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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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
Incorporation or organization) Identification No.)
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.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 AND
MARCH 31, 2003....................................................3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 AND 2002...............................4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED JUNE 30, 2003 AND 2002...............................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..........................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........20
ITEM 4. CONTROLS AND PROCEDURES............................................21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................22
ITEM 5. OTHER INFORMATION..................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................23
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2003 2003
------------ ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,707,343 $ 3,968,146
Notes receivable 4,719,552 --
Accounts receivable 863,040 359,008
Other receivable 332,924 2,129
------------ ------------
TOTAL CURRENT ASSETS 8,622,859 4,329,279
------------ ------------
Other Assets:
Isle of Capri-Black Hawk, L.L.C 11,260,997 8,633,782
Dry Creek Casino, L.L.C 851,823 659,897
Route 66 Casinos, L.L.C 1,295,960 1,290,199
Restaurant Connections International, Inc. (RCI) -- --
Gold Mountain Development, L.L.C 3,135,265 3,065,281
Goldfield Resources, Inc. 480,812 480,812
Sunrise Land and Minerals Corporation 371,750 371,750
Note receivable from Dry Creek Rancheria 29,042,331 28,334,437
Note receivable from affiliates 4,650,751 6,150,552
Note receivable - other -- 3,339,060
Other assets 368,107 236,416
Deferred loan issue costs 894,559 838,026
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 $ 61,016,840 $ 57,772,890
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 868,906 $ 882,388
Accrued interest payable 347,384 314,829
Deferred tax liability 3,315,077 2,384,425
Current portion of long term debt 3,123,798 1,932,072
------------ ------------
TOTAL CURRENT LIABILITIES 7,655,165 5,513,714
------------ ------------
LONG TERM LIABILITIES
Deferred income 1,112,416 1,014,729
Notes payable, net of current portion 33,487,254 34,683,665
------------ ------------
TOTAL LONG TERM LIABILITIES 34,599,670 35,698,394
------------ ------------
TOTAL LIABILITIES 42,254,835 41,212,108
------------ ------------
MINORITY INTEREST
Dry Creek Casino, L.L.C. 488,742 360,450
Route 66 Casinos, L.L.C. 696,808 671,852
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 1,342,832 1,337,973
outstanding at June 30 and March 31, 2003, respectively
Additional paid in capital 9,997,267 9,847,840
Retained earnings 6,675,341 4,912,245
Accumulated other comprehensive loss (438,985) (569,578)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 17,576,455 15,528,480
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,016,840 $ 57,772,890
============ ============
The accompanying notes are an integral part of these financial statements.
3
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
----------------------------
2003 2002
------------ ------------
REVENUES
Gaming Assets Participations:
Dry Creek Casino, L.L.C. $ 300,458 --
Route 66 Casinos, L.L.C. 145,516 57,068
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 1,782,768 490,400
------------ ------------
EXPENSES
General and administrative 327,445 252,294
Interest expense 974,111 261,639
Salaries 273,604 219,459
Legal and professional fees 314,026 46,737
Other 22,208 22,867
------------ ------------
TOTAL EXPENSES 1,911,394 802,996
------------ ------------
EQUITY IN EARNINGS OF ISLE OF CAPRI-BLACK HAWK 2,833,347 2,558,380
MINORITY INTEREST
Dry Creek Casino, L.L.C. (53,292) (32,499)
Route 66 Casinos, L.L.C. (24,956) (8,985)
------------ ------------
Net income before federal income tax provision 2,626,473 2,204,300
Federal income tax provision 863,377 823,950
------------ ------------
NET INCOME $ 1,763,096 $ 1,380,350
============ ============
PER SHARE INFORMATION
Net income available to common shareholders $ 1,763,096 $ 1,380,350
============ ============
Net income per common share - basic $ 0.16 $ 0.13
============ ============
Net income per common share - diluted $ 0.14 $ 0.11
============ ============
Basic weighted average number of common shares outstanding 11,171,734 10,776,537
============ ============
Fully diluted weighted average number of common shares outstanding 13,079,936 13,076,606
============ ============
The accompanying notes are an integral part of these financial statements.
4
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
June 30,
--------------------------
2003 2002
----------- -----------
CASH FLOWS -- OPERATING ACTIVITIES:
Net income $ 1,763,096 $ 1,380,350
Adjustments to reconcile net income to net cash
Provided (used) by operating activities:
Depreciation 6,289 7,684
Consultant option expenses 77,500 --
Amortization of loan issue costs 73,054 30,955
Amortization of capitalized development cost 14,438 --
Amortization of deferred income (71,411) (8,300)
Write-off of project 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
Deferred tax expense 863,377 823,950
Minority interest
Dry Creek Casinos, L.L.C. 53,292 32,499
Route 66 Casinos, L.L.C. 24,956 8,985
Changes in operating assets and liabilities:
Receivables and other assets (816,210) (413,550)
Accounts payable and accrued liabilities 27,417 (48,403)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (413,549) 501,790
----------- -----------
CASH FLOWS -- INVESTING ACTIVITIES:
Purchases of real estate and assets held (432,421) (552,125)
for development
Purchase of furniture, fixtures, and (4,526) (7,629)
equipment
Note receivable from Dry Creek Rancheria (4,089,855) (3,542,489)
Note receivable - other 3,339,060 --
Note receivable from affiliates 299,801 432,175
----------- -----------
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 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:
- Isle of Capri - Black Hawk Casino and hotel located in Black Hawk,
Colorado;
- Colorado Central Station Casino located in Black Hawk, Colorado; and
- 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. The LLC began earning 20% of River Rock Casino's
earnings before 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
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.
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.
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.
REVENUE RECOGNITION OF INCOME - We recognize revenues from interest income
as such interest accrues on outstanding notes receivable. 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. 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 - 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." 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.
BASIS OF PRESENTATION - These financial statements are consolidated for
all majority owned subsidiaries as of June 30, 2003. 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.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
7
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.
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 $656,000for 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.
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 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,
8
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 which includes an other comprehensive gain of
$130,593, net of taxes of $67,275, related to the interest rate swap
transaction.
9
The following is a summary of condensed financial information pertaining to
IC-BH as of July 27, 2003 and for the quarter then ended:
ISLE OF CAPRI BLACK HAWK, L.L.C.
BALANCE SHEET
July 27,
2003
--------------
(in Thousands)
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
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
=========
10
ISLE OF CAPRI BLACK HAWK, L.L.C.
INCOME STATEMENT
Quarter
Ended
July 27,
2003
--------------
(in Thousands)
REVENUES
Casino $ 45,983
Rooms 1,543
Food, beverage and other 5,370
----------
Gross revenues 52,896
Less promotional allowances (10,762)
----------
Net revenues 42,134
OPERATING EXPENSES
Casino 6,757
Gaming taxes 8,725
Rooms 385
Food, beverage and other 1,214
Facilities 1,808
Marketing and administrative 9,523
Management fees 1,909
Depreciation and amortization 2,173
----------
Total operating expenses 32,494
----------
Operating income 9,640
Interest expense (2,911)
Interest income 29
----------
Income before income taxes 6,758
Income tax provision 169
----------
Net income $ 6,589
==========
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.
11
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
12
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 - At June 30, 2003, Clay County Holdings,
Inc ("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, Service Interactive,
Inc. ("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 $ 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 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.
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
Temporary differences reflected in the deferred income tax accounts
primarily relate to timing differences in the recognition of the allocated
equity in earnings from IC-BH for tax and financial reporting purposes and tax
benefits generated by available net operating loss carryforwards ("NOL's"). We
have available NOL's amounting to $931,471 as of June 30, 2003.
For the three months ended June 30, 2003, we recorded deferred tax expense
in the amount of $863,377. Our recorded deferred tax expense excludes tax
expense of $67,275 related to an interest rate swap transaction, which was
recorded net of tax as an accumulated other comprehensive gain.
13
NOTE 7. COMPUTATION OF EARNINGS PER SHARE
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.
YEAR ENDED JUNE 30, 2003
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to common stockholders $ 1,763,096 11,171,734 $ 0.16
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 1,350,715 (0.02)
Convertible debt 30,355 557,487 --
----------- ------------- ----------
FULLY DILUTED EPS
Income available to common stockholders $ 1,793,451 13,079,936 $ 0.14
=========== ============= ==========
YEAR ENDED JUNE 30, 2002
----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
BASIC EPS
Income available to common stockholders $ 1,380,350 10,776,537 $ 0.13
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants -- 1,757,034 (0.02)
Convertible debt 29,568 543,035 --
----------- ------------- ----------
DILUTED EPS
Income available to common stockholders $ 1,409,918 13,076,606 $ 0.11
=========== ============= ==========
As discussed in Note 8, 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 these convertible debt security being dilutive.
NOTE 8. SEGMENT REPORTING
We primarily operate in the gaming segment. The gaming segment consists of
a casino entertainment complex in Black Hawk, Colorado, 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 THREE MONTHS ENDED JUNE 30, 2003
----------------------------------------------
Gaming Other Totals
------------ ------------ ------------
Revenue $ 445,974 $ 29,145 $ 475,119
Segment profit (loss) (38,888) (89,738) (128,626)
Segment assets 48,429,283 3,987,827 52,417,110
Investment in Isle
of Capri Black Hawk L.L.C 11,260,997 -- 11,260,997
Interest expense 974,111 -- 974,111
Interest income 1,037,324 270,326 1,307,649
Equity in earnings of
equity investment 2,833,347 -- 2,833,347
14
AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2002
------------------------------------------------------------------------------------------
Real Restaurant
Gaming Estate Franchise Mining Other Totals
------------ ------------ ------------ ------------ ------------ ------------
Revenue $ 90,319 $ 30,367 $ -- $ 10,500 $ 18,547 $ 149,733
Segment profit (loss) (253,014) (217,995) -- (32,657) 191,070 (312,596)
Segment assets 15,384,572 6,108,625 -- 480,812 -- 21,974,009
Investment in Isle of
Capri Black Hawk, L.L.C. 8,633,782 -- -- -- -- 8,633,782
Interest expense -- -- -- 179 261,460 261,639
Interest income 150,346 -- -- -- 223,572 373,918
Equity in earning of
equity investment 2,558,380 -- -- -- -- 2,558,380
Reconciliation of reportable segment assets to our consolidated totals are as
follows:
JUNE 30,
---------------------------
2003 2002
----------- -----------
Assets
Total assets for reportable segments $52,417,110 $21,974,009
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 -- 638,994
----------- -----------
Total assets $61,016,840 $31,054,512
=========== ===========
Reconciliation of reportable segment revenues to our consolidated totals are as
follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------- ----------
Revenue
Total revenue for reportable segments $ 475,119 $ 116,482
Interest income allocated to reportable segments 1,307,649 373,918
---------- ----------
Total revenue $1,782,768 $ 490,400
========== ==========
Reconciliation of reportable segment profit or loss to our consolidated totals
are as follows:
THREE MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------- ----------
Profit or loss
Total loss for reportable segments $ (128,626) $ (312,596)
Equity in income of equity investments 2,833,347 2,558,380
Minority interest (78,248) (41,484)
---------- ----------
Net income before federal income tax provision $2,626,473 $2,204,300
========== ==========
15
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 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. 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-KSB for the year ended March 31, 2003. 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.
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.
16
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. 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.
Equity Method of Accounting
Our investments in IC-BH and RCI are accounted for using the equity method
of accounting since 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 representation on the
investee's Board of Directors or similar oversight body are considered in
determining whether the equity method of accounting is appropriate. We record
our equity in the income or losses of our investees three months in arrears for
RCI and one month in advance for IC-BH, based on 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
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
Rancheira 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 $1.8 million for the quarter ended June 30, 2003 compared to net income of
$1.4 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, including an other comprehensive gain of $131,000,
net of taxes of $67,000, related to an interest rate swap transaction.
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.
17
We own majority interests in Dry Creek Casino, L.L.C. and Route 66
Casinos, L.L.C., of 69% and 51%, respectively. For financial reporting purposes,
the assets, liabilities, and earnings of the partnership entities are included
in our consolidated financial statements. The interests of the other members of
both entities have been recorded as minority interest totaling $ 1.2 million 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 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 264%, or $1.3 million, to $1.8 million
for the quarter ended June 30, 2003. 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.
ROUTE 66 CASINOS, L.L.C. The gaming lease income of $146,000
consisted entirely of estimated revenues from gaming equipment from the
Route 66 Casino. 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.
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 264%, or $934,000, to $1.3 million for
the quarter ended June 30, 2003. 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. 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.
TOTAL EXPENSES. Total expenses increased 138%, or $1.1 million to $1.9
million for the quarter ended June 30, 2003, compared to $803,000 in the quarter
ended June 30, 2002. The increase is due primarily to an
18
increase in general and administrative expenses, interest expense, other
expense, salaries, and legal and professional fees as discussed below:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 30%, or $75,000, to $327,000 for the quarter ended June
30, 2003, compared to $252,000 in the quarter ended June 30, 2002. The
increase is primarily attributable to $59,000 of estimated general and
administrative expenses of Route 66 and an increase in amortization of
loan issue cost.
INTEREST EXPENSE. Interest expense increased 272%, or $712,000, to
$974,000 for the quarter ended June 30, 2003, compared to $262,000 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.
LEGAL AND PROFESSIONAL FEES. Legal and professional fees increased
568%, 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.
NET INCOME. Net income increased 28% or $383,000 to $1.8 million for the
quarter ended June 30, 2003 as compared to net income of $1.4 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 $3.5 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 for receiving an aggregate proceeds of $100,000 upon the exercise
of common stock options.
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 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
19
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 a 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, starting
in June 2003 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 Casinos 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
20
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 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.
21
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.
22
ITEM 5. OTHER INFORMATION
None.
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.
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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 14, 2003
24
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
25