an
aggregate cash payment of $500,000.
(b) Phoenix purchased an additional 1,000,000 shares of the Company's
common stock for $1,000.
(c) Phoenix sold to the Company 600 gaming devices for 1,000,000 shares of
the Company's common stock to be issued and a $500,000 Convertible Note
("Gaming Devices Note") to replace the current "Gaming Equipment Note". The
Gaming Devices Note was immediately converted into 500,000 shares of the
Company's common stock.
11
(d) The Convertible Grid Note will be replaced with a $1,500,000 promissory
note (the "Note") which bears interest at an annual rate of 10%, is payable
at the end of one year, and is collateralized by 100% of Viva Mexico stock.
(e) The transactions in (a) through (d), above, have been combined
resulting in a discount of $599,000 being recorded. The discount was
computed based upon an average sales price of $0.20 per share. The discount
is being amortized utilizing the straight line method over the term of the
notes (one year). This results in an effective interest rate for the
combined transaction of 39.9%.
In September, through the conversion of certain accounts payable and
additional cash financing, the Company secured a $600,000 note payable due
on January 10, 2002, collateralized by 1,000,000 shares of the Company's
stock held in escrow. The note bears interest at an annual rate of 10%,
however, all interest will be waived if the note is paid on or before the
due date. A total of 50,000 shares of the Company's stock is to be issued
to the lender as additional consideration for the note.
Also in September, the Company borrowed $250,000 from a shareholder. The
note bears interest at an annualized rate of 10% and is due January 4,
2002. The Company will issue 25,000 shares of the Company's stock as
additional consideration for the note.
The remaining additional financing during the quarter came from directors and
shareholders through the issuance of notes in September for a total of $450,000.
These notes are unsecured demand notes accruing interest at 10% per annum. The
shareholder lenders will receive additional compensation currently being
negotiated. As of September 30, 2001, the Company has other unsecured notes
totaling $528,594, all at 10% interest and due within one year.
The chart below shows the effects of the Company's debt conversion:
Notes Notes
Payable Conversion Number of Payable
June 30 Additional to Common Shares to Sept. 30,
2001 Financing Shares be issued 2001
-----------------------------------------------------------------------
Phoenix Leisure Convertible Grid Note $ 1,328,772 $ 1,000,822 $ (501,000) 3,500,000 $ 1,828,594
Phoenix Leisure Gaming Equipment Note 400,000 100,000 (500,000) 500,000 --
Note collateralized by Viva Mexico shares 1,000,000 -- (1,000,000) 5,000,000 --
Other notes 1,819,998 1,291,000 (1,050,000) 5,250,000 2,060,998
Less: Discount on notes payable, net -- (464,430) -- -- (464,430)
--------------------------------------------------------------------------
Total $ 4,548,770 $ 1,927,392 $(3,051,000) 14,250,000 $ 3,425,162
==========================================================================
Maturities of the Company's borrowings as of September 30, 2001 are as follows:
Demand $ 2,014,164
January 2002 850,000
July 2002 560,998
-----------
Total $ 3,425,162
===========
12
NOTE 8: DEFAULTS
The Company owes certain parties $275,000 under fee agreements for services
associated with identifying sources of available capital. The Company is in
default of those agreements as of October 31, 2001, and is currently negotiating
a settlement. These accrued liabilities are due in full and do not have a stated
interest rate.
NOTE 9: CONTINGENCIES
In April 2001, the Company and Viva Mexico entered into a five year lease with
an option for two additional five year renewal terms at the Gransur Mall
("Gransur") in Mexico City. Under the terms of the lease, the Company will pay
monthly rent at the higher of $17,051 per month or 2% of the operation's gross
revenues, as defined in the lease (the "Base Minimum Rent"), in addition to
common area costs commencing after August 14, 2001. The Base Minimum Rent cannot
exceed $30 per square meter leased, or approximately $28,418 per month based on
the current amount of leased space. Rental rates under the lease will be
adjusted yearly for inflation based on the U.S. Consumer Price Index. The
Company and its subsidiary began paying the lease in August 2001. The Company is
a guarantor of this lease. (Also see Note 10).
NOTE 10: SUBSEQUENT EVENTS
In October 2001, the Company received $117,956 from borrowings against the
Convertible Grid Note. A director / shareholder also loaned the Company $100,000
for a demand note at 10% per year to further finance the on-going development in
Mexico.
On October 12, 2001, the debt conversion and associated stock purchase
transactions were closed (also see Note 7).
On November 1, 2001, shortly after opening, the Company's lottery entertainment
center (LEC) in Mexico City was closed by the Secretaria de Gobernacion based on
that federal agency's interpretation of the Mexican Federal Law of Gaming and
Lotteries. The Company believes that Viva Mexico is licensed to operate, as the
Company currently intends to operate, under Mexico's national lottery contract.
The Company intends to file an "Amparo", the Mexican equivalent to an
injunction, requesting the LEC to remain open while legal proceedings are
pending. If the Amparo is accepted, the facility is expected to re-open within
ten to fifteen days under the protection of the Amparo, while the legal
proceedings determining compliance with local and federal laws are resolved. The
Company has retained legal representation in Mexico and believes that the
Mexican government will recognize the merits of the Company's case. However, no
assurance can be given that the Company will prevail. Management will reassess
the value of the Company's licenses, permits and goodwill based upon the result
of the injunction process currently being pursued, which may result in a
significant reduction of such values.
13
ITEM 2 Management's Discussion and Analysis or Plan of Operation
Overview
The Company is in the business of acquiring or developing and managing casino
gaming operations that are either undervalued or believed to evidence a high
rate of profitability, and providing consulting and managerial services relating
to the management and operation of such facilities.
The Company's principal business operation and investment is in Viva Mexico.
Viva Mexico entered into a Venture Agreement with a director of Viva Mexico (the
"Holder") assigning the Holder's rights in certain licenses and permits. In
September 2001, the Company acquired from the minority stockholders of Viva
Mexico their holdings of 1,785,000 shares of Viva Mexico's common stock
representing the remaining 35.7% interest therein in exchange for 2,550,000
restricted shares of the Company's common stock. The acquisition increased the
Company's ownership in Viva Mexico to 100% and has been based on the share price
of the Company on the date of the transaction.
On July 11, 2001, the Company and Viva Mexico entered into a management
agreement with Viva Management LLC to provide management and administrative
services in consideration of an annual fee (payable quarterly) equal to 4% of
the consolidated gross revenues generated by the business of the Company and
Viva Mexico. The current members of Viva Management LLC include Phoenix and
three directors of the Company.
On November 1, 2001, shortly after opening, the Company's lottery entertainment
center (LEC) in Mexico City was closed by the Secretaria de Gobernacion based on
that federal agency's interpretation of the Mexican Federal Law of Gaming and
Lotteries. The Company believes that Viva Mexico is licensed to operate, as the
Company currently intends to operate, under Mexico's national lottery contract.
The Company intends to file an "Amparo", the Mexican equivalent to an
injunction, requesting the LEC to remain open while legal proceedings are
pending. If the Amparo is accepted, the facility is expected to re-open within
ten to fifteen days under the protection of the Amparo, while the legal
proceedings determining compliance with local and federal laws are resolved. The
Company has retained legal representation in Mexico and believes that the
Mexican government will recognize the merits of the Company's case. However, no
assurance can be given that the Company will prevail. Management will reassess
the value of the Company's licenses, permits and goodwill based upon the result
of the injunction process currently being pursued, which may result in a
significant reduction of such values.
The value and ultimate recoverability of the Company's investment in Viva Mexico
and its plans to develop operating revenues are subject to the ability to
utilize electronic gaming devices which is subject to the Federal Law of Gaming
and Lotteries under the jurisdiction of Secretaria de Gobernacion. If the
Company is unsuccessful in obtaining a permit from Secretaria de Gobernacion or
receiving a favorable court ruling for its business methods, Viva Mexico would
be unable to operate as planned and would have difficulty in receiving value
from its investment.
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Liquidity and Capital Resources
To fund its operations in the quarter ended September 30, 2001, the Company
operated principally from loans and advances from related and unrelated persons
and companies.
The Company's financial position as of September 30, 2001 is as follows:
Cash and other current assets $ 1,205,905
-----------
Liabilities:
Accounts payable and accrued liabilities 1,990,925
Advances from stockholders and officers 3,375,162
Notes payable 50,000
-----------
5,416,087
-----------
Net working capital (deficit) $(4,210,182)
===========
At September 30, 2001 and at present, the Company's resources are insufficient
to satisfy its debts and obligations without the infusion of capital or the
renegotiation of such obligations. Since September 30, 2001 the Company's
working capital deficit has increased.
In April 2001, the Company began borrowing against a convertible promissory note
("Convertible Grid Note") from Phoenix for its Mexican development due, together
with interest thereon at the rate of 10% per annum, in April 2002. The
convertible promissory note is convertible at the option of the holder in
denominations of not less than $10,000, into fully paid shares of the Company's
common stock at the lesser of $0.20 per share or the market price per share. The
Company borrowed $1,000,822 against this note during the quarter ended September
30, 2001.
TRANSACTIONS THAT CLOSED ON OCTOBER 12, 2001:
On July 10, 2001, the Company entered into agreements with officers,
directors and investors to convert certain notes payable into equity shares
of Viva Gaming and Resorts Inc. and release collateral in Viva Mexico
shares. Notes payable aggregating $3,051,000 were converted to 14,250,000
shares of the Company to be issued, as well as a stock purchase of
1,500,000 shares to be issued for a cash payment of $300,000. Certain
accounts payable due to shareholders were also eliminated as part of this
transaction.
On July 10, 2001, as part of the above transaction, the Company
consolidated its promissory note for $500,000 with the remaining amount of
a convertible promissory note into a $560,998 unsecured promissory note to
a director with no stated interest rate, due July 10, 2002.
Also on July 10, 2001, as part of the above transaction, the Company
entered into an agreement with Phoenix, upon the delivery of gaming
equipment to Viva Mexico, whereby:
(a) Phoenix purchased 2,500,000 shares of the Company's common stock for an
aggregate cash payment of $500,000.
(b) Phoenix purchased an additional 1,000,000 shares of the Company's
common stock for $1,000.
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(c) Phoenix sold to the Company 600 gaming devices for 1,000,000 shares of
the Company's common stock to be issued and a $500,000 Convertible Note
("Gaming Devices Note") to replace the current "Gaming Equipment Note". The
Gaming Devices Note was immediately converted into 500,000 shares of the
Company's common stock.
(d)The Convertible Grid Note will be replaced with a $1,500,000 promissory
note (the "Note") which bears interest at an annual rate of 10%, is payable
at the end of one year, and is collateralized by 100% of Viva Mexico stock.
(e)The transactions in (a) through (d), above, have been combined resulting
in a discount of $599,000 being recorded. The discount was computed based
upon an average sales price of $0.20 per share. The discount is being
amortized utilizing the straight line method over the term of the notes
(one year). This results in an effective interest rate for the combined
transaction of 39.9%.
In September, through the conversion of certain accounts payable and
additional cash financing, the Company secured a $600,000 note payable due
on January 10, 2002, collateralized by 1,000,000 shares of the Company's
stock held in escrow. The note bears interest at an annual rate of 10%,
however, all interest will be waived if the note is paid on or before the
due date. A total of 50,000 shares of the Company's stock is to be issued
to the lender as additional consideration for the note.
Also in September, the Company borrowed $250,000 from a shareholder. The
note bears interest at an annualized rate of 10% and is due January 4,
2002. The Company will issue 25,000 shares of the Company's stock as
additional consideration for the note.
The remaining additional financing during the quarter came from directors and
shareholders through the issuance of notes in September for a total of $450,000.
These notes are unsecured demand notes accruing interest at 10% per annum. The
shareholder lenders will receive additional compensation currently being
negotiated. As of September 30, 2001, the Company has other unsecured notes
totaling $528,594, all at 10% interest and due within one year.
In October 2001, the Company received $117,956 from borrowings against the
Convertible Grid Note. A director / shareholder also loaned the Company $100,000
for a demand note at 10% per year to further finance the on-going development in
Mexico.
Notwithstanding the loans received in the period after September 30, 2001, the
Company is required to seek additional funding and complete negotiations with
certain secured and unsecured creditors to enable it to satisfy its current
obligations and enable it to fund the development of its operations and any
shortfall between expenses and expected revenue over the next twelve-month
period. The Company is seeking additional capital to fund the remaining
development and pre-opening costs related to Viva Mexico's first entertainment
center. There is, however, no assurance additional financing will be available
or available upon acceptable terms.
The Company owes certain parties $275,000 under fee agreements for services
associated with identifying sources of available capital. The Company is in
default of those agreements as of October 31, 2001 and is currently negotiating
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a settlement. These accrued liabilities are due in full and do not have a stated
interest rate.
Except to the extent required to complete the development of the individual
entertainment sites including the acquisition of gaming equipment, leasehold
improvements and other related equipment and capital assets, the Company does
not expect to purchase or sell plant and significant equipment in the next
twelve months.
The Company's Mexican subsidiary currently has approximately 160 contracted
workers. The number and positions of any new employees will be determined by the
Company's financial position.
Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". In accordance with these recent pronouncements, no amortization is
recorded for certain intangibles acquired after June 30, 2001. Instead,
intangibles will be reviewed at least annually for impairment. The Company's
intangibles acquired through the initial 64.3% acquisition of Viva Mexico in
August 2000 will continue to be amortized until January 1, 2002 at which point
they will be reviewed for impairment.
Forward Looking Statements
The information contained in this quarterly report about us and our business and
operations contains "forward-looking statements." Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. You are cautioned that all forward-looking statements
are necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements. Such risks and uncertainties would include,
but are not limited to, court rulings, changing government policies, government
intervention, addition of competing facilities, or the Company's ability to
attract future financing.
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PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
On November 1, 2001, shortly after opening, the Company's lottery entertainment
center (LEC) in Mexico City was closed by the Secretaria de Gobernacion based on
that federal agency's interpretation of the Mexican Federal Law of Gaming and
Lotteries. The Company believes that Viva Mexico is licensed to operate, as the
Company currently intends to operate, under Mexico's national lottery contract.
The Company intends to file an "Amparo", the Mexican equivalent to an
injunction, requesting the LEC to remain open while legal proceedings are
pending. If the Amparo is accepted, the facility is expected to re-open within
ten to fifteen days under the protection of the Amparo, while the legal
proceedings determining compliance with local and federal laws are resolved. The
Company has retained legal representation in Mexico and believes that the
Mexican government will recognize the merits of the Company's case. However, no
assurance can be given that the Company will prevail. Management will reassess
the value of the Company's licenses, permits and goodwill based upon the result
of the injunction process currently being pursued, which may result in a
significant reduction of such values.
ITEM 2. Changes in Securities and Use of Proceeds
In September 2001, the Company acquired from the minority stockholders of Viva
Mexico their holdings of 1,785,000 shares of Viva Mexico's common stock
representing the remaining 35.7% interest therein in exchange for 2,550,000
restricted shares of the Company's common stock. These shares were issued
pursuant to exemptions by reason of section 4(2) of the Securities and Exchange
Act of 1933, as amended. The acquisition increased the Company's ownership in
Viva Mexico to 100% and has been based on the share price of the Company on the
date of the transaction.
ITEM 6. Exhibits and Reports on Form 8-K
(b) Reports on 8-K.
On October 12, 2001, the Company filed a Current Report on Form 8-K where in
items 1 and 7, the Company discussed the change of control resulting from the
issuance of the Company's shares to purchase the remaining outstanding shares of
Viva Gaming and Resort de Mexico, S.A. de C.V. ("Viva Mexico"), and the October
12, 2001 stock purchases. As part of that 8-K, the Company filed the requisite
exhibits of documents evidencing such investments.
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SIGNATURES
In accordance with the Requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Viva Gaming & Resorts Inc.
(Registrant)
Date November 14, 2001
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By /s/ Peter LaFemina
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(Peter LaFemina, Chief Financial Officer, Secretary and Treasurer)
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