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 December 31, 2004
[ ] 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 1-15517
-------
Nevada Gold & Casinos, Inc.
(Name of issuer in its charter)
Nevada 88-0142032
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
3040 Post Oak Blvd.
Suite 675
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (713) 621-2245
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for any shorter period that the
registrant was required to file the reports), and (2) has been subject to those
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
[X] Yes [ ] No
The number of common shares outstanding was 12,755,203 as of February 7,
2005.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND
MARCH 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED DECEMBER 31, 2004 AND 2003. . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE
MONTHS ENDED DECEMBER 31, 2004 AND 2003. . . . . . . . . . . 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR
THE NINE MONTHS ENDED DECEMBER 31, 2004. . . . . . . . . . . 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED DECEMBER 31, 2004 AND 2003. . . . . . . . . . . 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . 31
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . 31
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. . 33
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 33
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 34
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
-------------- -------------
2004 2004
ASSETS (Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 2,886,522 $ 3,528,631
Accounts receivable 455,984 216,322
Income tax receivable 2,510,000 2,522,000
Notes receivable from affiliates, current portion 1,200,000 1,200,000
Other assets 195,921 79,272
-------------- -------------
TOTAL CURRENT ASSETS 7,248,427 7,546,225
-------------- -------------
Joint ventures in equity investees:
Isle of Capri Black Hawk, L.L.C. 17,957,858 15,708,324
Route 66 Casinos, L.L.C. 3,085,236 1,852,828
Sunrise Land and Mineral Corporation 371,750 371,750
Investments in development and operating projects:
Dry Creek Casino, L.L.C., gaming 1,194,520 1,264,164
Nevada Gold Tulsa, Inc., gaming 1,201,035 744,617
Gold River, L.L.C., gaming 123,358 19,770
Gold Mountain Development, L.L.C., real estate 3,356,958 3,342,207
Goldfield Resources, Inc., mining 480,812 480,812
Other assets, gaming 519,235 414,571
Notes receivable from Dry Creek Rancheria 10,000,000 10,000,000
Notes receivable - gaming projects 5,214,071 -
Notes receivable from affiliates 3,052,121 3,839,586
Deferred loan issue cost, net 410,008 285,450
Deferred tax asset 870,187 -
Furniture, fixtures and equipment, net of accumulated depreciation
of $153,931 at December 31, 2004 and $124,609 at March 31, 2004 100,739 80,753
-------------- -------------
TOTAL ASSETS $ 55,186,315 $ 45,951,057
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,215,087 $ 1,205,241
Deferred tax liability - 2,517,678
Current portion of long-term debt, net of discount 6,516,134 - _
-------------- -------------
TOTAL CURRENT LIABILITIES 7,731,221 3,722,919
-------------- -------------
LONG-TERM LIABILITIES
Deferred income 101,995 145,833
Convertible note, net of discount and current portion - 11,029,266
Term note payable, net of current portion 3,272,500 -
Note payable on credit facility 13,915,671 -
-------------- -------------
TOTAL LONG-TERM LIABILITIES 17,290,166 11,175,099
-------------- -------------
TOTAL LIABILITIES 25,021,387 14,898,018
-------------- -------------
COMMITMENTS AND CONTINGENCIES - -
MINORITY INTEREST - DRY CREEK CASINO, L.L.C. 263,382 253,719
STOCKHOLDERS' EQUITY
Common stock, $0.12 par value, 20,000,000 shares authorized, 13,343,603 and
12,279,352 shares issued at December 31, 2004, and March 31, 2004, respectively 1,601,232 1,473,522
Additional paid in capital 20,961,697 19,256,200
Treasury stock, 604,900 shares, at cost (6,608,955) -
Retained earnings 13,920,028 10,261,455
Accumulated other comprehensive income (loss) 27,544 (191,857)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 29,901,546 30,799,320
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 55,186,315 $ 45,951,057
============== =============
The accompanying notes are an integral part of these financial statements.
3
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
--------------------------
2004 2003
------------ ------------
REVENUES
Gaming asset participation income:
Dry Creek Casino, L.L.C. $ 1,238,520 $ 867,718
Other income:
Interest income 444,060 1,795,659
Royalty income 16,903 16,903
------------ ------------
TOTAL REVENUES 1,699,483 2,680,280
------------ ------------
EXPENSES
General and administrative 270,552 295,602
Interest expense 512,355 747,775
Salaries 599,589 333,263
Legal and professional fees 567,788 239,720
Amortization of deferred loan issue cost 63,926 967,124
Other 44,032 50,789
------------ ------------
TOTAL EXPENSES 2,058,242 2,634,273
------------ ------------
EQUITY IN EARNINGS OF ISLE OF CAPRI-BLACK HAWK 1,477,890 2,457,760
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C. 400,755 418,351
MINORITY INTEREST - DRY CREEK CASINO, L.L.C. (184,448) (127,156)
------------ ------------
Income before income tax provision 1,335,438 2,794,962
Federal income tax provision - deferred (507,466) (986,675)
------------ ------------
NET INCOME $ 827,972 $ 1,808,287
============ ============
PER SHARE INFORMATION
Net income per common share - basic $ 0.06 $ 0.16
============ ============
Net income per common share - diluted $ 0.06 $ 0.12
============ ============
Basic weighted average number of
common shares outstanding 12,837,107 11,660,023
============ ============
Fully diluted weighted average number of
common shares outstanding 14,286,637 15,189,664
============ ============
The accompanying notes are an integral part of these financial statements.
4
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
December 31,
--------------------------
2004 2003
------------ ------------
REVENUES
Gaming asset participation income:
Dry Creek Casino, L.L.C. $ 3,655,655 $ 2,576,926
Other income:
Interest income 1,370,461 4,348,959
Royalty income 50,708 45,537
Miscellaneous income - 34,975
------------ ------------
TOTAL REVENUES 5,076,824 7,006,397
------------ ------------
EXPENSES
General and administrative 761,913 667,028
Interest expense 1,330,755 2,809,681
Salaries 1,556,046 893,418
Legal and professional fees 1,248,834 1,082,037
Amortization of deferred loan issue cost 292,915 960,084
Write-off of project development costs 180,850 23,403
Other 142,879 119,675
------------ ------------
TOTAL EXPENSES 5,514,192 6,555,326
------------ ------------
EQUITY IN EARNINGS OF ISLE OF CAPRI-BLACK HAWK 5,517,108 7,948,208
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C. 1,246,897 636,625
MINORITY INTEREST - DRY CREEK CASINO, L.L.C. (546,272) (396,080)
------------ ------------
Income before income tax provision 5,780,365 8,639,824
Federal income tax provision - deferred (2,121,792) (2,973,753)
------------ ------------
NET INCOME $ 3,658,573 $ 5,666,071
============ ============
PER SHARE INFORMATION
Net income per common share - basic $ 0.29 $ 0.50
============ ============
Net income per common share - diluted $ 0.26 $ 0.39
============ ============
Basic weighted average number of
common shares outstanding 12,799,385 11,361,669
============ ============
Fully diluted weighted average number of
common shares outstanding 14,793,284 15,403,212
============ ============
The accompanying notes are an integral part of these financial statements.
5
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Additional Other Total
------------------------ Paid Retained Comprehensive Treasury Stockholders'
Shares Amount in Capital Earnings Income (Loss) Stock Equity
----------- ----------- ------------ ----------- --------------- ------------- ---------------
Balance at 4/1/2004 12,279,352 $1,473,522 $19,256,200 $10,261,455 $ (191,857) $ - $ 30,799,320
Exercise of stock options 764,251 91,710 2,462,412 - - - 2,554,122
Repurchase of common stock
(1,106,817 shares), at cost - - - - - (13,153,955) (13,153,955)
Retirement of treasury stock (501,917) (60,230) (6,484,770) - - 6,545,000 -
Stock issued for cashless
warrant exercise 801,917 96,230 (96,230) - - - -
Tax benefit of option and
warrant exercises - - 5,622,683 - - - 5,622,683
Options issued for services - - 201,402 - - - 201,402
Comprehensive income:
Net income - - - 3,658,573 - - 3,658,573
Interest rate swap,
net of tax - - - - 219,401 - 219,401
---------------
Comprehensive income - - - - - - 3,877,974
----------- ----------- ------------ ----------- --------------- ------------- ---------------
Balance at 12/31/2004 13,343,603 $1,601,232 $20,961,697 $13,920,028 $ 27,544 $ (6,608,955) $ 29,901,546
=========== =========== ============ =========== =============== ============= ===============
The accompanying notes are an integral part of these consolidated financial statements.
6
NEVADA GOLD & CASINOS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
December 31,
---------------------------
2004 2003
------------ -------------
CASH FLOWS - OPERATING ACTIVITIES:
Net income $ 3,658,573 $ 5,666,071
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation 29,322 16,950
Options granted to consultants 201,402 77,500
Amortization of beneficial conversion
and deferred loan issue costs 422,956 1,189,261
Amortization of project development cost 84,133 164,227
Amortization of deferred income (145,833) (975,494)
Write-off of project development cost 180,850 23,403
Equity in earnings of Isle of Capri-Black Hawk (5,517,108) (7,948,208)
Cash distribution from Isle of Capri-Black Hawk 3,600,000 2,457,000
Equity in earnings of Route 66 Casinos, L.L.C. (1,246,897) (636,625)
Deferred income tax expense 2,121,792 2,973,753
Minority interest - Dry Creek Casino, L.L.C. 546,272 396,080
Changes in operating assets and liabilities:
Receivables and other assets (461,985) (2,817,983)
Accounts payable and accrued liabilities 111,840 154,858
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,585,317 740,793
------------ -------------
CASH FLOWS - INVESTING ACTIVITIES:
Project asset expenditures (1,273,283) (1,042,808)
Purchase of furniture, fixtures and equipment (49,308) (21,036)
Collections on note receivable - Dry Creek Rancheria - 22,558,684
Advances on note receivable - Dry Creek Rancheria - (4,089,855)
Collections on note receivable - gaming projects - 3,339,060
Advances on notes receivable - gaming projects (4,683,385) -
Collections on notes receivable from affiliates 900,000 900,000
Advances on note receivable from affiliate (112,535) (64,570)
------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (5,218,511) 21,579,475
------------ -------------
CASH FLOWS - FINANCING ACTIVITIES:
Proceeds from borrowing on credit facility 6,000,000 -
Payments on debt - (23,615,737)
Repurchase of common stock (6,608,955) -
Deferred loan issue costs (417,472) (244,587)
Dry Creek Casino, L.L.C. capital contribution - 75,000
Proceeds from exercises of stock options 2,554,122 457,320
Cash distribution to minority partners (536,610) (551,229)
------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 991,085 (23,879,233)
------------ -------------
Net decrease in cash (642,109) (1,558,965)
Beginning cash balance 3,528,631 3,968,146
------------ -------------
Ending cash balance $ 2,886,522 $ 2,409,181
============ =============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 1,143,979 $ 3,085,010
------------ -------------
The accompanying notes are an integral part of these financial statements
7
NEVADA GOLD & CASINOS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS
--------
We were formed in 1977, and since 1994 have been primarily a developer
of gaming facilities and related lodging and entertainment facilities ("gaming
projects"). We also have real estate interests in Colorado, California, and
Nevada. We report our operations in two segments - gaming projects and other
assets. For a summary of financial information concerning these two segments,
please refer to the information provided in Note 9 to the Consolidated Financial
Statements.
DESCRIPTION OF BUSINESS- GAMING PROJECTS
Colorado Gaming Projects
We are a 43% non-operating owner of Isle of Capri Black Hawk, L.L.C.
("IC-BH"). Isle of Capri Casinos, Inc. ("Isle") is the 57% operating owner.
IC-BH owns three casinos in Colorado (referred to collectively as the "Colorado
Casinos"). Isle operates the Colorado Casinos under an agreement with IC-BH for
a management fee based upon a percentage of the revenues and operating profit of
the Colorado Casinos. IC-BH's gaming properties are:
The Isle of Capri - Black Hawk. The Isle of Capri - Black Hawk, which
commenced operation in December 1998, is located on an approximately 10-acre
site and is one of the first gaming facilities reached by customers arriving
from Denver via Highway 119. In November 2004, a new 8.4 mile four-lane highway
from I-70 to Central City was completed. This new highway provides additional
access to the Black Hawk/ Central City market. The property currently consists
of a casino with approximately 1,066 slot machines and 14 table games, a
237-room hotel and 1,100 parking spaces in an attached parking garage. The Isle
of Capri - Black Hawk also offers customers a wide variety of non-gaming
amenities, including three dining facilities and a 4,000 square foot event
center that can be used for meetings and entertainment.
The Colorado Central Station - Black Hawk. The Colorado Central
Station - Black Hawk, which IC-BH acquired in April 2003, is located across the
intersection of Main Street and Mill Street from the Isle of Capri - Black Hawk.
The property currently consists of a casino with approximately 625 slot machines
and 19 table games. The property also offers guests three dining options. This
property is currently undergoing an expansion, discussed in more detail below.
Prior to the expansion project, which began in January, 2004, the property had
546 parking spaces across two parking areas. During the expansion project, valet
parking is available to customers of the Colorado Central Station. The expansion
project will include a new 1,200 space parking garage.
The Colorado Grande - Cripple Creek. The Colorado Grande - Cripple
Creek, which IC-BH acquired in April 2003, is located at a primary intersection,
near the center of the Cripple Creek market. The property currently consists of
a casino with approximately 220 slot machines, no table games, a 4-room hotel
and 44 parking spaces. The property offers guests dining at its restaurant.
In January 2004, IC-BH commenced a $95 million construction project at
its Black Hawk Casinos. The expansion project includes 15,000 square feet of
additional gaming space, a covered skywalk to connect the two casino properties,
a 1,200-space parking garage, 160 additional hotel rooms and a 200-seat
restaurant. As currently planned, IC-BH expects to open the first phase, which
includes two floors of parking and the casino expansion, in spring 2005. The
hotel, restaurant and remaining parking are scheduled to be completed within
twelve months thereafter. IC-BH is also funding approximately $20 million (which
is part of the $95 million overall total) of public improvements which include
extending Main Street to connect to Colorado Highway 119. This will provide
customers direct access to IC-BH's Black Hawk casinos and parking garages at the
first two traffic lights into Black Hawk.
River Rock Gaming Project
Dry Creek Casino, L.L.C., of which we own 69%, was formed in 2001 to
assist the Dry Creek Rancheria Band of Pomo Indians ("tribe") with the
development and financing of its River Rock Casino located approximately 75
miles north of the San Francisco Bay area, in Sonoma County, California. The
River Rock Entertainment Authority was formed as an unincorporated
instrumentality of the tribe to own and operate the River Rock Casino. The
casino features 1,600 slot machines, 16 table games, and two restaurants. As of
December 31, 2004, we had a note receivable of $10 million from Dry Creek
Casino, L.L.C, which loaned such funds to the River Rock Casino.
8
Under the development and loan agreement, Dry Creek Casino, L.L.C. earns a
credit enhancement fee equal to 20% of River Rock Casino's earnings before taxes
(if any), depreciation and amortization. The credit enhancement fee is payable
for a period of five years, starting June 1, 2003 and ending on May 31, 2008.
Route 66 Gaming Project
On May 23, 2002, we entered into a joint venture agreement (the "Route
66 Casinos, L.L.C." or "Route 66") with American Heritage, Inc., d/b/a The
Gillmann Group ("The Gillmann Group") that is 51% owned by us and 49% by The
Gillmann Group. The Gillmann Group had several contracts with the Laguna
Development Corporation ("LDC"), a federally chartered corporation wholly-owned
by the Pueblo of Laguna, the second largest pueblo in New Mexico. The Gillmann
Group agreed to assign these contracts to Route 66 Casinos, L.L.C.
The contracts included a Development and Construction Agreement, as
well as three gaming lease equipment agreements. Under the Development and
Construction Agreement, The Gillmann Group was to consult on the development and
operation of a temporary casino and a permanent casino in Rio Puerco, New Mexico
and provide or arrange for financing of the temporary and permanent casinos. As
compensation for the consulting services, LDC entered into gaming lease
equipment agreements with The Gillmann Group. Route 66 Casinos, L.L.C. expects
to receive on average approximately 16% of gross revenue from the gaming devices
subject to the leases over a five-year period which commenced in September,
2003.
The Route 66-themed casino opened on September 4, 2003. The
165,000-square-foot casino, located 11 miles west of Albuquerque adjacent to
I-40, includes 1,250 slot machines, and multiple food, beverage and retail
outlets. Pueblo of Laguna's land is adjacent to I-40, the original Route 66-once
termed "The Main Street of America" and made famous by the TV series Route 66.
We are currently involved in a dispute with The Gillmann Group as
discussed in Part II, Item 1. To date, we have received no cash distributions
from the venture. Our portion of the earnings of the venture have been estimated
and recorded based on financial information made available to us. We are
vigorously pursuing our rights under the joint venture agreement.
Muscogee (Creek) Nation Gaming Project
On December 23, 2003, we (through our wholly owned subsidiary, Nevada
Gold Tulsa, Inc.) entered into Development and Management Agreements with the
Muscogee (Creek) Nation (the "Nation"), a federally recognized Indian tribe,
pursuant to which we will assist the Nation in developing and operating a
multi-phase gaming and entertainment project to be located in southern Tulsa,
Oklahoma. The project will be developed on and around the site of the existing
Creek Nation Casino. The first phase will include the construction of a
state-of-the-art gaming center featuring approximately 3,000 gaming machines and
a 750 to 1,500 space, multi-level parking facility. Retail stores, restaurants
and other entertainment venues are planned for subsequent phases. The Nation's
total investment in the casino is expected to be approximately $110 million. We
will assist the Nation in arranging financing and in designing, constructing,
equipping and opening the gaming entertainment complex. The first phase of
development is targeted to be completed in late 2006, but there can be no
assurance that it will be completed in that timeframe.
The Management Agreement is subject to the approval of the National
Indian Gaming Commission ("NIGC") prior to its becoming effective. The
Development Agreement provides for a fee to us of $2.2 million upon completion
of the gaming entertainment complex; however, if the Management Agreement is
approved by the NIGC, we will not receive any fees under the Development
Agreement, but will instead receive fees solely from the Management Agreement as
described below. The term of the Management Agreement is for 60 months, and
provides for the payment of a monthly management fee, starting after the opening
of the gaming entertainment complex, equal to 12% of monthly net income less
principal payments on debt based on a 10 year amortization period.
La Jolla Band of Luiseno Mission Indians
On August 9, 2004, we (through our wholly owned subsidiary, Gold
River, L.L.C.) entered into a Development Agreement with the La Jolla Band of
Luiseno Mission Indians, a federally recognized Indian Tribe, pursuant to which
we will assist the Tribe in developing and constructing a gaming facility. A
Management
9
Agreement with the Tribe is being finalized pursuant to which we will assist the
tribe in managing the gaming facility. The multi-phase project will be developed
on the 9,998 acre La Jolla Indian Reservation in Pauma Valley, California. The
first phase will include the construction of a casino with 349 slot machines, 12
table games, dining facilities and parking. The total project cost for the first
phase will be approximately $25 million. Subsequent phases may include an
expanded casino, RV-park, additional restaurants and other entertainment venues.
We will receive a management fee of 23% of pretax income over a five year
period, with a two year period renewal for the first phase, and a new five year
term for any subsequent phase. We will also receive a 2% development fee on the
total project costs of each phase.
OTHER BUSINESS ACTIVITIES
Gold Mountain Development. Through our wholly-owned subsidiary, Gold
Mountain Development, L.L.C., we own approximately 240 acres of real property
in the vicinity of Black Hawk, Colorado. In November 2004, the Central City
Business Improvement District completed the construction of a new 8.4 mile
four-lane highway from I-70 to Central City. The new highway is adjacent to a
portion of our 240 acres. We are currently having discussions with third
parties to joint venture with us on the development of the property.
Sunrise Land and Mineral. We have a 50% interest in Sunrise Land and
Mineral Corporation, ("Sunrise"). Sunrise owns approximately 300 acres of land
in Nevada County, California, including all surface, mineral, water, air, and
timber rights, and mining leases consisting of approximately 8,600 acres in
White Pine County, Nevada. The 300 acres serves as collateral for our note
receivable of $201,355 from Sunrise.
Goldfield Resources, Inc. Our wholly-owned subsidiary, Goldfield
Resources, Inc. ("Goldfield"), holds mining claims totaling approximately 9,000
acres in the State of Nevada. Goldfield is not directly involved in mining
operations. Goldfield has secured a mining lease for its properties with
Metallic Goldfield, Inc. ("Metallic"), and retains a royalty interest under the
lease. This lease permits Goldfield to benefit financially from successful
mining operations without incurring the significant labor and machinery costs of
operating mining projects. Gold mining operations must be conducted in
accordance with state and federal rules and regulations. Under the lease
agreement, Metallic is primarily responsible for all regulatory compliance.
However, Metallic's failure to comply with any of the applicable rules or
regulations could create potential liability for Goldfield.
Restaurant Connections International, Inc. We are a founding
shareholder of Restaurant Connections International, Inc. ("RCI"), and currently
own an approximate 30% interest in RCI. RCI owns the sole Pizza Hut franchise in
Sao Paulo, Brazil, giving RCI ownership and operation of 16 Pizza Hut
restaurants in Sao Paulo. RCI is pursuing a sale of its assets or other form of
monetization, and RCI has retained an investment banker to assist RCI in these
efforts. Other global fast food restaurants have entered the Brazilian
marketplace and are general competitors of RCI. McDonald's and Dunkin Donuts
have each established a presence in Sao Paulo and in other areas of Brazil.
These restaurant companies have significantly greater financial and other
resources that could adversely affect RCI's operations.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
The financial statements included herein have been prepared by us,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"), and reflect all adjustments which are, in the
opinion of management, necessary to present a fair statement of the results for
the interim periods on a basis consistent with the annual audited consolidated
financial statements. All such adjustments are of a normal recurring nature. The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for an entire year. Certain information, accounting
policies and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been omitted pursuant to applicable SEC rules and regulations, although we
believe that all disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with our
audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended March 31, 2004.
BASIS OF PRESENTATION - These financial statements are consolidated
for all majority owned subsidiaries for all periods presented. The portions not
owned by the Company are recorded as minority interests. 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.
10
EQUITY METHOD OF ACCOUNTING - Our investments in IC-BH, Route 66
Casinos, L.L.C., Sunrise, and RCI are accounted for using the equity method of
accounting because the investment gives us the ability to exercise significant
influence, but not control, over the investees. Significant influence is
generally deemed to exist where we have an ownership interest in the investee of
between 20% and 50%, although other factors such as the degree of ultimate
control, representation on the investee's Board of Directors or similar
oversight body are considered in determining whether the equity method of
accounting is appropriate. Although we have an ownership interest of 51% in
Route 66 Casinos, L.L.C., we account for the investment in Route 66 Casinos,
L.L.C. using the equity method because the agreement provides that we and our
joint venture partner have equal voting rights in the joint venture and the
operating activities of the joint venture are currently controlled by the
minority venturer (See Part II, Item 1). We record our equity in the income or
losses of our equity investees using the same reporting periods as presented
herein, except we report our equity in income or losses three months in arrears
for RCI (which has a calendar fiscal year) and one month in advance for IC-BH
(which has a fiscal year ending on the last Sunday in April). Sunrise holds
approximately 300 acres of land in California and has no operating activities;
thus, there has been no equity in earnings or losses recorded during the three
and nine months periods ended December 31, 2004 and 2003. Deferred tax assets
or liabilities are recorded for allocated earnings or losses of our equity
investments that are not currently reportable for federal income tax purposes.
IMPAIRMENT OF EQUITY INVESTEES - We review our investments in equity
investees for impairment whenever events or changes in circumstances indicate
that the carrying amount of the investment has experienced a decline in value
that is other than temporary and may not be recoverable. Generally our equity
investees are evaluated periodically by determining an estimate of fair value
derived from an analysis of undiscounted net cash flow, replacement cost or
market comparison, before interest, and if required we will recognize an
impairment loss equal to the difference between its carrying amount and its
estimated fair value. If impairment is recognized, the reduced carrying amount
of the asset will be accounted for at its new basis. Should an impairment
occur, the carrying value of our investment in an equity investee would not be
recorded below zero unless there are guaranteed obligations of the investee or
if we are otherwise committed to provide further financial support. The process
of evaluating for impairment requires estimates as to future events and
conditions, which are subject to varying market and economic factors, such as
recurring losses, permanent devaluation of the underlying long-term assets and
intangibles held by the equity investee and softening industry trends that
appear to be irreversible. Therefore, it is reasonably possible that a change
in estimate resulting from judgments as to future events could occur which would
affect the recorded amounts. As of December 31, 2004 management believes that
no impairment exists based upon periodic reviews. Furthermore, no impairment
losses have been required to be recorded for the fiscal years ended March 31,
2004, 2003 and 2002.
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.
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. Property held for development is carried at the lower
of cost or net realizable value. We review our investments in land development
projects for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS No. 144"),
"Accounting for the Impairment and Disposal of Long-Lived Assets." If the
carrying amount of the asset, including any intangible assets associated with
that asset, exceeds its estimated undiscounted net cash flow, before interest,
the Company will recognize an impairment loss equal to the difference between
its carrying amount and its estimated fair value. As of December 31, 2004, we
believe that no impairment exists based upon periodic reviews. Furthermore, no
impairment losses have been required to be recorded for the fiscal years ended
March 31, 2004, 2003, and 2002.
CAPITALIZED PROJECT DEVELOPMENT COSTS - We capitalized certain third
party legal, professional, and other miscellaneous fees directly related to the
procurement, evaluation and establishment of gaming and real estate projects.
Development expenditures are recorded at cost. The costs are amortized over the
estimated useful life of the project. When accumulated costs on a specific
project exceed the net realizable value of such project or the project is
abandoned, the costs are charged to expense.
FURNITURE, FIXTURES, AND EQUIPMENT - We depreciate furniture,
fixtures, and equipment over their estimated useful lives, ranging from two to
seven years, using the straight-line method. Expenditures for furniture,
fixtures, and equipment are capitalized at cost. When items are retired or
otherwise disposed of, a gain or (loss) is
11
recorded for the difference between net book value and proceeds realized on the
property. Ordinary maintenance and repairs are charged to expense, and
replacements and betterments are capitalized.
DEFERRED LOAN COSTS - Deferred loan costs are comprised of direct
costs of securing financing. These costs are amortized to expense on a
straight-line basis over the underlying life of the debt instrument.
REVENUE RECOGNITION - We accrue credit enhancement fees earned from
River Rock Casino for each month as earned. The credit enhancement fee income is
payable to us on the 15th day of the month following the month it is earned. As
of December 31, 2004, there has been no delinquency in the payment of credit
enhancement fees.
We record revenues from interest income on notes receivable on the
accrual basis as earned. The dates on which interest income is actually payable
are dependent upon the terms of the particular note receivable agreement, and
may not correspond to the date such interest income is recorded. Interest income
on notes receivable related to certain gaming development projects is deferred
because realizability of the interest is contingent upon the completion of
project financing or the cash flow from operations of the gaming projects.
Interest deferred during the development period is recognized over the remaining
life of the notes using the effective interest method.
We record royalty income on the accrual basis as earned. The dates on
which royalty income is actually payable are dependent upon the terms of the
contract, and may not correspond to the date such royalty income is recorded.
The amounts of the base monthly royalty income that we may earn fluctuate with
changes in the Consumer Price Index (effective in August 2003) which is used to
calculate the royalty income. As of December 31, 2004, there has been no
delinquency in the payment of royalty income.
INCOME TAXES - The asset and liability approach is used for financial
accounting and reporting for income taxes. Under this approach, deferred tax
assets and liabilities are recognized based on anticipated future tax
consequences, using currently enacted tax laws, attributable to differences
between financial statement carrying amounts of assets and liabilities and their
respective tax basis.
EARNINGS PER SHARE - The Company accounts for its earnings per share
in accordance with SFAS No. 128 - "Earnings Per Share" which requires the
presentation of basic and diluted earnings per share on the consolidated
statement of operations. 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" (See Note 8).
STOCK-BASED COMPENSATION - We have adopted 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. In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - An Amendment to FASB Statement
No. 123" to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
The Company elected to not change to the fair value based method of accounting
for stock based compensation. Additionally, SFAS No. 148 amended disclosure
requirements of SFAS No. 123 to require more prominent disclosure in both annual
and interim financial statements. We elected to continue to apply APB No. 25
and, when required, provide the pro forma provisions of SFAS No. 123.
During the nine months ended December 31, 2004, we granted options to
purchase 271,000 shares of our common stock to directors, employees and a third
party consultant as compensation for services. We have recorded $201,402 as
consultant expenses related to options granted to a consultant based on the
estimated fair value of the options on the date of grant using Black Scholes
option pricing model. Had compensation costs for all options issued been
determined based on the fair value at the grant date consistent with the
provision of SFAS No. 123, net income and net income per share would have
decreased to the pro forma amounts indicated below:
12
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------
Net income - as reported $ 827,972 $1,808,287 $3,658,573 $5,666,071
Less: total stock-based employee compensation
expense determined under fair value based
method for all awards granted to employees,
net of related tax effect (70,457) - (386,426) (555,311)
-------------------------------------------------
Net income - pro forma $ 757,515 $1,808,287 $3,272,147 $5,110,760
=================================================
Net income per share - as reported
Basic $ 0.6 $ 0.16 $ 0.29 $ 0.50
Diluted $ 0.6 $ 0.12 $ 0.26 $ 0.39
Net income per share - pro forma
Basic $ 0.6 $ 0.16 $ 0.26 $ 0.45
Diluted $ 0.6 $ 0.12 $ 0.23 $ 0.35
The weighted average fair value at the date of grant of options to purchase
shares during the three months ended December 31, 2004 was $3.45 per share. The
weighted average fair value at the date of grant of options during the nine
months ended December 31, 2004 and December 31, 2003 was $3.73 and $4 per
share, respectively. The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------
2004 2003 2004 2003
---------------------------------------------
Expected life 2 years 2 years 2 years 2 years
Interest rate 3.75% 3.75% 3.75% 3.75%
Dividend yield - - - -
Volatility 56% 65% 56% 65%
USE OF ESTIMATES - The preparation of financial statements in
conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Material estimates include depreciation
expense, amortization of deferred loan costs and development costs, and
operating activities of the Route 66 Casino. Actual results could differ from
those estimates.
LEASE GUARANTEES - In November 2002, FASB issued interpretation No.
("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 establishes
disclosure and liability-recognition requirements for direct and indirect debt
guarantees with specified characteristics. The initial measurement and
recognition requirements of FIN 45 are effective prospectively for guarantees
issued or modified after December 31, 2002. However, the disclosure requirements
are effective for interim and annual financial-statements periods after December
15, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS - We review our investments in land
development projects for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets." If the carrying amount of the asset, including any
intangible assets associated with that asset, exceeds its estimated undiscounted
net cash flow, before interest, the Company will recognize an impairment loss
equal to the difference between its carrying amount and its estimated fair
value. If impairment is recognized, the reduced carrying amount of the asset
will be accounted for at its new cost. For a depreciable asset, the new cost
will be depreciated over the
13
asset's remaining useful life. Generally, fair values are estimated using
discounted cash flow, replacement cost or market comparison analyses. As of
December 31, 2004, we believe that no impairment exists based upon periodic
reviews. Furthermore, no impairment losses have been required to be recorded for
the fiscal years ended March 31, 2004 , 2003 and 2002.
CONCENTRATION OF RISK - 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 - IC-BH has a $205 million credit facility,
comprised of a $40 million revolving credit facility maturing on December 31,
2006 and a $165 million term loan maturing on December 31, 2007. The degree to
which IC-BH is leveraged could have important consequences including, but not
limited to, the following: (a) an 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, improvement
to or expansion of the Colorado Casinos and cash distributions to IC-BH joint
venture partners; and (c) a possible impaired ability to obtain additional
financing for future working capital, capital expenditures, acquisitions or
other general corporate purposes. To date, cash flow from the IC-BH casino
operations has been more than sufficient to pay its debt obligations.
At December 31, 2004, we were leveraged with $23.8 million in
corporate debt. We also have guaranteed debt of $96,000 of an affiliated company
that may mature during the next fiscal year. To date, cash distributions from
IC-BH, notes receivable collections and credit enhancement fees from the River
Rock Casino have been sufficient to satisfy our current obligations. At Decembet
31, 2004, we also had a pending $2.5 million income tax refund and $22.8 million
available under our $40 million credit facility.
COMPREHENSIVE INCOME - Comprehensive income is a broad concept of an
enterprise's financial performance that includes all changes in equity during a
period that arises from transactions and economic events from nonowner sources.
Comprehensive income is net income plus "other comprehensive income," which
consists of revenues, expenses, gains and losses that do not affect net income
under U.S. generally accepted accounting principles. Other comprehensive income
consists of adjustments to interest rate swaps, net of tax relating to our
equity investment in IC-BH.
Comprehensive income consisted of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- ----------------------
2004 2003 2004 2003
----------------------- ----------------------
Net income $ 827,972 $1,808,287 $3,658,573 $5,666,071
Change in fair value of interest rate swaps,
net of tax 68,769 (17,847) 219,401 189,269
---------- ----------- ---------- ----------
Comprehensive income $ 896,741 $1,790,440 $3,877,974 $5,855,340
========== =========== ========== ==========
The accumulated other comprehensive income (loss) reflected on the
balance sheet at December 31, 2004 and March 31, 2004 consisted solely of the
adjustments to interest rate swaps, net of tax.
NOTE 3. ISLE OF CAPRI - BLACK HAWK, L.L.C.
----------------------------------------
We are a 43% owner of IC-BH with Isle. IC-BH has a Senior Secured
Credit Facility which provides for a $40 million revolving credit facility
maturing on December 31, 2006 or such date as the Tranche C term loans are
repaid in full, whichever comes first. Tranche A and Tranche B term loans were
converted into a $165 million Tranche C term loan maturing on December 31, 2007.
IC-BH is required to make quarterly principal payments of $400,000 on the term
loan portions of the IC-BH Senior Secured Credit Facility commencing in June
2004 with a balloon payment of $159.2 million due upon maturity.
14
The $40 million revolving credit facility loan bears interest, at
IC-BH's option, at either (1) the highest of 0.05% in excess of the federal
funds effective rate or the rate that the bank group announces from time to
time as its prime lending rate plus an applicable margin of up to 2.50% or (2)
a rate tied to LIBOR plus an applicable margin of up to 3.50%. The Tranche C
term loan bears interest, at IC-BH's option, at either (1) the highest of 0.05%
in excess of the federal funds effective rate or the rate that the bank group
announces from time to time as its prime lending rate plus an applicable margin
of up to 2.00% or (2) a rate tied to LIBOR plus an applicable margin of up to
3.25%.
The IC-BH Senior Secured Credit Facility provides for certain
covenants, including those of a financial nature. IC-BH was in compliance with
these covenants as of December 31, 2004. The Senior Secured Credit Facility is
secured by liens on IC-BH's assets.
In January 2004, IC-BH commenced a $95 million construction project at
its Black Hawk Casinos. The expansion project includes 15,000 square feet of
additional gaming space, a covered skywalk to connect the two casino properties,
a 1,200-space parking garage, 160 additional hotel rooms and a 200-seat
restaurant. As currently planned, IC-BH expects to open the first phase, which
includes two floors of parking and the casino expansion by the end of February
2005. The hotel, restaurant and remaining parking are scheduled to be completed
within twelve months thereafter. IC-BH is also funding approximately $20 million
(which is part of the $95 million overall total) of public improvements which
include extending Main Street to connect to Colorado Route 119. This will
provide customers direct access to IC-BH's Black Hawk casinos and parking
garages at the first two traffic lights into Black Hawk.
Our 43% ownership of the IC-BH is being accounted for using the equity
method. Our investment in IC-BH is stated at cost, adjusted for our equity in
the undistributed earnings or losses of IC-BH. IC-BH's undistributed earnings
allocable to us through January 23, 2005 (IC-BH's quarter end) totaled
$1,477,890 and $5,517,108 for the three and nine months ended December 31, 2004,
respectively. During the nine months ended December 31, 2004 and 2003, we
received cash distributions of $3,600,000 and $2,457,000, respectively, from
IC-BH and our basis in the project through January 23, 2005 is $17,957,858.
15
The following is a summary of financial information pertaining to IC-BH for the
periods presented:
ISLE OF CAPRI BLACK HAWK, L.L.C.
BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
January 23, April 25,
2005 2004
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,644 $ 30,343
Accounts receivable - other 639 774
Accounts receivable - related parties 29 11
Deferred income taxes 385 196
Inventories 840 353
Prepaid expenses 1,360 1,651
-------------------------
TOTAL CURRENT ASSETS 16,897 33,328
-------------------------
Property and equipment, net 207,031 159,774
Deferred financing costs, net of accumulated amortization 2,840 3,571
Deferred income taxes asset 3,246 -
Restricted cash - 43
Goodwill and other intangible assets 35,023 35,023
Prepaid deposits and other 332 576
-------------------------
TOTAL ASSETS $ 265,369 $ 232,315
=========================
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,764 $ 1,853
Accounts payable - trade 12,373 1,495
Accounts payable - related parties 2,005 2,154
Accrued liabilities:
Interest 1,476 1,075
Payroll and related expenses 4,225 5,292
Property, gaming and other taxes 5,041 3,002
Progressive jackpot and slot club awards 3,592 3,667
Deferred income tax 32 -
Other 3,932 1,735
-------------------------
TOTAL CURRENT LIABILITIES 34,440 20,273
-------------------------
Long-term debt, less current maturities 176,644 163,940
Deferred income taxes 1,402 451
-------------------------
TOTAL LONG-TERM LIABILITIES 178,046 164,391
-------------------------
TOTAL LIABILITIES 212,486 184,664
-------------------------
Members' equity:
Members' equity 52,786 48,327
Accumulated other comprehensive income (loss) 97 (676)
-------------------------
TOTAL MEMBERS' EQUITY 52,883 47,651
-------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 265,369 $ 232,315
=========================
16
ISLE OF CAPRI BLACK HAWK, L.L.C.
INCOME STATEMENTS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
----------------------------
January 23, January 25,
2005 2004
----------------------------
REVENUES
Casino $ 116,624 $ 132,108
Rooms 4,345 4,356
Food, beverage and other 14,860 15,373
----------------------------
Gross revenues 135,829 151,837
Less promotional allowances (30,069) (31,238)
----------------------------
Net revenues 105,760 120,599
OPERATING EXPENSES
Casino 18,293 18,525
Gaming taxes 21,711 24,711
Rooms 1,158 1,113
Food, beverage and other 3,312 3,220
Facilities 5,658 5,278
Marketing and administrative 25,979 28,409
Management fees 4,652 5,490
Depreciation and amortization 7,465 6,412
----------------------------
Total operating expenses 88,228 93,158
----------------------------
Operating income 17,532 27,441
Interest expense (6,970) (8,553)
Interest income 62 98
----------------------------
Income before income taxes 10,624 18,986
Income tax (provision) benefit
(applicable to two subsidiaries) 2,206 (502)
----------------------------
Net income $ 12,830 $ 18,484
============================
The difference in carrying value of our investment in IC-BH and our
equity interest in IC-BH is related to the fact that we originally contributed
appreciated property which was recorded by IC-BH at fair market value while we
continued to carry the property at its original cost basis.
During IC-BH's three and nine months ended January 23, 2005, IC-BH
recorded an other comprehensive gain of $242,315 and $773,083 related to the
interest rate swap transaction, respectively. Our share of the other
comprehensive gain was $68,769 and $219,401, net of income taxes of $35,426 and
$113,024, respectively..
17
NOTE 4. EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C.
-----------------------------------------------------
We have estimated our share of operational activities of Route 66
Casino L.L.C. and have recorded such amounts using the equity method of
accounting. The estimated revenues are based on published net win numbers
provided by the Route 66 Casino to the State of New Mexico Gaming Control Board
for the 1250 gaming devices leased to the casino by Route 66 Casino L.L.C.
Estimated expenses are comprised of debt service payments on the 1250 gaming
devices supplied to the casino, the supply of parts for the repair of these
gaming devices, and a monthly overhead fee to the other member of the Route 66
Casino, L.L.C. that was initially agreed to by us and the other member. The
direct expenses related to the debt service of the gaming devices and the other
member's overhead are stable fixed costs with little variable activity. The
only variable expense in our expense estimation would be for repair parts for
the gaming devices, and because of our experience and industry knowledge, we
are able to estimate these expenses and have factored that component of expense
into our estimates. We believe the net profits determined from the estimated
revenues and expenses are reasonable, however, actual financial results may
vary from our estimates.
NOTE 5. NOTES RECEIVABLE
-----------------
NOTES RECEIVABLE - DRY CREEK RANCHERIA - At December 31, 2004, Dry Creek
Casino, L.L.C. had a note receivable of $10 million from the Dry Creek
Rancheria Band of Pomo Indians for its River Rock Casino. We have a note
receivable of $10 million from Dry Creek Casino, L.L.C. In November 2003, the
River Rock Entertainment Authority borrowed $200 million to repay a majority of
the tribe's indebtedness, to fund the completion of three parking structures
and related infrastructure improvements, and to fund the settlement of
litigation involving the tribe. In connection therewith, the River Rock Casino
reduced the $32.6 million of indebtedness owed to the Dry Creek Casino, L.L.C.
to $10 million, and the Dry Creek Casino, L.L.C. reduced the $31.1 million of
indebtedness owed to us to $10 million. The $10 million note receivable to Dry
Creek Casino, L.L.C. from the River Rock Casino has been amended to provide for
interest payable monthly at a rate of 9% per annum. On November 7, 2003 the Dry
Creek Rancheria Band of Pomo Indians entered into an Intercreditor Agreement.
The agreement states that if no default or event of default has occurred and is
then continuing or if the Authority shall neither have requested nor received
funds for construction cost overruns from the construction escrow account on or
before the 45th day following substantial completion of the first parking
structure comprising a portion of the project, the Authority. On November 7,
2003 the Dry Creek Rancheria Ban of Pomo Indians entered into an Intercreditor
Agreement. The agreement sates that if no default or event of default has
occurred and is then continued or if the Authority shall neither have requested
nor received funds for construction cost overruns from constructions escrow
account on or before 45th day following substantial completion of the first
parking structure comprising a portion of the project the Authority shall,
pursuant to an Officer's Certificate, repay Dry Creek Casino, L.L.C's $5
million. Under the same condition, the Authority shall repay the rest of the
debt on the 75th day following substantial completion of the project.If the
amount of such loan is needed to complete such construction, the balance of the
loan will be repaid from River Rock Casino's excess cash flow (anticipated to
begin in calendar year 2005). An identical loan agreement was entered into
between us and Dry Creek Casino, L.L.C. Repayments received by Dry Creek
Casino, L.L.C. will be used to repay the loan to us.
NOTES RECEIVABLE - AFFILIATES - At December 31, 2004, Clay County
Holdings, Inc ("CCH") owed us $2 million which amount bears an interest rate of
12% per annum, and is payable by CCH in a minimum amount of $150,000 plus
accrued interest per quarter until paid in full. At December 31, 2004, Service
Interactive ("SI") owed us $2 million which amount bears an interest rate of 12%
per annum, and is payable by SI in a minimum amount of $150,000 plus accrued
interest per quarter until paid in full. Both loans are secured by a lien on
our common stock owned by CCH with approximately $14.3 million of market equity
value as of December 31, 2004. In December 2004, we received the loan repayments
from CCH and SI for the quarter ended December 31, 2004. At December 31, 2004,
Sunrise owed us $201,000 which amount bears an interest rate of 12% per annum.
The note from Sunrise is secured by a deed of trust lien on 300 acres of land in
Nevada County, California. CCH is our largest shareholder, beneficially owning
approximately 19% of our total outstanding common stock. The President of CCH is
the son-in-law of our CEO. We also have a 50% ownership interest in Sunrise.
NOTES RECEIVABLE - GAMING PROJECTS - From time to time, we make
advances to third parties related to the development of gaming/entertainment
projects. We make these advances after undertaking extensive due diligence. In
our due diligence for tribal loans we determine whether a tribe is federally
recognized, has land in trust, and has a compact with the state. If the tribe
meets all three of these criteria, the economic analysis supports the
investment, and we have a binding agreement with the tribe, we make the
advances. In certain cases the tribe might not be federally recognized, or have
land in trust and we then evaluate with our Native American regulatory
consultants the merits and likelihood that federal recoginition will be
achieved by the tribe or that land could be placed in trust, and how long each
process would take. In our due diligence for Non-Native American projects, we
review the economic feasibility of the project and the resulting risks
associated with completing the project.
On a monthly basis, we review each of our notes receivable to
evaluate whether the collection of our note receivable is still probable. In
our analysis, we review the economic feasibility and the current financial,
legislative and development status of the project. If the analysis of our
review indicates that the project is still economic feasible, we will continue
recording the notes receivable as an asset. If the analysis of our review
indicates that the project is no longer economic feasible, we will then
write-off the notes receivable as bad debt expense.
At December 31, 2004, we had notes receivable of $5.2 million related
to the development of gaming/entertainment projects. Of this amount, $2.3
million is represented by a note to a third party which bears interest at a rate
of 10% and is payable on or before ten years from the date of the note, with
earlier repayment
18
required upon obtaining permanent financing or out of cash flow from operation
of such gaming/entertainment project.
Additionally, $1.6 million of the notes receivable is related to a
Native-American gaming development project. A development agreement has been
entered into with an Indian tribe and we are making advances to fund the Tribe's
federal recognition efforts and administrative expenses. This note bears
interest at 10% per annum. The note is payable from the first proceeds of the
development loan or future revenues from the Tribe's economic enterprises,
including any gaming facility.
In addition to these two notes we made other loans to Indian tribes
and third parties totaling approximately $1.3 million. These notes bear an
average interest rate of 10% per annum with maturity dates based on the
availability of project financing and /or cash flow from operations. The
repayment of such loans and accrued interest will be largely dependent upon the
ability to obtain financing at each gaming project and/or the performance of
each gaming project.
NOTE 6. LONG-TERM DEBT
---------------
CONVERTIBLE NOTE - At December 31, 2004, we had outstanding $3.3
million on a convertible note bearing interest at a rate of 7.5% per annum and
with a maturity date of December 31, 2005. The principal is convertible into
1,105,833 shares of our common stock.
$40 MILLION CREDIT FACILITY - In June 2004, we entered into an
agreement with the holder of the convertible note for a $40 million revolving
credit facility. The $40 million revolving credit facility allows us to borrow,
on a revolving basis, up to $40 million (less any other indebtedness owed by us
under the $3.3 million convertible note) at any time prior to June 30, 2008.
Amounts advanced under the revolving credit facility bear interest at the rate
of 8.5% per annum. As of December 31, 2004, the availability under this
revolving credit facility is approximately $22.8 million. The convertible note
and $40 million revolving credit facility are secured by our interest in IC-BH.
$6.5 MILLION TERM LOAN - In June 2004, a financial advisor who
facilitated the procurement of the $13 million credit facility exercised
warrants previously granted to him. The warrants allowed him to purchase
1,041,533 shares of our common stock at the price of $3.00 per share. We
provided for these warrants to be exercised on a cashless basis by the holder.
The implied cash value of the exercise of all the warrants was $3,124,599. The
implied cash value was exchanged for 239,616 shares of common stock at a fair
market value of $13.04 per share leaving a net issuance of 801,917 shares of
common stock. We repurchased 501,917 of these shares at the fair market value
of $13.04 per share through the issuance of a $6.5 million note payable which
bears interest at the rate of 7.5% per annum, with $3.25 million of principal
maturing on each of April 1, 2005 and April 1, 2006. Subsequently, the 501,917
shares of common stock repurchased were retired (see Note 8).
NOTE 7. FEDERAL AND STATE INCOME TAXES
--------------------------------
We have recorded a net deferred tax asset in connection with tax
credit and net operating loss carry forwards, compensation expense in connection
with the issuance of stock options, and for equity in earnings of our equity
investments not currently taxable for federal income tax purposes.
NOTE 8. EQUITY
During the nine months ended December 31, 2004, holders of options
with an average exercise price of $3.34 per share elected to exercise and
receive a total of 764,251 shares of our restricted and unrestricted common
stock in exchange for cash proceeds of approximately $2.6 million.
During the nine months ended December 31, 2004, the financial advisor
who facilitated the procurement of the $13 million credit facility exercised
warrants. The number of shares underlying the warrants held by the financial
advisor provided for the purchase of 1,041,533 of our common stock for $3.00 per
share. We provided for these warrants to be exercised on a cashless basis by
the holder. The implied cash value of the exercise of all the warrants was
$3,124,599. The implied cash value was exchanged for 239,616 shares of common
stock at a fair market value of $13.04 per share resulting in a net issuance of
801,917 shares of common stock. We repurchased 501,917 of these shares at the
fair market value of $13.04 per share through the issuance of a $6.5 million
note
19
payable which bears interest at the rate of 7.5% per annum, with $3.25 million
of principal maturing on each of April 1, 2005 and April 1, 2006. Subsequently,
the 501,917 shares of common stock repurchased were retired.
During the nine months ended December 31, 2004, we repurchased 604,900
shares of common stock in the open market for approximately $6.6 million at an
average purchase price of $10.93 per shares, which are held as treasury stock at
December 31, 2004. The 604,900 shares of common stock will be retired.
During the nine months ended December 31, 2004, we recorded $5,622,683
of tax benefit related to exercises of non-qualified options and warrants.
The following is presented as a reconciliation of the numerators and
denominators of basic and diluted earnings per share ("EPS") computations, in
accordance with SFAS No. 128.
THREE MONTHS ENDED DECEMBER 31, 2004
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------------
BASIC EPS
Income available to common stockholders $ 827,972 12,837,107 $ 0.06
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 343,697 -
Convertible debt 38,883 1,105,833 -
-------------- ------------- ---------------
FULLY DILUTED EPS
Income available to common stockholders $ 866,855 14,286,637 $ 0.06
============== ============= ===============
THREE MONTHS ENDED DECEMBER 31, 2003
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------------
BASIC EPS
Income available to common stockholders $ 1,808,287 11,660,023 $ 0.16
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 2,019,995 (0.03)
Convertible debt 81,620 1,509,646 (0.01)
-------------- ------------- ---------------
DILUTED EPS
Income available to common stockholders $ 1,889,907 15,189,664 $ 0.12
============== ============= ===============
NINE MONTHS ENDED DECEMBER 31, 2004
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------------
BASIC EPS
Income available to common stockholders $ 3,658,573 12,799,385 $ 0.29
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 849,344 (0.01)
Convertible debt 117,543 1,144,555 (0.02)
-------------- ------------- ---------------
FULLY DILUTED EPS
Income available to common stockholders $ 3,776,116 14,793,284 $ 0.26
============== ============= ===============
NINE MONTHS ENDED DECEMBER 31, 2003
----------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------------------------------------------
BASIC EPS
Income available to common stockholders $ 5,666,071 11,361,669 $ 0.50
EFFECT OF DILUTIVE SECURITIES
Common stock options and warrants - 2,325,606 (0.09)
Convertible debt 277,312 1,715,937 (0.02)
-------------- ------------- ---------------
DILUTED EPS
Income available to common stockholders $ 5,943,383 15,403,212 $ 0.39
============== ============= ===============
20
As discussed in Note 5, our convertible debt is subject to an option
to convert principal and accrued interest into our common stock. In accordance
with SFAS No. 128, the effects of applying the if-converted method for the three
and nine months ended December 31, 2004 and 2003 results in this convertible
debt being dilutive.
NOTE 9. SEGMENT REPORTING
------------------
We primarily operate in the gaming segment. The gaming segment
consists of our investments in IC-BH, Dry Creek Casino, L.L.C., Route 66
Casinos, L.L.C., Nevada Gold Tulsa and Gold River, 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, and results of
insignificant operations such as real estate and mining.
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
-------------------------------------------------------------
Gaming Other Totals
-------------------------------------------------------------
Revenue $ 1,538,595 $ 160,888 $ 1,699,483
Segment profit (loss) 1,430,560 (95,122) 1,335,438
Segment assets 39,947,218 4,209,520 44,156,738
Investment in Isle of Capri
Black Hawk, L.L.C. 17,957,858 - 17,957,858
Investment in Route 66
Casinos, L.L.C. 3,085,236 - 3,085,236
Interest expense 512,355 - 512,355
Interest income 300,075 143,985 444,060
Equity in earnings of Isle of
Capri Black Hawk, L.L.C. 1,477,890 - 1,477,890
Equity in earnings of Route 66
Casinos, L.L.C. 400,755 - 400,755
AS OF AND FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
-------------------------------------------------------------
Gaming Other Totals
-------------------------------------------------------------
Revenue $ 2,495,004 $ 185,276 $ 2,680,280
Segment profit (loss) 2,914,970 (120,008) 2,794,962
Segment assets 28,593,523 4,124,849 32,718,372
Investment in Isle of Capri
Black Hawk, L.L.C. 14,411,761 - 14,411,761
Investment in Route 66
Casinos, L.L.C. 1,385,252 - 1,385,252
Interest expense 747,775 - 747,775
Interest income 1,627,286 168,373 1,795,659
Equity in earnings of Isle of
Capri Black Hawk, L.L.C. 2,457,760 - 2,457,760
Equity in earnings of Route 66
Casinos, L.L.C. 418,351 - 418,351
21
AS OF AND FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
-------------------------------------------------------------
Gaming Other Totals
-------------------------------------------------------------
Revenue $ 4,586,143 $ 490,681 $ 5,076,824
Segment profit (loss) 6,048,050 (267,685) 5,780,365
Segment assets 39,947,218 4,209,520 44,156,738
Investment in Isle of Capri
Black Hawk, L.L.C. 17,957,858 - 17,957,858
Investment in Route 66
Casinos, L.L.C. 3,085,236 - 3,085,236
Interest expense 1,330,755 - 1,330,755
Interest income 930,488 439,973 1,370,461
Equity in earnings of Isle of
Capri Black Hawk, L.L.C. 5,517,108 - 5,517,108
Equity in earnings of Route 66
Casinos, L.L.C. 1,246,897 - 1,246,897
AS OF AND FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
-------------------------------------------------------------
Gaming Other Totals
-------------------------------------------------------------
Revenue $ 6,309,364 $ 697,033 $ 7,006,397
Segment profit (loss) 8,936,734 (296,910) 8,639,824
Segment assets 28,593,523 4,124,849 32,718,372
Investment in Isle of Capri
Black Hawk, L.L.C. 14,411,761 - 14,411,761
Investment in Route 66
Casinos, L.L.C. 1,385,252 - 1,385,252
Interest expense 2,809,681 - 2,809,681
Interest income 3,732,438 616,521 4,348,959
Equity in earnings of Isle of
Capri Black Hawk, L.L.C. 7,948,208 - 7,948,208
Equity in earnings of Route 66
Casinos, L.L.C. 636,625 - 636,625
Reconciliations of reportable segment assets to our consolidated totals are as
follows:
DECEMBER 31,
------------------------
2004 2003
----------- -----------
Assets
Total assets for reportable segments $44,156,738 $32,718,372
Cash not allocated to segments 2,886,522 2,409,181
Notes receivable not allocated to segments 4,252,121 5,315,122
Other assets not allocated to segments 3,790,195 47,485
Furniture, fixtures, and equipment not allocated to segments 100,739 1,857,151
----------- -----------
Total assets $55,186,315 $42,347,311
=========== ===========
NOTE 10. COMMITMENTS AND CONTINGENCIES
-------------------------------
We have agreed to arrange for financing in connection with the
development of a gaming project in Pauma Valley, California with the La Jolla
Band of Luiseno Indians. If project financing is unavailable to the project and
22
financing alternatives require a guaranty, we have agreed to act as guarantor on
up to $25 million of project costs budgeted for La Jolla's Phase 1 project.
Alternatively, if financing for the project is unavailable on acceptable terms
we have agreed to provide financing up to $25 million.
We have agreed to provide up to $1 million of financing to Muscogee
(Creek) Nation for pre-development costs related to the gaming project in Tulsa,
Oklahoma.
We have provided $1.6 million in advances to an Indian gaming project as of
December 31, 2004 and are committed to fund another $1.8 million over a period
of two years. This additional funding requirement could be offset by other
sources of income or financing generated by the Indian tribe while pursuing a
gaming development project.
During the quarter ended December 31, 2004, our guarantee on debt of
SI for the performance of the payment obligations was $96,000. 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 indemnify our officers and directors for certain events or
occurrences while the directors or officers are or were 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 discussion 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-K for the year ended March 31, 2004. These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement are based.
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
effects of matters that are inherently uncertain.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations are
discussed throughout this section where such policies affect our reported and
expected financial results.
EQUITY METHOD OF ACCOUNTING
Our investments in IC-BH, Route 66 Casinos, L.L.C., Sunrise, and RCI
are accounted for using the equity method of accounting because the investment
gives us the ability to exercise significant influence, but not control, over
the investees. Significant influence is generally deemed to exist where we
have an ownership interest in the
23
investee of between 20% and 50%, although other factors such as the degree of
ultimate control, representation on the investee's Board of Directors or similar
oversight body are considered in determining whether the equity method of
accounting is appropriate. Although we have an ownership interest of 51% in
Route 66 Casinos, L.L.C., we account for the investment in Route 66 Casinos,
L.L.C. using the equity method because the agreement provides that we and the
joint venture partner have equal voting rights in the joint venture and the
operating activities of the joint venture are currently controlled by the
minority venturer (See Part II, Item 1). We record our equity in the income or
losses of our equity investees using the same reporting periods as presented
here in, except we report our equity in income or losses three months in arrears
for RCI (which has a calendar fiscal year) and one month in advance for IC-BH
(which has a fiscal year ending on the last Sunday in April.) Sunrise holds
approximately 300 acres of land in California and has no operating activities;
thus, there has been no equity in earnings or losses recorded during the three
and nine months periods ended December 31, 2004 and 2003. Deferred tax assets
or liabilities are recorded for allocated earnings or losses of our equity
investments that are not currently reportable for federal income tax purposes.
IMPAIRMENT OF EQUITY INVESTEES
We review our investments in equity investees for impairment, whenever
events or changes in circumstances indicate that the carrying amount of the
investment has experienced a decline in value that is other than temporary and
may not be recoverable. Generally our equity investees are evaluated
periodically by determining an estimate of fair value derived from an analysis
of undiscounted net cash flow, replacement cost or market comparison, before
interest, and if required we will recognize an impairment loss equal to the
difference between its carrying amount and its estimated fair value. If
impairment is recognized, the reduced carrying amount of the asset will be
accounted for as its new cost. Should an impairment occur, the carrying value
of our investment in an equity investee would not be recorded below zero unless
there are guaranteed obligations of the investee or if we are otherwise
committed to provide further financial support. The process of evaluating for
impairment requires estimates as to future events and conditions, which are
subject to varying market and economic factors, such as recurring losses,
permanent devaluation of the underlying long-term assets and intangibles held by
the equity investee and softening industry trends that appear to be
irreversible. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the
recorded amounts. As of December 31, 2004 management believes that no
impairment exists based upon periodic reviews. Furthermore, no impairment
losses have been required to be recorded for the fiscal years ended March 31,
2004, 2003 and 2002.
REVENUE RECOGNITION
We accrue credit enhancement fees earned from River Rock Casino for
each month as earned. The credit enhancement fee income is due on the 15th day
of the month following the month its earned. As of December 31, 2004, there has
been no delinquency in the payment of credit enhancement fees.
We record revenues from interest income on notes receivable on the
accrual basis as earned. The dates on which interest income is actually payable
is dependent upon the terms of the particular note receivable agreement, and may
not correspond to the date such interest income is recorded. Interest income on
notes receivable related to certain gaming development projects is deferred
because realizability of the interest is contingent upon the completion of
project financing or the cash flow from operations of the gaming projects.
Interest deferred during the development period is recognized over the remaining
life of the notes using the effective interest method.
We record royalty income on the accrual basis as earned. The dates on
which royalty income is actually payable is dependent upon the terms of the
contract, and may not correspond to the date such royalty income is recorded.
The amounts of the base monthly royalty income that we may earn fluctuate with
changes in the Consumer Price Index (effective in August 2003) which is used to
calculate the royalty income. As of December 31, 2004, there was no delinquency
in the payment of royalty income.
INCOME TAXES
Income taxes are accounted for in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the use of 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.
24
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Material estimates include depreciation expense, amortization of
deferred loan costs and development costs and operating activities of the Route
66 Casino. Actual results could differ from those estimates.
CAPITALIZED PROJECT DEVELOPMENT COSTS
We capitalize certain third party legal, professional, and other
miscellaneous fees directly related to the procurement, evaluation and
establishment of gaming and real estate projects. Development expenditures are
recorded at cost. The costs are amortized over the estimated useful life of the
project. When accumulated costs on a specific project exceed the net realizable
value of such project or the project is abandoned, the costs are charged to
expense.
General
We are primarily a developer of gaming facilities and related lodging
and entertainment facilities. We reported net income of $828,000 for the three
months ended December 31, 2004 compared to net income of $1.8 million for the
three months ended December 31, 2003, and net income of $3.7 million for the
nine months ended December 31, 2004 compared to net income of $5.7 million for
the nine months ended December 31, 2003.
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 nine months ended December 31, 2004, our allocable income from IC-BH
through January 23, 2005, IC-BH's quarter end, totaled $5.5 million, compared to
$7.9 million for the nine months ended December 31, 2003. During the nine
months ended December 31, 2004, we received a cash distribution of $3.6 million
from IC-BH and our basis in the project through January 23, 2005 was $18
million.
We own a 69% majority interest in Dry Creek Casino, L.L.C. For
financial reporting purposes, the assets, liabilities, and earnings of Dry Creek
Casino, L.L.C. are included in our consolidated financial statements. The
interests of the other members have been recorded as minority interests totaling
$263,000 at December 31, 2004.
We have made loans to Dry Creek Casino, L.L.C., which has in turn made
loans to the River Rock Casino. We will be repaid these loans as Dry Creek
Casino, L.L.C. is repaid. Excluding the repayments on these loans, as a member
of Dry Creek Casino, L.L.C., we will also receive credit enhancement fees from
the River Rock Casino equal to 20% of River Rock Casino's earnings before taxes
(if any), depreciation and amortization for a period of five years starting June
1, 2003 and ending May 31, 2008.
Our ownership of Route 66 Casinos, L.L.C. is accounted for using the
equity method of accounting. Our investment in Route 66 Casinos, L.L.C. is
stated at cost and, adjusted for our equity in the undistributed earnings or
losses of Route 66 Casinos, L.L.C. During the nine months ended December 31,
2004 and 2003, our portion of Route 66's undistributed earnings totaled $1.2
million and $637,000, respectively.
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. During the nine months ended
December 31, 2004, our portion of RCI's undistributed earnings through September
30, 2004 totaled $58,000. In accordance with the equity method of accounting,
our investment account balance was reduced to zero in our fiscal year ended
March 31, 2000 and the remaining allocated loss of $1.1 million has not been
reflected in our financial statements.
We hold 50% of Sunrise's equity interest. Our investment in Sunrise is
accounted for using the equity method of accounting and is stated at cost of
$372,000, adjusted for our equity in its undistributed earnings or losses.
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
25
activities together with capitalized interest. Property held for development is
carried at the lower of cost or net realizable value.
RIVER ROCK CASINO DEBT REFINANCING
In November 2003, the River Rock Entertainment Authority borrowed $200
million to repay a majority of the tribe's indebtedness, to fund the completion
of three parking structures and related infrastructure improvements, and to
fund the settlement of litigation involving the tribe. In connection therewith,
the River Rock Casino reduced the indebtedness owed to Dry Creek Casino,
L.L.C., Dry Creek Casino, L.L.C. reduced the indebtedness owed to us to $10
million at December 31, 2004. The $10 million note receivable to Dry Creek
Casino, L.L.C. from the River Rock Casino has been amended to provide for
interest payable monthly at a rate of 9% per annum. On November 7, 2003 the Dry
Creek Rancheria Band of Pomo Indians entered into an Intercreditor Agreement.
The agreement states that if no default or event of default has occurred and is
then continuing or if the Authority shall neither have requested nor received
funds for construction cost overruns from the construction escrow account on or
before the 45th day following substantial completion of the first parking
structure comprising a portion of the project, the Authority. On November 7,
2003 the Dry Creek Rancheria Ban of Pomo Indians entered into an Intercreditor
Agreement. The agreement sates that if no default or event of default has
occurred and is then continued or if the Authority shall neither have requested
nor received funds for construction cost overruns from constructions escrow
account on or before 45th day following substantial completion of the first
parking structure comprising a portion of the project the Authority shall,
pursuant to an Officer's Certificate, repay Dry Creek Casino, L.L.C's $5
million. Under the same condition, the Authority shall repay the rest of the
debt on the 75th day following substantial completion of the project.If the
amount of such loan is needed to complete such construction, the balance of the
loan will be repaid from River Rock Casino's excess cash flow (anticipated to
begin in calendar year 2005). An identical loan agreement was entered into
between us and Dry Creek Casino, L.L.C. Repayments received by Dry Creek
Casino, L.L.C. will be used to repay the loan to us. On November 7, 2003 the
Dry Creek Rancheria Band of Pomo Indians entered into an Intercreditor
Agreement. The agreement states that if no default or event of default has
occurred and is then continuing or if the Authority shall neither have
requested nor received funds for construction cost overruns from the
construction escrow account on or before the 45th day following substantial
completion of the first parking structure comprising a portion of the project,
the Authority. On November 7, 2003 the Dry Creek Rancheria Ban of Pomo Indians
entered into an Intercreditor Agreement. The agreement sates that if no default
or event of default has occurred and is then continued or if the Authority
shall neither have requested nor received funds for construction cost overruns
from constructions escrow account on or before 45th day following substantial
completion of the first parking structure comprising a portion of the project
the Authority shall, pursuant to an Officer's Certificate, repay Dry Creek
Casino, L.L.C's $5 million. Under the same condition, the Authority shall repay
the rest of the debt on the 75th day following substantial completion of the
project.If the amount of such loan is needed to complete such construction, the
balance of the loan will be repaid from River Rock Casino's excess cash flow
(anticipated to begin in calendar year 2005). An identical loan agreement was
entered into between us and Dry Creek Casino, L.L.C. Repayments received by Dry
Creek Casino, L.L.C. will be used to repay the loan to us.
If the amount of such loan
is needed to complete such construction, the balance of the loan will be repaid
from River Rock Casino's excess cash flow (anticipated to begin in calendar
year 2005). An identical loan agreement was entered into between us and Dry
Creek Casino, L.L.C. Repayments received by Dry Creek Casino, L.L.C. will be
used to repay the loan to us.
Overview
Historically Nevada Gold & Casinos, Inc. has relied on Isle of Capri
Black Hawk for the majority of its earnings and cash flow. As discussed below,
in June 2003 we began receiving a credit enhancement fee from the River Rock
Casino. We expect to receive credit enhancement fees through May 2008, and
anticipate that these fees will increase and become a larger contributor to our
revenues and earnings since the River Rock Casino has expanded by adding parking
structures, which were substantially completed in December 2004. Our business
strategy will continue to focus on developing gaming projects but with greater
emphasis on operating and owning gaming establishments. If we are successful,
both our revenues and expenses can be expected to increase and become more
diversified.
Results of Operations
Comparison of the quarters ended December 31, 2004 and 2003
--------------------------------------------------------------------
REVENUES. Revenues decreased 37%, or $981,000 to $1.7 million for the
quarter ended December 31, 2004, compared to $2.7 million for the quarter ended
December 31, 2003. Our revenue primarily consists of the following income
streams:
CREDIT ENHANCEMENT FEE INCOME
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 equal to
20% of River Rock Casino's earnings before taxes (if any), depreciation and
amortization for providing assistance in the development and financing of the
River Rock Casino project. During the quarter ended December 31 2004, the credit
enhancement fee income increased 43% or $371,000 to $1.2 million for the quarter
ended December 31, 2004, compared to $868,000 for the quarter ended December 31,
2003. The increase is primarily related to increased revenues at the property
resulting from additional available parking and an expanded bus program.
OTHER REVENUES
INTEREST INCOME. Our interest income consists primarily of interest
earned on loans we have made in connection with the River Rock Casino project,
other gaming projects, and to our affiliates. Interest income decreased 75%, or
$1.4 million to $444,000 for the quarter ended December 31, 2004, compared to
$1.8 million for the quarter ended December 31, 2003. The decrease is
attributable to River Rock Casino's $22.6 million note receivable principal
repayment in November 2003 which significantly decreased the average outstanding
balance of notes receivable during the quarter ended December 31, 2004 compared
to the quarter ended December 31, 2003.
ROYALTY INCOME. Royalty income was $17,000 for each of the quarters
ended December 31, 2004 and 2003. This income is derived solely from our mining
agreement with Metallic Goldfield, Inc. ("Metallic"). Based on our agreement
with Metallic, we anticipate receiving $62,000 of royalties during the fiscal
year ending March 31,
26
2005. However, our agreement with Metallic is terminable at any time; therefore,
there is no assurance we will receive these revenues in the future.
EQUITY IN EARNINGS OF ISLE OF CAPRI BLACK HAWK L.L.C. Equity in
earnings of IC-BH decreased 40% to $1.5 million for the quarter ended December
31, 2004 compared to $2.5 million for the quarter ended December 31, 2003. The
decrease is primarily attributable to a decrease in gaming revenue caused by
construction disruption related to the $95 million expansion project in its
Black Hawk properties during the quarter ended December 31, 2004. We believe
such construction disruption from the expansion project will likely continue
until the first phase of expansion is completed, which is anticipated to occur
by the end of February 2005.
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C. Equity in earnings of
Route 66 decreased 4% to $401,000 for the quarter ended December 31, 2004
compared to $418,000 for the quarter ended December 31, 2003.
TOTAL EXPENSES. Total expenses decreased 22%, or $576,000 to $2.1
million for the quarter ended December 31, 2004, compared to $2.6 million for
the quarter ended December 31, 2003. The decrease primarily relates to the net
result of decreases in interest expense of $235,000 and amortization of deferred
loan issue cost of $903,000. Expansion in our business cause increase in
corporate office expenses, including increases of office rent related to the
addition of office space and office supplies,, salary expenses related to
increases in number of personnel and salaries to existing employees. Also, an
increase of $328,000 in legal and professional fees was related to consulting
services attributable to operational and regulatory issues, and additional legal
expenses attributable to litigation.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 8%, or $25,000, to $271,000 for the quarter ended December 31
2004, compared to $296,000 for the quarter ended December 31, 2003. The decrease
primarily relates to the net result of decreases in amortization of development
cost of $78,000 which is partially offset by an increase in travel, office and
telephone expenses attributable to the expansion of our business and additional
personnel.
INTEREST EXPENSE. Interest expense decreased 31%, or $235,000, to
$512,000 for the quarter ended December 31, 2004, compared to $748,000 for the
quarter ended December 31, 2003. The decrease is primarily related to the
repayment of our $23 million credit facility in November 2003 which
significantly lowered our overall weighted average outstanding corporate debt
during the quarter ended December 31, 2004.
SALARIES. Salaries increased 80%, or $266,000, to $600,000 for the
quarter ended December 31, 2004, compared to $333,000 for the quarter ended
December 31, 2003 related to increasing personel by 25% including adding an
in-house General Counsel, a Director of Casino Operations, and a project
executive. There were also salary increases to existing employees.
LEGAL AND PROFESSIONAL FEES. Legal and professional fees increased
137%, or $328,000, to $568,000 for the quarter ended December 31, 2004, compared
to $239,000 for the quarter ended December 31, 2003. The increase is primarily
the result of an increase in consulting service fees primarily attributable to
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX"),
operational and regulatory issues, and additional legal expenses attributable to
litigation.
AMORTIZATION OF DEFERRED LOAN ISSUE COST. Amortization of deferred
loan issue cost decreased to $64,000 for the quarter ended December 31, 2004,
compared to $967,000 for the quarter ended December 31, 2003. The decrease
primarily attributable to the absence of the recognition of $770,000 of deferred
loan issue cost related to the repayment of our $23 million credit facility in
November 2003.
NET INCOME. Income before income tax provision decreased 52%, or $1.5
million, to $1.3 million for the quarter ended December 31, 2004 as compared to
$2.8 million for the quarter ended December 31, 2003. Net income decreased 54%
or $980,000 to $828,000 for the quarter ended December 31, 2004 as compared to
net income of $1.8 million for the quarter ended December 31, 2003. The
effective tax rate for the quarters ended December 31, 2004 and 2003 was 38% and
35%, respectively.
27
Comparison of the nine months ended December 31, 2004 and 2003
--------------------------------------------------------------
REVENUES. Revenues decreased 28%, or $1.9 million to $5.1 million for
the nine months ended December 31, 2004, compared to $7 million for the nine
months ended December 31, 2003. Our revenue primarily consists of the following
income streams:
CREDIT ENHANCEMENT FEE INCOME
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 equal to
20% of River Rock Casino's earnings before taxes (if any), depreciation and
amortization for providing assistance in the development and financing of the
River Rock Casino project. During the nine months ended December 31 2004, the
credit enhancement fee income increased 42% or $1 million, to $3.7 million,
compared to $2.6 million for the nine months ended December 31, 2003. The
increase is primarily related to the recording of a full nine months credit
enhancement fee income for the nine months ended December 31, 2004, compared to
the recording of seven months of credit enhancement fee income during the nine
months ended December 31, 2003. We started earning credit enhancement fees in
June 2003, according to the term of the contract. Revenue was increased related
to higher attendance at the property resulting from additional available
parking and an expanded bus program.
OTHER REVENUES
INTEREST INCOME. Our interest income consists primarily of interest
earned on loans we have made in connection with the River Rock Casino project,
other gaming projects, and to our affiliates. Interest income decreased 68%, or
$3 million to $1.4 million for the nine months ended December 31, 2004, compared
to $4.3 million for the nine months ended December 31, 2003. The decrease is
attributable to River Rock Casino's $22.6 million note receivable principal
repayment in November 2003 which significantly decreased the average outstanding
balance of notes receivable during the nine months ended December 31, 2004
compared to the quarter ended December 31, 2003.
ROYALTY INCOME. Royalty income increased 11%, or $5,000, to $51,000
for the nine months ended December 31, 2004, compared to $46,000 for the nine
months ended December 31, 2003. The increase is attributable to an increase in
the base monthly royalty income amount which fluctuates due to changes in the
Consumer Price Index (effective in August 2003) which is used to calculate the
royalty income. This income is derived solely from our mining agreement with
Metallic Goldfield, Inc. ("Metallic"). Based on our agreement with Metallic, we
anticipate receiving $62,000 of royalties during the fiscal year ending March
31, 2005. However, our agreement with Metallic is terminable at any time;
therefore, there is no assurance we will receive these revenues in the future.
EQUITY IN EARNINGS OF ISLE OF CAPRI BLACK HAWK L.L.C. Equity in
earnings of IC-BH decreased 31% to $5.5 million for the nine months ended
December 31, 2004 compared to $7.9 million for the nine months ended December
31, 2003. The decrease is primarily attributable to a decrease in gaming revenue
caused by construction disruption related to the $95 million expansion project
in its Black Hawk properties during the nine months ended December 31, 2004. We
believe such construction disruption from the expansion project will likely
continue until the first phase of expansion is completed, which is anticipated
to occur by the end of February 2005.
EQUITY IN EARNINGS OF ROUTE 66 CASINOS, L.L.C. Equity in earnings of
Route 66 increased 96% to $1.2 for the nine months ended December 31, 2004
compared to $637,000 for the nine months ended December 31, 2003. The increase
is primarily related to estimated rental revenues from the gaming equipment
lease of 1,250 slot machines with the Route 66 Casino's permanent facility which
opened on September 4, 2003. Prior to the opening of the permanent facility,
there was a temporary casino with only 100 leased slot machines and another
facility with 45 leased slot machines.
TOTAL EXPENSES. Total expenses decreased 16%, or $1 million, to $5.5
million for the nine months ended December 31, 2004, compared to $6.6 million
for the nine months ended December 31, 2003. The decrease primarily relates to
decreases in interest expense of $1.5 million and amortization of deferred loan
issue cost of $667,000 and legal fees of $237,000 which were partially offset by
the expansion in our business resulting in
28
increases totaling $94,000 in general and administrative expenses related to
office supplies, the addition of office space and filing fees, an increase of
$663,000 in salary expenses related to increases in number of personnel and
salaries of existing employees, $404,000 of consulting service fees and a
$157,000 of write-off of project development costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased 14%, or $95,000, to $762,000 for the nine months ended
December 31 2004, compared to $667,000 for the nine months ended December 31,
2003. The increase is primarily related to the expansion in our business and
personnel which caused an increase in corporate office expense including
increases in travel, telephone expenses, office supplies and filing fees.
INTEREST EXPENSE. Interest expense decreased 53%, or $1.5 million, to
$1.3 million for the nine months ended December 31, 2004, compared to $2.8
million for the nine months ended December 31, 2003. The decrease is primarily
related to the repayment of our $23 million credit facility in November 2003
which significantly lowered our overall weighted average outstanding corporate
debt during the nine months ended December 31, 2004.
SALARIES. Salaries increased 74%, or $663,000, to $1.6 million for
the nine months ended December 31, 2004, compared to $893,000 for the nine
months ended December 31, 2003. The increase is related to increasing personel
by 25% including adding an in-house General Counsel, a Director of Casino
Operations, and a project executive. There were also salary increases to
existing employees.
LEGAL AND PROFESSIONAL FEES. Legal and professional fees increased
$167,000 to $1.2 million for the nine months ended December 31, 2004, compared
to $1.1 million for the nine months ended December 31, 2003. The increase is
primarily the net result of a $237,000 decrease in legal fees relating to
litigation and $404,000 increase in consulting service fees primarily
attributable to compliance with Section 404 of the Sarbanes-Oxley Act of 2002
("SOX"), operational and regulatory issues and increased audit fees.
AMORTIZATION OF DEFERRED LOAN ISSUE COST. Amortization of deferred
loan issue cost decreased 69% or $667,000 to $293,000 for the quarter ended
December 31, 2004, compared to $960,000 for the nine months ended December 31,
2003. The decrease primarily attributable to the absence of the recognition of
$770,000 of deferred loan issue cost related to the repayment of our $23 million
credit facility in November 2003.
WRITE-OFF OF PROJECT DEVELOPMENT COSTS. During the nine months ended
December 31, 2004, we recorded a write-off of project development cost of
$181,000, compared to $23,000 in the nine months ended December 31, 2003. The
$181,000 of write-off in the nine months ended December 31, 2004 was for the due
diligence costs incurred for a gaming project we evaluated for acquisition that
was subsequently taken off the market. The $23,000 of write-off in the nine
months ended December 31, 2003 was for a project that we determined not to be
economically feasible.
NET INCOME. Income before income tax provision decreased 33% or $2.9
million, to $5.8 million for the nine months ended December 31, 2004 as compared
to $8.6 million for the nine months ended December 31, 2003. Net income
decreased 35% or $2 million to $3.7 million for the nine months ended December
31, 2004 as compared to net income of $5.7 million for the nine months ended
December 31, 2003. The effective tax rate for the nine months ended December
31, 2004 and 2003 was 38% and 34%, respectively.
Liquidity and Capital Resources
OPERATING ACTIVITIES. Net cash provided by operating activities
during the nine months ended December 31, 2004 amounted to $3.6 million,
compared to $741,000 of net cash provided by operating activities during the
nine months ended December 31, 2003. The increase was primarily related to an
increase in cash distributions from IC-BH and receipts of credit enhancement fee
income from the River Rock Casino project for the nine months ended December 31,
2004.
INVESTING ACTIVITIES. Net cash used in investing activities during
the nine months ended December 31, 2004, amounted to $5.2 million, a decrease of
$26.8 million over the $21.6 million of net cash provided by investing
29
activities in the nine months ended December 31, 2003. During the nine months
ended December 31, 2003, River Rock Casino and a third party repaid a total of
$25.9 million in notes receivable. There were no significant notes receivable
repayments during the nine months ended December 31, 2004.
At December 31, 2004, we had notes receivable of $5.2 million related
to the development of gaming/entertainment projects. Of this amount, $2.3
million is represented by a note to a third party which bears interest at a rate
of 10% and is payable on or before ten years from the date of the note, with
earlier repayment required upon obtaining permanent financing or out of cash
flow from operation of such gaming/entertainment project.
Additionally, $1.6 million of the notes receivable is related to a
Native-American gaming development project. A development agreement has been
entered into with an Indian tribe and we are making advances to fund the Tribe's
federal recognition efforts and administrative expenses. This note bears
interest at 10% per annum. The note is payable from the first proceeds of the
development loan or future revenues from the Tribe's economic enterprises,
including any gaming facility.
In addition to these two notes we made other loans to Indian tribes
and third parties totaling approximately $1.3 million. These notes bear an
average interest rate of 10% per annum with maturity dates based on the
availability of project financing and /or cash flow from operations. The
repayment of such loans and accrued interest will be largely dependent upon the
ability to obtain financing at each gaming project and/or the performance of
each gaming project.
FINANCING ACTIVITIES. Net cash provided by financing activities
during the nine months ended December 31, 2004 amounted to $991,000, compared to
the $23.9 million of net cash used in financing activities in the nine months
ended December 31, 2003. During the nine months ended December 31, 2004, we
received $2.6 million from the exercise of options, and borrowed of $6 million
from our $40 million credit facility. We also repurchased 604,900 shares of our
common shares for a total of $6.6 million.
At December 31, 2004, we had available cash of $2.9 million. In June
2004, we amended the existing financing documents relating to our $13 million
credit facility and entered into a $40 million revolving credit facility. We
reduced the amount of debt outstanding under the $13 million credit facility to
approximately $3.3 million (by borrowing approximately $7.9 million from the $40
million revolving credit facility), which matures December 31, 2005, and amended
the interest rate to 7.5% per annum. The $3.3 million principal amount is
convertible into 1,105,833 shares of our common stock. The reduction of the
convertible debt to $3.3 million had the effect of reducing the shares into
which the debt is convertible from 1,739,166 shares to 1,105,833 shares. The
$40 million revolving credit facility allows us to borrow, on a revolving basis,
up to $40 million (less any other indebtedness owed by us to the lender) at any
time prior to June 30, 2008. Amounts advanced under the revolving credit
facility bear interest at the rate of 8.5% per annum. The convertible note and
$40 million credit facility are secured by our interest in IC-BH.
In June 2004, a financial advisor who facilitated the procurement of
the $13 million credit facility exercised warrants previously granted to himThe
warrants allowed him to purchase 1,041,533 shares of our common stock at the
price of $3.00 per share. We provided for these warrants to be exercised on a
cashless basis by the holder. The implied cash value of the exercise of all the
warrants was $3,124,599. The implied cash value was exchanged for 239,616
shares of common stock at a fair market value of $13.04 per share leaving a net
issuance of 801,917 shares of common stock. We repurchased 501,917 of these
shares at the fair market value of $13.04 per share through the issuance of a
$6.5 million note payable which bears interest at the rate of 7.5% per annum,
with $3.25 million of principal maturing on each of April 1, 2005 and 2006.
Subsequently, the 501,917 shares of common stock repurchased were retired
We believe we have adequate capital to fund our operations for the
next twelve months. During the next twelve months, we expect to receive cash
distributions from IC-BH of approximately $3 million to $4 million based on our
current estimate and note receivable collections of $1.2 million from affiliate
companies. We also anticipate that Dry Creek Casino, L.L.C. will be receiving
its credit enhancement fee from River Rock Casino. We believe the credit
enhancement fee will increase when the parking structures are completed at the
end of this calendar year.
At February 2, 2005, we were leveraged with $16.6 million in corporate
debt. We also have guaranteed debt of $96,000 of an affiliated company that may
mature during the next fiscal year. In January 2005, we received a
30
$2.3 million federal income tax refund, and River Rock Casino repaid $5 million
of the $10 million loan to Dry Creek Casino, L.L.C. In turn, Dry Creek Casino,
L.L.C. repaid $5 million of the $10 million loan to us. With these proceeds, we
prepaid $3.3 million of the $6.5 million term loan owing to a financial advisor
and repaid $4 million of our $13.9 million outstanding under our $40 million
revolving credit facility. To date, cash distributions from IC-BH, notes
receivable collections and credit enhancement fees from the River Rock Casino
have been sufficient to satisfy our current obligations. However, if we are
required to perform on our outstanding guarantee, or if the debt covenant ratios
of the River Rock Casino debt financing preclude the payment to us of our credit
enhancement fees or outstanding note receivable to River Rock Casino, we may
need to borrow from our $40 million revolving credit facility to meet our
current obligations. Currently, we have $26.8 million available under our $40
million revolving credit facility.
We have agreed to arrange for financing in connection with the
development of a gaming project in Pauma Valley, California with the La Jolla
Band of Luiseno Indians. If financing is unavailable to the project and
financing alternatives require a guaranty, we have agreed to act as guarantor on
up to $25 million of project costs budgeted for La Jolla's Phase 1 project.
Alternatively, if financing for the project is unavailable, we have agreed to
provide financing up to $25 million. We are currently pursuing and anticipate
that project financing will be available on acceptable terms. In the event that
such financing is not available and we finance all or a portion of the $25
million project cost, or in the event we were to issue a guaranty and were
required to honor that guaranty, we would be required to increase our borrowings
under our existing revolving credit facility, which would increase our leverage
and adversely affect our liquidity. We might also be required to obtain
additional financing through the issuance of debt and/or equity securities. We
cannot be certain that any additional financing, if necessary, would be
available to us on acceptable terms.
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.
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
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) and
15d-15(e)) as of December 31, 2004, have concluded that our disclosure controls
and procedures are effective in providing reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
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. Management of the Company, with the participation of its principal
executive officer and principal financial officer, has concluded there were no
significant changes in the Company's internal controls over financial reporting
that occurred during three months ended December 31, 2004 that has materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and our subsidiaries are, from time to time, defendants in various
lawsuits relating to routine matters incidental to our business. As with all
litigation, no assurance can be provided as to the outcome of the following
matters and litigation inherently involves significant costs. Following is a
summary of litigation impacting us and our subsidiaries.
Route 66 Casino. On September 27, 2002, we filed a claim for
arbitration, seeking damages, specific performance and other relief against
American Heritage, Inc. (d/b/a The Gillmann Group), the other member in
31
Route 66 Casinos, L.L.C. Route 66 Casinos, L.L.C. was jointly formed by us and
The Gillmann Group to assist the Pueblo of Laguna in the development and
financing of gaming facilities on land located 11 miles west of Albuquerque, New
Mexico. We and The Gillmann Group entered into several contracts arising from
The Gillmann Group's agreement to assist in the development and equipping of the
Route 66 Casino. One such agreement, the Route 66 Casinos, L.L.C. Operating
Agreement, governed the relationship of the parties relating to the Route 66
gaming operation. Pursuant to this agreement, we are to receive 51% of the net
revenue from the Route 66 gaming operation. This agreement, which was signed by
both us and The Gillmann Group, contains an arbitration clause.
In addition to the operating agreement, the parties also entered into
a promissory note and a right of first refusal agreement, whereby The Gillmann
Group agreed to offer us the right to partner on future gaming projects. The
Gillmann Group and Mr. Gillmann have breached each of these agreements.
We initiated arbitration proceedings pursuant to the Route 66 Casinos,
L.L.C. operating agreement; however, The Gillmann Group and Mr. Gillmann refused
to participate on the ground that the operating agreement is invalid. We then
filed a lawsuit in state district court on October 3, 2002, in Harris County,
Texas (Nevada Gold & Casinos, Inc. v. Ameican Heritage, Inc., et al. (No.
2002-51378)), initially seeking to recover payment pursuant to the promissory
note. We have since amended our claims to include breach of contract, breach of
fiduciary duty, fraud and other claims related to The Gillmann Group's
repudiation of the Route 66 Casinos, L.L.C. operating agreement and right of
first refusal agreement.
The Gillmann Group then filed a lawsuit in state district court on
October 4, 2002, in Clark County, Nevada (American Heritage, Inc., et al. v.
Nevada Gold & Casinos, Inc., et al. (No. A457315)). In its lawsuit, The Gillmann
Group seeks judicial dissolution of Route 66 Casinos, L.L.C. and seeks a
declaratory judgment that the operating agreement is void based upon fraudulent
misrepresentation. We immediately moved to compel arbitration, which was denied
by the Nevada district court. We appealed this ruling to the Nevada Supreme
Court. Likewise, the Nevada Supreme Court has ordered the parties not to
participate in arbitration until it rules on whether the dispute is subject to
arbitration. A ruling is expected within the next year.
Meanwhile, the related lawsuit in Texas has been stayed pending the
outcome of the Nevada appeal.
Rinaldo Corporation. On October 18, 2004, Rinaldo Corporation filed an
action captioned Rinaldo Corporation vs. Nevada Gold & Casinos, Inc., Sierra
Research and Consulting, LLC, Sheila L. Torkelson, Michael R. Derry (d/b/a Waste
Not Tribal Services), and Does 1 Through 100, against the Company in the
Superior Court of the State of California (No. S-1500-CV 253969 AEW).
According to the Complaint, Rinaldo Corporation ("Rinaldo") and the Timbisha
Shoshone Tribe of the Western Shoshone Nation (the "Tribe") entered into a
Development Contract and Personal Property Lease on or about November 2, 2002,
which obligates Rinaldo to (a) finance and provide technical assistance to the
Tribe in acquiring suitable real property and causing such land to be taken into
trust by the United States; (b) design, construct and otherwise develop at its
own expenses the structure and related equipment to be used as the gaming
facility; and (c) advance certain operating funds to the Tribe while the gaming
facility is being developed, constructed and brought into operation. In the
Complaint, Rinaldo claims that the Company and the other named defendants
wrongfully interfered with the agreement between Rinaldo and the Tribe. Rinaldo
alleges tortious interference with contract and prospective economic advantage,
unfair competition and conspiracy and seeks up to $50 million in damages and
unspecified punitive damages. Rinaldo also seeks a preliminary and permanent
injunction barring the Company and the other defendants from engaging in further
acts of alleged interference. On October 29, 2004, Rinaldo filed its First
Amended Complaint. The Company demurred to Rinaldo's First Amended Complaint,
and, at a hearing on January 5, 2005, the Court orally sustained Nevada Gold's
demurrer with respect to one cause of action (with leave for Rinaldo to amend),
and denied it with respect to the others. The Court has not yet signed a
written order memorializing its oral demurrer ruling, and Nevada Gold has not
yet answered any portion of Rinaldo's complaint. We believe the claims against
us to be without merit and we intend to vigorously and appropriately defend the
claims asserted in this matter.
32
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended December 31, 2004, we repurchased
390,000 shares of our common stock in the open market at an average price of
$10.88 per share.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number
of Shares Maximum Number
Total Purchased as Part of Shares
Number of Average of Publicly that May Yet Be
Shares Price Paid Announced Plans Purchased Under the
Period Purchased per Share or Programs Plan or Programs
- -------------- --------- ----------- ----------------- -------------------
10/01-10/31/04 324,000 $ 10.97 324,000 * 160,100
11/01-11/30/04 66,000 $ 10.45 66,000 * 94,100
12/01-12/31/04 - $ - - 94,100
Total 390,000 $ 10.88 390,000 * 94,100
* 500,000 share buyback plan announced
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as
Appendix A to the company's definitive proxy statement filed on Schedule 14A on July 30, 2001)
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)
3.3 Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 4.2 to Form S-8 filed October 11, 2002)
3.4 Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 3.3 to Form 10-Q filed November 9, 2004)
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)
4.5 Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.5 to the company's
Form S-8, file no. 333-100517)
10.1 Second Amended and Restated Operating Agreement of Isle of Capri Blackhawk L.L.C. (filed
previously as Exhibit 10.1 to Form 10-K, filed on July 14, 2004)
10.2 First Amended and Restated Members Agreement dated April 22, 2003 by and between Casino
America of Colorado, Inc., Casino America, Inc., Blackhawk Gold, Ltd., and Nevada Gold & Casinos,
Inc. (filed previously as Exhibit 10.2 to Form 10-K, filed on July 14, 2004)
10.3 License Agreement dated July 29, 1997 by and between Casino America, Inc. and Isle of Capri Black
Hawk L.L.C. (filed previously as Exhibit 10.5 to the company's Form 10-QSB, filed November 14,
1997)
10.4 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)
10.5 Amended and Restated Nevada Gold & Cainos, Inc. 1999 Stock Option Plan (filed previously as
Exhibit 4.5 to Form S-8 filed October 11, 2002)
10.6(*) Credit Facility dated June 28, 2004 by and between Nevada Gold & Casinos, Inc. and the Lender
(portions of this exhibit have been omitted pursuant to a request for confidential treatment
and filed separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Exchange Act.)
10.7(*) Amended and Restated Security Agreement dated June 28, 2004 by and among Nevada Gold & Casinos,
Inc., Blackhawk Gold, Ltd. and the Lender (portions of this exhibit have been omitted pursuant to a
request for confidential treatment and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange
Act.)
10.8(*) Amended and Restated Secured Promissory Note dated June 28, 2004 by and among Nevada Gold & Casinos,
Inc. and the Lender (portions of this exhibit have been omitted pursuant to a request for confidential
treatment and filed separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Exchange Act.)
14 Code of Ethics (filed previously as Exhibit 14 to Form 10-K, filed on July 14, 2004)
31.1(*) Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
31.2(*) Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
32.1(*) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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
34
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: February 9, 2005
35
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as
Appendix A to the company's definitive proxy statement filed on Schedule 14A on July 30, 2001)
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)
3.3 Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 4.2 to Form S-8 filed October 11, 2002)
3.4 Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed
previously as Exhibit 3.3 to Form 10-Q filed November 9, 2004)
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)
4.5 Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.5 to the company's
Form S-8, file no. 333-100517)
10.1 Second Amended and Restated Operating Agreement of Isle of Capri Blackhawk L.L.C. (filed
previously as Exhibit 10.1 to Form 10-K, filed on July 14, 2004)
10.2 First Amended and Restated Members Agreement dated April 22, 2003 by and between Casino
America of Colorado, Inc., Casino America, Inc., Blackhawk Gold, Ltd., and Nevada Gold & Casinos,
Inc. (filed previously as Exhibit 10.2 to Form 10-K, filed on July 14, 2004)
10.3 License Agreement dated July 29, 1997 by and between Casino America, Inc. and Isle of Capri Black
Hawk L.L.C. (filed previously as Exhibit 10.5 to the company's Form 10-QSB, filed November 14,
1997)
10.4 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)
10.5 Amended and Restated Nevada Gold & Cainos, Inc. 1999 Stock Option Plan (filed previously as
Exhibit 4.5 to Form S-8 filed October 11, 2002)
10.6(*) Credit Facility dated June 28, 2004 by and between Nevada Gold & Casinos, Inc. and the Lender
(portions of this exhibit have been omitted pursuant to a request for confidential treatment
and filed separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Exchange Act.)
10.7(*) Amended and Restated Security Agreement dated June 28, 2004 by and among Nevada Gold & Casinos,
Inc., Blackhawk Gold, Ltd. and the Lender (portions of this exhibit have been omitted pursuant to a
request for confidential treatment and filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange
Act.)
10.8(*) Amended and Restated Secured Promissory Note dated June 28, 2004 by and among Nevada Gold & Casinos,
Inc. and the Lender (portions of this exhibit have been omitted pursuant to a request for confidential
treatment and filed separately with the Securities and Exchange Commission pursuant to a request for
confidential treatment in accordance with Rule 24b-2 under the Exchange Act.)
14 Code of Ethics (filed previously as Exhibit 14 to Form 10-K, filed on July 14, 2004)
31.1(*) Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
31.2(*) Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
32.1(*) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
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
36