Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

 

		October 31,				April 30,
		2010				2010
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	2,550,306			$	3,155,736
Restricted cash			652,557				5,266,938
Accounts receivable			825,434				66,822
Prepaid expenses			1,177,755				475,262
Income tax receivable			1,154,762				1,750,374
Other current assets			286,416				155,796
Total current assets			6,647,230				10,870,928
Investments in development projects			202,253				1,418,789
Investments in development project held for sale			3,373,966				3,437,932
Note receivable - development projects, net of current portion and allowances			1,700,000				1,700,000
Goodwill			16,424,679				10,243,362
Identifiable intangible assets, net of accumulated amortization of $1,230,469 and $729,000 at October 31, 2010 and April 30, 2010			7,983,383				5,101,800
Property and equipment, net of accumulated depreciation of $3,304,868 and $2,978,679 at October 31, 2010 and April 30, 2010, respectively			5,204,324				3,473,051
Deferred tax asset			2,307,017				1,848,419
BVO receivable			4,000,000				4,000,000
Other assets, net of allowances			510,137				376,938
Total assets		$	48,352,989			$	42,471,219
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	1,887,206			$	1,060,017
Accrued interest payable			70,000				70,000
Other accrued liabilities			1,338,246				687,819
Long-term debt, current portion			76,316				—
Total current liabilities			3,371,768				1,817,836
Long-term debt, net of current portion			15,092,291				10,000,000
Other liabilities			23,541				30,944
Total liabilities			18,487,600				11,848,780
Commitments and contingencies			—				—
Stockholders' equity:
Common stock, $0.12 par value per share; 50,000,000 shares authorized; 13,935,330 shares issued and 12,764,130 shares outstanding at October 31, 2010 and April 30, 2010, respectively			1,672,240				1,672,240
Additional paid-in capital			20,008,595				19,859,966
Retained earnings			18,559,293				19,464,972
Treasury stock, 1,171,200 shares at October 31, 2010 and April 30, 2010, respectively, at cost			(10,369,200	)			(10,369,200	)
Accumulated other comprehensive loss			(5,539	)			(5,539	)
Total stockholders' equity			29,865,389				30,622,439
Total liabilities and stockholders' equity		$	48,352,989			$	42,471,219

The accompanying notes are an integral part of these consolidated financial statements.

 

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

(unaudited)

		Three Months Ended								Six Months Ended
		October 31,				October 31,				October 31,				October 31,
		2010				2009				2010				2009
Revenues:
Casino		$	12,008,128			$	4,788,536			$	17,767,983			$	8,973,599
Food and beverage			2,936,433				1,234,909				4,278,054				2,348,675
Other			542,514				218,837				768,022				402,871
Management fee			-				250,000				-				500,000
Gross revenues			15,487,075				6,492,282				22,814,059				12,225,145
Less promotional allowances			(1,674,037	)			(751,923	)			(2,474,521	)			(1,427,567	)
Net revenues			13,813,038				5,740,359				20,339,538				10,797,578
Expenses:
Casino			6,392,339				2,071,139				9,022,758				3,955,094
Food and beverage			1,213,057				887,247				1,893,025				1,721,790
Marketing and administrative			3,455,196				1,435,444				5,227,453				2,676,223
Facility			1,137,305				231,183				1,484,979				492,031
Corporate expense			930,906				945,368				2,100,085				2,377,065
Legal expense			64,863				38,710				461,019				103,003
Depreciation and amortization			534,619				517,985				848,458				663,152
Other			333,971				114,382				489,876				223,632
Total operating expenses			14,062,256				6,241,458				21,527,653				12,211,990
Operating loss			(249,218	)			(501,099	)			(1,188,115	)			(1,414,412	)
Non-operating income (expenses):
Gain on sale of assets			-				-				384,414				-
Interest income			44,191				46,559				89,115				105,068
Interest expense			(396,070	)			(225,490	)			(623,858	)			(378,471	)
Amortization of loan issue costs			(11,250	)			(27,770	)			(22,500	)			(59,979	)
Loss before income tax benefit			(612,347	)			(707,800	)			(1,360,944	)			(1,747,794	)
Income tax benefit			215,741				263,685				455,265				602,970
Net loss		$	(396,606	)		$	(444,115	)		$	(905,679	)		$	(1,144,824	)
Per share information:
Net loss per common share - basic		$	(0.03	)		$	(0.03	)		$	(0.07	)		$	(0.09	)
Net loss per common share - diluted		$	(0.03	)		$	(0.03	)		$	(0.07	)		$	(0.09	)
Basic weighted average number of shares outstanding			12,764,130				12,939,130				12,764,130				12,939,130
Diluted weighted average number of shares outstanding			12,764,130				12,939,130				12,764,130				12,939,130

The accompanying notes are an integral part of these consolidated financial statements.

 

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Notes to Consolidated Financial Statements

Note 1.   Basis of Presentation

The interim financial information included herein is unaudited. However, the accompanying consolidated financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our Consolidated Balance Sheets at October 31, 2010 and April 30, 2010, Consolidated Statements of Operations for the three and six months  ended October 31, 2010 and October 31, 2009, and Consolidated Statements of Cash Flows for the six months ended October 31, 2010 and October 31, 2009. Although we believe the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2010 and the notes thereto included in our Annual Report on Form 10-K. The results of operations for the three and six months ended October 31, 2010 are not necessarily indicative of the results expected for the full year.

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, investments, intangible assets and goodwill, property, plant and equipment, income taxes, insurance, employment benefits and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

Certain reclassifications have been made to conform prior year financial information to the current period presentation.  Those reclassifications did not impact working capital, total assets, total liabilities, net loss or stockholders’ equity.

Note 2.   Critical Accounting Policies

Revenue Recognition

In accordance with gaming industry practice, we recognize casino revenues as the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive jackpots which are recorded as a progressive jackpot liability. Revenues from food, beverage, entertainment, and the gift shops are recognized at the time the related service or sale is performed or made.

The retail value of food and beverage and other services furnished to guests without charge is included in gross revenue and deducted as promotional allowances. We record the redemption of coupons and points for cash as a reduction of revenue. These amounts are included in promotional allowances in the accompanying consolidated statements of operations. The estimated cost of providing such complimentary services that is included in casino expense in the accompanying consolidated statements of operations was as follows:

		Three Months Ended								Six Months Ended
		October 31, 2010				October 31, 2009				October 31, 2010				October 31, 2009
Food and beverage		$	1,176,446			$	176,645			$	1,573,765			$	374,953
Other			5,888				2,856				11,798				6,346
Total cost of complimentary services		$	1,182,334			$	179,501			$	1,585,563			$	381,299

 

Fair Value of Financial Instruments and Concentrations of Credit Risk 

 

U.S. generally accepted accounting principles defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement. The three levels are defined as follows: 

 

 

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Level 1 - Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

 

 Level 2 - Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

 Level 3 - Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities. 

 

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily notes receivable, cash and cash equivalents, accounts receivable and payable, and long term debt. At October 31, 2010, the Company had one note receivable outstanding. This note was issued in connection with a potential gaming project. Management performs periodic evaluations of the collectibility of this note. The Company’s cash deposits are held with large, well-known financial institutions, and, at times, such deposits may be in excess of the federally insured limit.  The recorded value of cash, accounts receivable and payable, approximate fair value based on their short term nature; the recorded value of long term debt approximates fair value as interest rates approximate current market rates.

 

New Accounting Pronouncements Issued

As of October 31, 2010, there are several new accounting standards and interpretations effective. Below is a discussion of significant standards that may impact us.

 

Improving Disclosures about Fair Value Measurements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06). This update provides amendments to Topic 820 and requires new disclosures for 1) significant transfers in and out of Level 1 and Level 2 and the reasons for such transfers and 2) activity in Level 3 fair value measurements to show separate information about purchases, sales, issuances and settlements. In addition, this update amends Topic 820 to clarify existing disclosures around the disaggregation level of fair value measurements and disclosures for the valuation techniques and inputs utilized (for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06 are applicable to interim and annual reporting periods beginning subsequent to December 15, 2009, with the exception of Level 3 disclosures of purchases, sales, issuances and settlements, which will be required in reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact the Company’s consolidated financial statements.

 

Exemption from Sarbanes Oxley 404(b)

 

On July 31, 2010, President Obama signed into law the exemption from Sarbanes Oxley 404(b) for public companies with less than $75 million in market capitalization.   

 

Note 3. Restricted Cash

 

During the six months ended October 31, 2010, we maintained approximately $613,000 in Player Supported Jackpot funds which are progressive games that customers fund.  When a jackpot is hit it is paid from these funds.  We also maintain approximately $40,000 of insurance and tax reserve funds in accordance with a lending agreement.  During the three months ended July 31, 2010, we used the $5,000,000 Project Fund for the acquisition of six mini-casinos in Washington State.

 

  Note 4.   Notes Receivable and BVO Receivable

Notes Receivable

 

Southern Tier Acquisition II, LLC and Oneida Entertainment, LLC

 

On June 14, 2007, we sold our membership interest of American Racing to two of our former partners, Southern Tier Acquisition II, LLC (“Southern Tier”) and Oneida Entertainment, LLC (“Oneida”). At April 30, 2009, we had notes receivable of $550,000 from both Southern Tier and Oneida. The notes receivable and accrued interest were paid in full on June 15, 2009.

 

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Notes Receivable - Development 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. On a quarterly 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 our analysis indicates that the project is no longer economically feasible, the note receivable will be written down to its estimated fair value.

Big City Capital, LLC

 

During fiscal 2008, we determined that our ability to collect $859,000 of accrued interest and $1.5 million of the original $3.2 million notes receivable from Big City Capital, LLC (“Big City Capital”) had been impaired. As a result we wrote down the notes receivable to $1.7 million, by establishing a $1.5 million allowance, and we wrote off the accrued interest. At October 31, 2010, we had notes receivable of $1.7 million related to the development of gaming/entertainment projects, net of a $1.5 million allowance, which is represented by notes receivable from Big City Capital.

 

The repayment of these loans will be largely dependent upon the ability to obtain financing for the development project and/or the performance of the development project.

BVO Receivable

 

As of May 2007, we owned a 40% interest in Buena Vista Development Company, LLC (“Buena Vista Development”) which is developing a casino for a Native American tribe in Amador County, California.  Effective November 25, 2008, through our wholly- owned subsidiary, Nevada Gold BVR, LLC, we sold our 40% interest in Buena Vista Development, LLC (BVR) to B. V. Oro, LLC (BVO), which is owned by our former partner and related parties for $16 million cash and a $4 million receivable from BVD which is due no later than two years after the opening of a gaming/entertainment facility to be built by BVD for the Buena Vista Rancheria of Me-Wuk Indians.  This receivable bears interest at the rate of prime plus 1% and is guaranteed by our former partner and related parties.  In addition we are entitled to a 5% carried interest in the Class B membership interest. As of October 31, 2010, the opening date could not be estimated.  Should the facility not be developed, the collectibility of this receivable cannot be assured.

Note 5.   Long-Term Debt  

Our long-term financing obligations are as follows:

		October 31,				April 30,
		2010				2010
$6.0 million promissory note, 10% through June 30, 2010, 11% interest until maturity at June 30, 2013		$	6,000,000			$	6,000,000
$5.1 million note payable, LIBOR plus 9% interest, maturing
July 23, 2012			5,070,000				-
$4.0 million promissory note, 7% interest, maturing May 12, 2012			4,000,000				4,000,000
IGT note, 8% interest, maturing May 16, 2012			34,137				-
Williams Gaming note, 8% imputed interest, maturing November 18, 2011			64,470				-
Total			15,168,607				10,000,000
Less: current maturities			(76,316	)			-
Total long-term financing obligations		$	15,092,291			$	10,000,000

The $6.0 million promissory note matures June 30, 2013.  The interest rate on the note was fixed at 10% through June 2010, then changed to 11% on the unpaid balance for the remainder of the term.  The $5.1 million promissory note matures July 23, 2012 and the interest rate is based on the 30 day LIBOR at the end of each calendar month, plus 9%, with a 30 day LIBOR floor of 2.0%.  The $4.0 million promissory note matures May 12, 2012 and the interest rate is fixed for the term at 7%.

 

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Note 6.   Stock-Based Compensation

Information about our share-based plans

The company has three employee stock plans, the 1999 Stock Option Plan (the “Stock Option Plan”), the 2009 Equity Incentive Plan (the “2009 Plan”) and the 2010 Employee Stock Purchase Plan, as amended (the “2010 Plan”).

The Stock Option Plan

The Company’s Stock Option Plan provided for the granting of awards to our directors, officers, employees and independent contractors.  The Stock Option Plan expired in January, 2009 and was replaced with a new plan described below.  The number of shares of common stock reserved for issuance under the Stock Option Plan was 3,250,000 shares. The plan was administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee had discretion under the plan regarding the vesting and service requirements, exercise price and other conditions.

The 2009 Plan

On April 14, 2009, the shareholders of the Company approved the Company’s 2009 Plan.  The number of shares with respect to which awards may be granted under the 2009 Plan is 1,750,000 shares.  The 2009 Plan is similar to the 1999 Stock Option Plan in most respects and continues to provide for awards which may be made subject to time based or performance based vesting.  Under the 2009 Plan the Committee is authorized to grant the following types of awards:

·

Stock Options including Incentive Stock Options (“ISO”)

·

Options not intended to qualify as ISO’s

·

Stock Appreciation Rights

·

Restricted Stock Grants.

To date, the Committee has only awarded stock options and restricted stock under both plans. Our practice has been to issue new shares upon the exercise of stock options. Stock option rights granted prior to fiscal year 2006 under the Stock Option Plan generally have 5-year terms and are fully vested and exercisable immediately. Subsequent option rights granted generally have 3, 5 or 10 year terms and are exercisable in three or five equal annual installments, with some options grants providing for immediate vesting for a portion of the grant.

A summary of activity under the Company’s share-based payment plans for the six months ended October 31, 2010 is presented below:

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
		Shares				Exercise				Contractual				Value
			(000’s)			Price				Term				($000’s)
Outstanding at April 30, 2010			1,456,000			$	1.77
Granted			340,000				0.98
Exercised			-				-
Forfeited or expired			-				-
Outstanding at October 31, 2010			1,796,000			$	1.62				5.4			$	-
Exercisable at October 31, 2010			1,504,333			$	1.70				4.8			$	-

As of October 31, 2010, there was a total of $208,839 of unamortized compensation related to stock options, which cost is expected to be recognized over a weighted-average period of 1.7 years.

Compensation cost for stock options was based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following weighted-average:

 

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		Six Months Ended
		October 31, 2010				October 31, 2009
Expected volatility			195.9	%			143.3	%
Expected term			10.0				8.0
Expected dividend yield			-				-
Risk-free interest rate			3.08	%			1.43	%
Forfeiture rate			-				-

Expected volatility is based on historical volatility on the Company’s stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for U.S. Treasury instruments with maturities matching the relevant expected term of the award.   The weighted average grant date fair value of options granted during the six months ended October 31, 2010, was $0.98.

The 2010 Plan

On October 11, 2010, the shareholders of the Company approved the Company’s 2010 Plan which permits all our eligible employees, including employees of certain of our subsidiaries, to purchase shares of the company's common stock through payroll deductions at a purchase price not to be less than 90% of the fair market value of the common stock on each purchase date.  The number of shares available for issuance under the 2010 Plan is a total of 500,000 shares. The Plan is administered by the Board of Directors which administration may be delegated to the Compensation Committee of the Board of Directors.  On December 1, 2010, the Board of Directors amended the 2010 Plan effective January 1, 2011, to allow its participants to contribute up to a maximum of twenty (20%) percent of their company paid compensation.  The 2010 Plan is not available for employee participation until January 1, 2011, therefore, as of October 31, 2010, no shares were issued under the 2010 Plan.

Note 7.   Computation of Earnings Per Share

The following is presented as a reconciliation of the numerators and denominators of basic and diluted earnings per share computations:

		Three Months Ended								Six Months Ended
		October 31,				October 31,				October 31,				October 31,
		2010				2009				2010				2009
Numerator:
Basic and Diluted:
Net loss available to common stockholders		$	(396,606	)		$	(444,115	)		$	(905,679	)		$	(1,144,824	)
Denominator:
Basic weighted average number of common shares outstanding			12,764,130				12,939,130				12,764,130				12,939,130
Dilutive effect of common stock options and warrants			—				—				—				—
Diluted weighted average number of common shares outstanding			12,764,130				12,939,130				12,764,130				12,939,130
Loss per share:
Net loss per common share - basic		$	(0.03	)		$	(0.03	)		$	(0.07	)		$	(0.09	)
Net loss per common share - diluted		$	(0.03	)		$	(0.03	)		$	(0.07	)		$	(0.09	)

For the six months ended October 31, 2010 and October 31, 2009, potential dilutive common shares issuable under options of 1,504,333 and 1,486,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

 

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Note 8.   Segment Reporting  

We have two business segments (i) gaming and (ii) non-core. The gaming segment for the three and six month periods ended October 31, 2010 and October 31, 2009, consists of Colorado Grande Casino and the Washington mini casinos.  The “non-core” column is the land in Colorado and its taxes and maintenance expenses.

Summarized financial information for our reportable segments is shown in the following table.

		As of and for the Three Months Ended October 31, 2010
		Gaming				Non-Core				Totals
Net revenue		$	13,813,038			$	-			$	13,813,038
Segment loss pre tax			(603,460	)			(8,887	)			(612,347	)
Segment assets			38,192,381				3,495,966				41,688,347
Depreciation and amortization			534,165				454				534,619
Addition to property and equipment			11,034				—				11,034
Interest expense, net (includes amortization)			363,129				—				363,129
Income tax benefit			215,741				—				215,741

		As of and for the Three Months Ended October 31, 2009
		Gaming				Non-Core				Totals
Net revenue		$	5,740,359			$	-			$	5,740,359
Segment loss pre tax			(707,226	)			(574	)			(707,800	)
Segment assets			30,298,512				3,715,279				34,013,791
Depreciation and amortization			516,943				1,042				517,985
Addition to property and equipment			386,151				—				386,151
Interest expense, net (includes amortization)			206,701				—				206,701
Income tax benefit			263,471				214				263,685

 

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		As of and for the Six Months Ended October 31, 2010
		Gaming				Non-Core				Totals
Net revenue		$	20,339,538			$	—			$	20,339,538
Segment loss pre tax			(1,346,251	)			(14,693	)			(1,360,944	)
Segment assets			38,192,381				3,495,966				41,688,347
Depreciation and amortization			846,970				1,488				848,458
Additions to property and equipment			9,985,879				—				9,985,879
Interest expense, net (includes amortization)			557,243				—				557,243
Income tax benefit			455,265				—				455,265

		As of and for the Six Months Ended October 31, 2009
		Gaming				Non-Core				Totals
Net revenue		$	10,797,578			$	—			$	10,797,578
Segment loss pre tax			(1,742,451	)			(5,343	)			(1,747,794	)
Segment assets			30,298,512				3,715,279				34,013,791
Depreciation and amortization			661,046				2,106				663,152
Additions to property and equipment			15,634,130				—				15,634,130
Interest expense, net (includes amortization)			333,382				—				333,382
Income tax benefit			601,127				1,843				602,970

Reconciliation of reportable segment assets to our consolidated totals is as follows:

		October 31,
		2010
Total assets for reportable segments		$	41,688,347
Cash and restricted cash not allocated to segments			3,202,863
Income tax receivable			1,154,762
Deferred tax asset			2,307,017
Total assets		$	48,352,989

Note 9. Other Assets

Other assets consist of the following at October 31, 2010 and April 30, 2010, respectively:

		October 31, 2010				April 30, 2010
Accrued interest receivable		$	320,137			$	234,438
Other assets			70,000				-
Deferred loan issue cost, net			120,000				142,500
Other assets		$	510,137			$	376,938

 

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Note 10.   Commitments and Contingencies  

We rent office space in Houston, Texas, under a non-cancelable operating lease which expires on March 31, 2013. Also, we lease (through our wholly-owned subsidiary, Colorado Grande Enterprises, Inc.) a portion of a building in Cripple Creek, Colorado, and an adjacent parking lot, for use in connection with the Colorado Grande Casino facilities. We lease this property at an annual rent of the greater of $144,000 or 5% of Colorado Grande-Cripple Creek’s adjusted gross gaming revenues, as defined, with an annual cap of $400,000. This lease is for an initial term of sixteen years with an option to renew for fifteen years with the final option period concluding January 31, 2021. On July 7, 2005, we exercised the option to extend the lease to January 2021. On April 1, 2008 we extended the lease to January 2033 at a flat annual rent of $400,000 from February 2021 through January 2033.

Six card-room facilities in the State of Washington were acquired on July 23, 2010 (see note 12), resulting in the following leases:  Silver Dollar Casino in SeaTac has a building lease which expires in May 2022, with an annual rent of $238,000 and an option to renew for an additional 10-year term; the Silver Dollar Casino in Renton has a building lease which expires in March 2019 with an annual rent of $480,000 and an option to renew for up to two additional 10-year terms; the Silver Dollar Casino Mill Creek in Bothell has a building lease which expires in April 2012, with an annual rent of $286,000 and an option to renew for up to two additional 10-year terms; the Club Hollywood Casino in Shoreline has building and parking lot leases which expire in March 2017, with annual rents of $660,000 and $11,350, respectively, and options to renew each of them for up to four 5-year terms; the Golden Nugget Casino in Tukwila has a building lease which expires in November 2014, with an annual rent of $166,000 and an option to renew for an additional 10-year term; and the Royal Casino in Everett has a building lease which expires in January 2016 with an annual rent of $360,600 and an option to renew for up to four 5-year terms.  The administrative office in Renton, WA has entered into a lease agreement, effective September 1, 2010, which expires in December 2014 with an annual rent of $53,000.  This represents a 46% reduction of square footage and annual rent compared to the prior operation.

Three card-room facilities in the State of Washington were acquired on May 12, 2009 (see note 12), resulting in the assumption of three leases.  A casino building lease for the Crazy Moose Casino in Mountlake Terrace expires in May 2011, with an annual rent of $192,000 and an option to extend the lease for two five year additional terms. A lease for the administrative office in Auburn, WA expires in February 2011, with an annual rent of $28,800 and an option to renew for one additional 3-year term.  We have no intention to extend the Auburn lease due to the consolidation of this office with the administrative offices in Renton resulting in additional cost savings.  Finally, the Crazy Moose Casino in Pasco has a parking lot lease which expires in January, 2011, with an annual rent of $6,300 and an option to renew for an additional 35-month term.

We continue to pursue additional development opportunities that may require, individually and in the aggregate, significant       commitments of capital, extensions of credit, up-front payments to third parties and guarantees by the Company of third-party debt.

We indemnified our officers and directors for certain events or occurrences while the director or officer is or was serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited; however, we have a Directors and Officers Liability Insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid, provided that such insurance policy provides coverage.

Note 11. Legal Proceedings

The Company is not currently involved in any material legal proceedings.

Note 12. Acquisition

NG Washington II, LLC

 

On July 23, 2010, the Company, through NG Washington II, LLC, its wholly-owned subsidiary, acquired six additional casinos, and the leasehold to their related operating center, in the state of Washington. The casinos are the Silver Dollar Casino in SeaTac, the Silver Dollar Casino in Renton, the Silver Dollar Casino Mill Creek in Bothell, the Club Hollywood Casino, located in Shoreline, the Royal Casino, located in Everett, and the Golden Nugget Casino, located in Tukwila (collectively, “Silver Dollar Casinos”). All of the Silver Dollar Casinos are located in western Washington State.  The Company acquired the Silver Dollar Casinos through bankruptcy proceedings.  The Silver Dollar Casinos were previously owned by subsidiaries of Evergreen Gaming Corporation, a British Columbia Corporation, which is under bankruptcy court protection.  The Company purchased the six casinos from Grant-Thornton, Ltd. (the “Receiver”), in its capacity as a court-appointed receiver for Big Nevada, Inc., Gameco, Inc., Gaming Consultants, Inc., Gaming Management, Inc., Golden Nugget Tukwila, Hollydrift Gaming, Inc., Little Nevada, Inc., Mill Creek Gaming, Inc., Royal Casino Holdings, Inc., and Silver Dollar Mill Creek, Inc.,  for $11.07 million, $6.0 million which was paid in cash to the Receiver and $5.07 million financed pursuant to a credit agreement between NG Washington II Holdings, LLC, and Fortress Credit Corp., as an agent for the lenders.  Two promissory notes, issued pursuant to the credit agreement, are due July 23, 2012, and bear an interest rate based on the 30-day LIBOR at the end of each calendar month, plus 9%, with a 30-day LIBOR floor of 2.0%.  Interest is due monthly.   The terms of the credit agreement contain, among others, customary events of default, including nonpayment when due of principal or any interest or fees or other amounts owing within specified grace periods, and failure to comply with certain affirmative or negative covenants, including certain financial covenants.  The preliminary purchase price was allocated to the assets acquired and liabilities assumed based on management’s estimate of their fair value on the date of acquisition.   A summary of the preliminary purchase price allocation, using the values agreed to at closing, is as follows:

 

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			(000’s	)
Current assets and liabilities, net		$	(383	)
Property and equipment			1,889
Customer relationships			3,382
Goodwill			6,182
Purchase price		$	11,070

The results of operations of ($368,000), which includes depreciation and amortization of $215,000, as well as closing costs, pre-opening expenses, and severance pay totaling an additional $170,000, have been included in the consolidated statements of operations since the date of the acquisition of July 23, 2010. At October 31, 2010 goodwill acquired was approximately $6,182,000, all of which is expected to be deductible for tax purposes.

NG Washington, LLC 

 

On May 12, 2009, the Company, through NG Washington, LLC, its wholly-owned subsidiary, acquired certain assets and liabilities of Crazy Moose Casino, Inc., Crazy Moose II, Inc., Coyote Bob’s, Inc., and Gullwing III, LLC for a purchase price of $15,962,200, including $212,000 of costs directly associated with the acquisition that were expensed at the end of fiscal year 2009. The acquisition was financed with cash and a note to the sellers for $4 million. The acquisition was accounted for as a purchase business combination in accordance with ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed based on management’s estimate of their fair value on the date of acquisition.  A summary of the remaining purchase price allocation, valued by an independent third party, is as follows:

			(000’s	)
Current assets and liabilities, net		$	(11	)
Property and equipment			2,400
Customer relationships			2,951
Trade names			1,862
Noncompete			1,018
Goodwill			7,530
Purchase price		$	15,750

The results of operations of $2,657,000, which includes depreciation and amortization of $1,421,000, have been included in the consolidated statements of operations since the date of the acquisition of May 12, 2009. At October 31, 2009 goodwill acquired was $7,530,000, all of which is expected to be deductible for tax purposes.

Note 13.  Goodwill and Other Intangible Assets

In connection with our acquisition of the Colorado Grande casino on April 25, 2005, and the acquisitions of the Washington casinos on May 12, 2009 and July 23, 2010 (see Note 12), we have goodwill and identifiable intangible assets with an indefinite useful life of $24.1 million, net of amortization.

The change in the carrying amount of goodwill and other intangibles for the six months ended October 31, 2010, is as follows (in thousands):

		Total				Goodwill				Other Intangibles
Balance as of April 30, 2010		$	16,074			$	10,243			$	5,831
Acquired during the six months ended October 31, 2010			9,564				6,182				3,382
Accumulated amortization			(1,230	)			-				(1,230	)
Balance as of October 31, 2010		$	24,408			$	16,425			$	7,983

The $6.1 million increase in goodwill and $3.4 million increase in intangibles from April 30, 2010 to October 31, 2010 results from recording the estimated intangibles for the acquisition of six additional Washington mini-casinos during fiscal 2011.   Other intangible assets are generally amortized on a straight line basis over the useful lives of the assets.  All goodwill and other intangible assets pertain to the gaming segment.

 

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A summary of other intangible assets follows (in thousands):

		As of October 31, 2010
Amortizable		Gross Carrying Amount				Accumulated Amortization
Customer relationships		$	6,333			$	(752	)
Non-compete agreements			1,018				(478	)
Subtotal			7,351				(1,230)
Non-amortizable
Trade names			1,862				-
Total		$	9,213			$	(1,230	)