PART I FINANCIAL INFORMATION
Item
1. Financial Statements.
1
SOUTHWEST CASINO CORPORATION
Consolidated
Balance Sheets (Unaudited)
September 30, 2007
|
|
2007
|
|
ASSETS
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
1,546,514
|
|
Accounts Receivable
|
|
44,624
|
|
Inventories
|
|
129,858
|
|
Prepaid Expenses and Other Current Assets
|
|
912,786
|
|
Total Current Assets
|
|
$
|
2,633,782
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
Leasehold Improvements
|
|
15,384,266
|
|
Furniture and Equipment
|
|
5,187,193
|
|
Accumulated Depreciation
|
|
(10,471,421
|
)
|
Net Property and Equipment
|
|
$
|
10,100,038
|
|
|
|
|
|
OTHER ASSETS
|
|
|
|
Other Assets
|
|
14,840
|
|
Investment in Unconsolidated Subsidiary
|
|
7,296,511
|
|
Total Other Assets
|
|
$
|
7,311,351
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
20,045,171
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
Accounts Payable
|
|
$
|
472,749
|
|
Accrued Expenses
|
|
1,038,391
|
|
Accrued Liabilities - Related Parties
|
|
122,467
|
|
Current Portion of Long-Term Liabilities
|
|
1,000,777
|
|
Total Current Liabilities
|
|
$
|
2,634,384
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
Long-Term Liabilities Net of Current
Portion
|
|
$
|
6,743,222
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
Preferred Stock, $.001 Par Value; 30,000,000
Shares Authorized
|
|
$
|
|
|
Common Stock, $.001 Par Value; 75,000,000
Shares Authorized, 27,643,443 Shares Issued and 27,286,443 Outstanding at September
30, 2007
|
|
27,644
|
|
Additional Paid-in Capital
|
|
21,384,335
|
|
Accumulated Deficit
|
|
(10,422,114
|
)
|
|
|
10,989,865
|
|
Less Treasury Stock (357,000 shares
redeemed)
|
|
(322,300
|
)
|
|
|
|
|
Total Stockholders Equity
|
|
10,667,565
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
20,045,171
|
|
See Notes to Unaudited Consolidated Financial Statements
2
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Operations (Unaudited)
For the Three and Nine Months Ended September 30, 2007
and 2006
|
|
For the three months
|
|
For the three months
|
|
For the nine months
|
|
For the nine months
|
|
|
|
ended September 30, 2007
|
|
ended September 30, 2006
|
|
ended September 30, 2007
|
|
ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
NET
REVENUES
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
4,094,313
|
|
$
|
4,216,390
|
|
$
|
11,219,589
|
|
$
|
11,587,076
|
|
Food &
Beverage/Hotel
|
|
170,860
|
|
194,496
|
|
401,180
|
|
452,552
|
|
Management and
Consulting
|
|
434,658
|
|
1,468,192
|
|
3,566,109
|
|
4,562,005
|
|
Entertainment
|
|
38,261
|
|
11,304
|
|
67,807
|
|
17,429
|
|
Other
|
|
42,525
|
|
39,062
|
|
124,330
|
|
129,295
|
|
|
|
4,780,617
|
|
5,929,444
|
|
15,379,015
|
|
16,748,357
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Casino
|
|
$
|
2,964,218
|
|
$
|
3,022,993
|
|
$
|
8,709,011
|
|
$
|
8,751,517
|
|
Food &
Beverage/Hotel
|
|
386,956
|
|
385,210
|
|
1,036,644
|
|
1,091,744
|
|
Corporate Expense
|
|
803,589
|
|
741,101
|
|
2,928,408
|
|
2,053,397
|
|
Project Development
Costs
|
|
99,112
|
|
47,642
|
|
351,683
|
|
225,125
|
|
Entertainment
|
|
103,207
|
|
53,069
|
|
172,044
|
|
102,649
|
|
Impairment Loss
|
|
400,435
|
|
|
|
400,435
|
|
|
|
Depreciation and
Amortization
|
|
378,465
|
|
542,728
|
|
1,406,842
|
|
1,627,833
|
|
|
|
5,135,982
|
|
4,792,743
|
|
15,005,067
|
|
13,852,265
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
$
|
(355,365
|
)
|
$
|
1,136,701
|
|
$
|
373,948
|
|
$
|
2,896,092
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
16
|
|
$
|
762
|
|
$
|
3,237
|
|
$
|
1,934
|
|
Interest Expense
|
|
(187,410
|
)
|
(307,699
|
)
|
(640,233
|
)
|
(892,222
|
)
|
Gain (Loss) on
Disposition of Property and Equipment
|
|
7,420
|
|
(11,126
|
)
|
7,420
|
|
(11,126
|
)
|
Gain on
Disposition of Casino
|
|
452,426
|
|
|
|
452,426
|
|
|
|
Write-off of
Acquisition and Financing Costs
|
|
(476,723
|
)
|
|
|
(603,373
|
)
|
|
|
|
|
(204,271
|
)
|
(318,063
|
)
|
(780,523
|
)
|
(901,414
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes, equity in earnings of unconsolidated subsidiaries
|
|
(559,636
|
)
|
818,638
|
|
(406,575
|
)
|
1,994,678
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
|
(214,988
|
)
|
|
|
(615,342
|
)
|
Loss of Unconsolidated
Subsidiary, Net of Tax Benefit
|
|
(96,096
|
)
|
(43,667
|
)
|
(312,704
|
)
|
(144,132
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (Loss)
from Continuing Operations
|
|
(655,732
|
)
|
559,983
|
|
(719,279
|
)
|
1,235,204
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(655,732
|
)
|
$
|
559,983
|
|
$
|
(719,279
|
)
|
$
|
1,235,204
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share - basic
|
|
$
|
(0.02
|
)
|
$
|
0.03
|
|
$
|
(0.03
|
)
|
$
|
0.06
|
|
Income
(loss) per share - diluted
|
|
|
|
$
|
0.03
|
|
|
|
$
|
0.06
|
|
Weighted
average common shares outstanding - basic
|
|
27,286,443
|
|
19,688,656
|
|
26,571,292
|
|
19,671,249
|
|
Weighted
average common shares outstanding - diluted
|
|
|
|
20,664,715
|
|
|
|
20,690,557
|
|
See Notes to Unaudited Consolidated Financial Statements
3
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2007 and 2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(719,279
|
)
|
$
|
1,235,204
|
|
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
Depreciation and Amortization
|
|
1,406,842
|
|
1,627,833
|
|
Amortization of Loan Costs
|
|
58,019
|
|
123,730
|
|
Impairment Loss
|
|
400,435
|
|
|
|
Write-off of Acquisition and Financing Costs
|
|
603,373
|
|
|
|
(Gain) Loss on Disposition of Property and
Equipment
|
|
(7,420
|
)
|
11,126
|
|
Stock-based Compensation Expense
|
|
209,429
|
|
134,082
|
|
Loss of Unconsolidated Subsidiary
|
|
312,704
|
|
185,974
|
|
Gain on Disposition of Casino
|
|
(452,426
|
)
|
|
|
Change in Current Assets and Liabilities,
|
|
|
|
|
|
(Increase) Decrease in Restricted Cash
|
|
|
|
2,656
|
|
(Increase) Decrease in Receivables
|
|
112,879
|
|
(66,402
|
)
|
(Increase) Decrease in Inventories
|
|
43,358
|
|
(35,080
|
)
|
(Increase) Decrease in Prepaid Expenses
|
|
(263,530
|
)
|
25,714
|
|
(Increase) Decrease in Deferred Tax Asset
|
|
|
|
573,000
|
|
Increase (Decrease) in Accounts Payable
|
|
(188,088
|
)
|
(276,721
|
)
|
Increase (Decrease) in Accrued Expenses
|
|
106,960
|
|
(55,036
|
)
|
Increase (Decrease) in Accrued Interest
Payable
|
|
(5,927
|
)
|
(7,917
|
)
|
Net Cash Provided By Operating Activities
|
|
$
|
1,617,329
|
|
$
|
3,478,163
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
(276,476
|
)
|
(328,534
|
)
|
Proceeds from Disposition of Casino
|
|
490,018
|
|
|
|
Receipt (Payment) of Deposit
|
|
(3,318
|
)
|
14,000
|
|
Payment of Costs Associated with Management
Contract
|
|
(438,741
|
)
|
|
|
Investment in Unconsolidated Subsidiary
|
|
(2,555,195
|
)
|
(528,502
|
)
|
Net Cash Used In Investing Activities
|
|
$
|
(2,783,712
|
)
|
$
|
(843,036
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
Net Payments on Short-Term Notes Payable
|
|
$
|
(446,292
|
)
|
|
|
Principal Payments on Long-Term Borrowings
|
|
(1,471,418
|
)
|
(1,976,891
|
)
|
Proceeds from Issuance of Common Stock upon
Exercise of Warrants
|
|
|
|
12,000
|
|
Proceeds from Issuance of Common Stock and
Warrants
|
|
3,980,511
|
|
|
|
Redemption of Common Stock
|
|
(322,300
|
)
|
|
|
Payment of Financing Costs Written-Off
|
|
(558,864
|
)
|
|
|
Payments for Liabilities Owed to Related
Parties
|
|
|
|
(110,000
|
)
|
Net Cash Provided (Used) by Financing
Activities
|
|
$
|
1,181,637
|
|
$
|
(2,074,891
|
)
|
|
|
|
|
|
|
Net Increase in Cash and Cash Equivalents
|
|
15,254
|
|
560,236
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
Beginning of Period
|
|
1,531,260
|
|
1,195,145
|
|
End of Period
|
|
$
|
1,546,514
|
|
$
|
1,755,381
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
|
|
|
|
|
|
Interest Paid
|
|
$
|
588,141
|
|
$
|
773,683
|
|
Income Taxes Paid
|
|
$
|
42,346
|
|
$
|
22,506
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Capital Assets Acquired with Acounts Payable
|
|
$
|
136,270
|
|
$
|
68,081
|
|
Financing Costs Included in Accounts Payable
|
|
$
|
14,776
|
|
|
|
See Notes to Unaudited Consolidated Financial Statements
4
SOUTHWEST CASINO CORPORATION
Consolidated
Statements of Changes in Stockholders Equity (Unaudited)
For the Nine Months Ended September 30, 2007
|
|
Treasury Stock
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
Additional
|
|
Retained
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
December 31, 2006
|
|
|
|
$
|
|
|
19,688,656
|
|
$
|
19,689
|
|
$
|
17,239,894
|
|
$
|
(9,702,835
|
)
|
$
|
7,556,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
Common Stock and Warrants, net
|
|
|
|
|
|
7,954,787
|
|
7,955
|
|
3,935,012
|
|
|
|
3,942,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of
Common Stock
|
|
(357,000
|
)
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
(322,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based Compensation
Expense Related to Options and Warrants
|
|
|
|
|
|
|
|
|
|
209,429
|
|
|
|
209,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
(719,279
|
)
|
(719,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
September 30, 2007
|
|
(357,000
|
)
|
$
|
(322,300
|
)
|
27,643,443
|
|
$
|
27,644
|
|
$
|
21,384,335
|
|
$
|
(10,422,114
|
)
|
$
|
10,667,565
|
|
See Notes to Unaudited Consolidated Financial Statements
5
SOUTHWEST CASINO
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
NOTE 1 BASIS OF
PRESENTATION
The unaudited consolidated
financial statements of Southwest Casino Corporation, a Nevada corporation (the
Company), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) applicable to interim financial
information. Accordingly, certain information normally included in the annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States has been condensed or omitted. For
further information, please refer to the annual audited consolidated financial
statements of the Company, and the related notes included within the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2006, filed
with the SEC on March 21, 2007.
In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included, consisting only of normal recurring adjustments. The results for
the current interim period are not necessarily indicative of the results to be
expected for the full year.
NOTE 2
MANAGEMENT FINANCIAL PLANS
The Company has completed
two closings on an equity financing, see Note 5. The net proceeds from the sale
of securities were approximately $4 million. In connection with the financing
agreement entered into by North Metro, see Note 7, the Company was required to
make additional membership contributions of approximately $2.35 million to
North Metro from January 1, 2007 to the time the loan closed on April 20,
2007. As a result of the termination of
our management contract with the Cheyenne and Arapaho Tribes of Oklahoma (see
Note 8) we are seeking additional debt and/or equity financing. The Company believes it will be able to raise
the financing on terms acceptable to the Company and in an appropriate
timeframe; however the Company can provide no assurance that it will be able to
do so.
NOTE 3
STOCK OPTIONS AND AWARDS
Stock option plans:
On July 15, 2004, Southwest
Casino and Hotel Corp. shareholders approved the Southwest Casino and Hotel
Corp. 2004 Stock Incentive Plan that had been adopted by the companys Board of
Directors effective June 1, 2004. Under the terms of the reorganization
completed July 22, 2004, Southwest Casino Corporation assumed the rights and
obligations of Southwest Casino and Hotel Corp. under this plan. The plan
permits Southwest Casino Corporation to issue incentive awards to all employees
of Southwest Casino Corporation or any of its subsidiaries and any non-employee
directors, consultants or independent contractors of the Company or any of its
subsidiaries. Incentive awards under the plan include incentive options under
Section 422 of the Internal Revenue Code of 1986, non-statutory stock options
that do not qualify for incentive option treatment, stock appreciation
rights, restricted stock awards, performance units and stock bonuses. Effective
June 14, 2007, the shareholders approved an amendment to increase the number of
shares available for grant under the plan from 1,500,000 to 3,000,000. As
of September 30, 2007, options to purchase 925,000 shares were issued and are
outstanding. No options have been granted since July 1, 2006.
In addition to the
assumption of the 2004 Stock Incentive Plan, Southwest Casino Corporation
assumed outstanding non-plan options to acquire shares of Southwest Casino and
Hotel Corp. common stock as part of its reorganization. The Company assumed
stock options to purchase 1,575,000 shares of its common stock at a weighted
average price of $.62 per share.
Valuation and Expense
Information under SFAS 123(R)
On January 1, 2006, the
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004),
Share-Based Payment
(SFAS 123(R)), which requires the measurement and recognition of
compensation expense for all stock-based payment awards made to employees and
directors including employee stock options and employee stock purchases based
on estimated fair values. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107) relating to SFAS 123(R). The
Company has applied certain provisions of SAB 107 in its adoption of
SFAS 123(R).
SFAS 123(R) requires
companies to estimate the fair value of share-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Companys consolidated statement of operations.
SFAS 123(R) supersedes the Companys previous accounting under the
provisions of SFAS No. 123,
Accounting
for Stock-Based Compensation
(SFAS 123).
6
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
The effect of stock options
issued was to increase the net loss for the three and nine months ended
September 30, 2007 by $42,987 and $131,512 respectively, and basic loss per
share by $0.002 and $0.005, respectively. The effect of stock options
issued was to decrease net earnings for the three and nine months ended
September 30, 2006 by $40,294 and $125,705, respectively, and basic and diluted
earnings per share by $0.002 and $0.006, respectively.
Options are granted to
employees and directors at prices equal to the market value of the stock on the
dates the options are granted. The options granted have terms of 5 to 10 years
from the grant date and granted options typically vest quarterly over a one to
three year period. The fair value of each option is amortized into compensation
expense over the period the option vests. We have estimated fair value of all
stock options as of the date of grant applying the Black-Scholes pricing
valuation model. The application of this valuation model involves assumptions
that are judgmental and sensitive in the determination of compensation expense.
No options were granted during the nine months ended September 30, 2007.
Status of options during the
nine months ended September 30, 2007
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Contractual
Term
|
|
Aggregate
Intrinsic Value
|
|
Balance at December 31, 2006
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
Granted
|
|
0
|
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
0
|
|
|
|
|
|
|
|
Exercised
|
|
0
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at September 30, 2007
|
|
2,500,000
|
|
$
|
0.65
|
|
5.3 years
|
|
$
|
|
|
Options exercisable at September 30, 2007
|
|
2,237,500
|
|
$
|
0.65
|
|
5.0 years
|
|
$
|
|
|
As the closing stock price
of $0.47 at September 30, 2007 was less than the weighted average exercise
price for both options outstanding and options exercisable there was no
intrinsic value. As of September 30, 2007, the Companys unrecognized
share-based compensation related to stock options was approximately $172,000.
This cost is expected to be expensed over a weighted average period of one
year.
No tax benefit has been
recorded on the share based compensation expense for the three- and nine-month
periods ended September 30, 2007 and 2006.
NOTE 4
WARRANTS
Status of warrants:
|
|
Warrants
Outstanding
|
|
Weighted
Average
Exercise Price
|
|
Warrants outstanding as of December 31,
2006
|
|
1,837,500
|
|
$
|
0.56
|
|
Granted
|
|
4,258,602
|
|
$
|
0.64
|
|
Exercised
|
|
0
|
|
|
|
Cancelled
|
|
0
|
|
|
|
Warrants outstanding as of September 30,
2007
|
|
6,096,102
|
|
$
|
0.62
|
|
Sale of Unregistered
Securities
In connection with the
Securities Purchase Agreement (SPA) entered into on January 24, 2007 and
February 26, 2007, the Company issued warrants to purchase 2,975,293 shares of
common stock to investors and warrants to purchase and an additional 483,309
shares of common stock to the placement agent, see Note 5.
Investor Relations
Services and Financial Consulting Services
On January 17, 2007, the
Company entered into two agreements with Strategic Growth International, Inc. (SGI)
regarding investor relations and financial consulting services. As part of
these agreements, the Company issued to SGI warrants to purchase 800,000
7
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
shares of Southwest common
stock at a price of $0.63 per share that are exercisable for two years from the
date of the agreements. The exercise price equals the weighted average closing
price for one Southwest share on the Over-the-Counter Bulletin Board market for
the five trading days immediately preceding the date Southwest entered into the
Investor Relations Agreement. Beginning July 17, 2007, SGI has the right to
request the inclusion of the common shares underlying its warrants on any
registration statement that Southwest files on which the shares are eligible
for inclusion. Beginning January 17, 2008, SGI will have the right to require
Southwest to file a registration statement covering those shares.
Southwest had the right to
terminate the agreements at the end of six months. This right would have voided
if SGI met certain performance goals. If Southwest had terminated the agreement
at the end of six months, the number of shares subject to the warrants issued
to SGI would have been reduced by 50 percent. The Company did not exercise that
right. Southwest has the right to terminate the agreement at the end of any
month of its term during the second year of the agreement. Southwest also
agreed to indemnify SGI against certain claims that may arise in connection
with the services provided by SGI under the agreements.
The Company reviewed EITF
96-18
Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services
in determining the fair value of the
warrants. The Company valued the warrants based upon the consideration
received. The warrants have been valued at $220,000, which is being amortized
to consulting expense and additional paid in capital quarterly over the term of
the service agreements. For the three and nine months ended September 30,
2007, approximately $27,500 and $78,000 have been amortized.
The following is a
description of each agreement:
Investor Relations Services:
Under the terms of a letter
agreement accepted January 17, 2007, Southwest retained SGI to assist the company
as an investor relations advisor and develop a comprehensive financial
relations program designed to achieve increased awareness of Southwest and its
business and enhanced liquidity in the public market for the Companys stock.
Southwest agreed to pay SGI
$10,000 per month for a period of two years for these investor relations
services. Southwest also agreed to reimburse SGIs reasonable accountable
expenses incurred in connection with these services. In addition, Southwest
issued to SGI a warrant to purchase 100,000 shares of Southwest common stock,
see terms of warrant described above.
Financial Consulting Services:
Southwest also entered into
an agreement with SGI for financial consulting services on January 17, 2007
(the Consulting Agreement). Under the Consulting Agreement, SGI will assist
Southwest in developing a strategy to raise additional capital for gaming
projects the company is pursuing and for general working capital. SGI will also
help Southwest arrange and conduct meetings with potential sources of capital
and advise Southwest regarding the terms of any proposed financing
arrangements.
Southwest
is to pay SGI $8,000 per month for 24 months for the financial consulting
services provided under this agreement, however, SGI agreed to waive the
monthly fee in exchange for a warrant to purchase 700,000 shares of Southwest
common stock, see terms of warrant discussed above.
The
Company will also be required to pay an additional consulting fee of $100,000
or $200,000 if SGI assists the Company in completing equity or debt financing,
respectively, that meets standards stated in the agreement. In addition, if the
Company issues warrants as part of such a debt financing, it will also issue
warrants to purchase 100,000 shares of its common stock to SGI, on the same
terms as the warrants issued as part of debt financing.
NOTE 5 SALE OF
UNREGISTERED SECURITIES
On January 24, 2007 and
February 26, 2007, Southwest Casino Corporation (Southwest) entered into a
Securities Purchase Agreement (SPA) with certain institutional and other
accredited investors, as defined in Rule 501 of Regulation D promulgated under
the Securities Act of 1933, as amended, under which Southwest sold in a private
placement an aggregate of 7.44 million shares of its common stock with
accompanying warrants to purchase an aggregate of 2.98 million shares of its
common stock, at a purchase price of $0.55 per share of common stock. The
warrants are exercisable for a period of five years, beginning six months after
the date
8
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
of issuance, at an exercise
price of $0.61 per share. The number of shares issuable upon exercise of the
warrants and the exercise price of the warrants are adjustable in the event of
stock splits, combinations and reclassifications, but not in the event of the
issuance by Southwest of additional securities, unless such issuance is
pursuant to a rights offering or pro rata distribution to all security holders
except the investors.
The securities that were
issued in this private placement were not registered under the Securities Act
of 1933, as amended. However, under the terms of a Registration Rights
Agreement dated January 24, 2007 and February 26, 2007 between Southwest and
the investors, Southwest agreed to register the resale of the shares sold in
the private placement, including shares issuable upon exercise of the warrants
on a registration statement that became effective on May 11, 2007. Under
the Securities Purchase Agreement, Southwest and the investor parties have made
other covenants and representations and warranties regarding matters that are
customarily included in financings of this nature. If certain of its
obligations are not met, Southwest has agreed to make pro-rata cash payments as
liquidated damages to each investor.
The private placement
resulted in net proceeds to Southwest of approximately $3.94 million, after the
deduction of approximately, $150,000 of direct offering expenses. The placement
agent agreed to accept the cash portion of its placement agent fee in common
stock and warrants on the same terms as the investors, which resulted in the
placement agent receiving approximately 517,000 shares of common stock and
warrants to purchase an aggregate of approximately 207,000 shares of common
stock. In addition, the placement agent received a warrant to purchase
approximately 277,000 shares of common stock, which is exercisable for a period
of five years, beginning six months after the date of issuance, at an exercise
price of $1.00 per share.
The following officers and
directors of Southwest participated in the private placement on the same terms
as the other investors: James B. Druck, Chief Executive Officer and Director;
Thomas E. Fox, President and Chief Operating Officer and entities in which Mr.
Fox holds an ownership interest; Jeffrey S. Halpern, Vice President of
Government Affairs; Gus A. Chafoulias, Director; and David H. Abramson,
Director. Other than with respect to the SPA, there are no material
relationships between Southwest and any of the other investors in the private
placement.
NOTE 6
PROMOTIONAL ALLOWANCES
Revenue does not include the
retail amount of rooms, food, and beverages provided gratuitously to customers,
which was $881,000 and $895,000 for the nine months ended September 30, 2007
and 2006, respectively and was approximately $319,000 and $315,000 for the
three months ended September 30, 2007 and 2006, respectively.
NOTE 7
NORTH METRO HARNESS INITIATIVE, LLC
Organization
:
North Metro Harness
Initiative, LLC (a development stage Minnesota Limited Liability Company) (North
Metro) was formed on June 16, 2003 for the purpose of developing, owning, and
operating a horse race track and card room north of Minneapolis, Minnesota, in
Anoka County. North Metro has purchased land and obtained zoning, permitting
and regulatory approvals and begun construction of its facilities. On June 8,
2004, Southwest Casino and Hotel Corp. (Southwest) sold a 50% interest in the
Company to MTR Harness Inc. (MTR), a wholly owned subsidiary of MTR Gaming,
Inc.
North Metro will do business
in Minnesota under the name Running Aces Harness Park.
Accounting
for North Metro
:
The Company evaluates
whether North Metro should be treated as a variable interest entity (VIE)
subject to consolidation during the applicable reporting periods under
Financial Accounting Standards Board Interpretation 46(R)
Consolidation of Variable Interest Entities (as
amended
).
Contributions to capital of
North Metro have been made in accordance with the North Metro Member Control
Agreement dated June 8, 2004. Due to the amount of these contributions made by
MTR as of October 20, 2005, the Company no longer provided financial support in
excess of its 50 percent decision making power. As of September 30, 2007 the
Company has provided approximately 42 percent of the financial support from
members, but still retains its 50 percent decision making power. Therefore,
since October 20,
9
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
2005, the Company has
accounted for its investment in North Metro on the equity method. The Companys
investment in North Metro as of September 30, 2007 was $7,296,511, which is
recorded on the Companys consolidated balance sheet.
The following represents
North Metros income statement and the Companys calculation of the loss of
unconsolidated subsidiary net of tax benefit:
|
|
Three months
ended
September 30, 2007
|
|
Three months
ended
September 30, 2006
|
|
Nine months
ended
September 30, 2007
|
|
Nine months
ended
September 30, 2006
|
|
Revenues
|
|
$
|
31,844
|
|
$
|
18,218
|
|
$
|
80,305
|
|
$
|
18,218
|
|
|
|
|
|
|
|
|
|
|
|
Lobbying expenses
|
|
$
|
21,480
|
|
$
|
24,000
|
|
$
|
109,992
|
|
$
|
102,000
|
|
License feesMinnesota Racing Commission
|
|
77,995
|
|
61,090
|
|
200,496
|
|
187,881
|
|
Other
|
|
124,560
|
|
40,817
|
|
395,225
|
|
100,285
|
|
Total
|
|
224,035
|
|
125,907
|
|
705,713
|
|
390,166
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(192,191
|
)
|
$
|
(107,689
|
)
|
$
|
(625,408
|
)
|
$
|
(371,948
|
)
|
|
|
|
|
|
|
|
|
|
|
50% share of net loss
|
|
(96,096
|
)
|
(53,845
|
)
|
(312,704
|
)
|
(185,974
|
)
|
Net tax benefit
|
|
|
|
10,178
|
|
|
|
41,842
|
|
Loss of unconsolidated subsidiary net of
tax benefit
|
|
$
|
(96,096
|
)
|
$
|
(43,667
|
)
|
$
|
(312,704
|
)
|
$
|
(144,132
|
)
|
In 2006, North Metro formed
a wholly-owned subsidiary that acquired a nearby motel in December 2006 that
North Metro continues to operate in 2007 and will be used to house personnel
involved in the care of horses at the track during the racing season. The motel
has 15 rooms available to rent.
Southwest did not record a
tax benefit related to North Metros losses during the three and nine months
ended September 30, 2007, while Southwest did record a tax benefit during the
three and nine months ended September 30, 2006, see Note 13.
North Metro Financing
Agreement
On April 20, 2007, North
Metro entered into a Credit Agreement (the Credit Agreement) with Black
Diamond Commercial Finance, L.L.C. (Black Diamond) as agent and lender. Under
the terms of the Credit Agreement, North Metro will borrow $41.7 million to
construct, equip and open its harness racetrack and card club facility in
Columbus, Minnesota on the north side of the Minneapolis St. Paul
metropolitan area. The initial advance of $5 million of loan proceeds was made
April 20, 2007. As part of the loan agreement the members of North Metro agreed
to complete aggregate membership contributions of $20.8 million prior to
closing the loan. The total cost of the project is expected to approximate $62
million. As of September 30, 2007, Southwest contributed $8.9 million of
the total amount of $21.2 million contributed by the members. Certain
amounts related to non-construction costs continue to be funded by the
members. These amounts are not considered to be material to the total
cost of the project. Under the Credit Agreement, the initial advance of
loan proceeds will be followed by additional advances based on progress in
building and opening the racetrack and card room facility. During construction,
North Metro will make monthly payments of interest only based on a floating
index rate plus 4 percent or on a 1-month, 2-month or 3-month LIBOR rate plus 6
percent, at North Metros option. After the project opens, interest rates will
reduce to the applicable index rate plus 2.5 percent or the applicable LIBOR
rate plus 4.5 percent, again at North Metros option. North Metro must also pay
a fee equal to 4.5% per annum on any unused portion of the $41.7 million credit
facility. Principal payments of $104,250 will be due on the last day of each
fiscal quarter beginning the first full quarter after the project opening, as
defined in the agreement. North Metro will also be required to prepay the loan
in an amount equal to 50 percent of the projects excess cash flow for each
fiscal year beginning with the fiscal year ended December 31, 2008, as defined
in the agreement. Final payment equal to all outstanding principal and accrued
interest is due April 20, 2014.
North Metro may prepay the
loan, in whole or in part, at any time, subject to the payment of certain fees
and costs. The loan is secured by substantially all of the assets of North
Metro. The Credit Agreement does not provide for recourse against the members
of North Metro.
10
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
The Credit Agreement
contains standard affirmative and negative covenants regarding North Metro and
its wholly-owned subsidiary North Metro Hotel, LLC that restrict, among other
things, the ability to dispose of assets, transfer or pledge equity interests,
incur indebtedness, and make investments or distributions. Financial covenants
applicable to North Metro include, among other things, limits on capital
expenditures after opening, minimum EBITDA requirements, satisfaction of
leverage ratio limits, and delivery of financial statements.
In addition to customary and
standard events of default included in the Credit Agreement, failure to
substantially complete (as defined in the Credit Agreement) construction of the
North Metro project by June 30, 2008, and failure to operate the card room that
is part of the North Metro project at any time after July 1, 2008, would
constitute a default under the Credit Agreement.
Additional Membership
Contribution, Pledge, Subordination and Sponsor Support Agreements of Southwest
While the Credit Agreement
does not provide for recourse against Southwest in the case of a default by
North Metro, Southwest has pledged its membership interest in North Metro and
North Metro pledged its membership interest in North Metro Hotel, LLC as
security for repayment of the loan under the terms of a Pledge Agreement with
Black Diamond (the Pledge Agreement).
Southwest also entered into
a Subordination Agreement with Black Diamond (the Subordination Agreement)
under which Southwest has agreed that repayment of a $1.65 million membership
preferred capital contribution to North Metro, which North Metro was to repay
to Southwest out of the first available revenue from operations, will be
subordinated to the payments due under the loan agreements.
In addition, Southwest
entered into a Sponsor Support Agreement (the Support Agreement) under which
each member of North Metro has agreed to contribute additional capital to North
Metro if proceeds from the loan are insufficient to complete construction and
open the facility.
NOTE 8 TERMINATION OF
MANAGEMENT CONTRACT WITH THE CHEYENNE AND ARAPAHO TRIBES AND RELATED LITIGATION
The management and
consulting revenue on the Consolidated Statement of Operations for the three
and nine months ended September 30, 2007 relate entirely to revenues earned
from the management agreement with the Cheyenne and Arapaho Tribes of Oklahoma.
As described below, the Cheyenne and Arapaho Tribes contract with the Company
has terminated and the Company has not and will not receive any revenues from
managing those casinos after August 17, 2007. In addition, as described below,
the remaining contract costs, recorded as an intangible asset, on the Companys
Consolidated Balance Sheet have been written off.
On May 18, 2007, the
National Indian Gaming Commission approved Amendment No. 11 to the Third
Amended and Restated Gaming Management Agreement dated June 16, 1995 between
the Company and the Cheyenne and Arapaho Tribes of Oklahoma (the Tribes). Southwest continued to manage the Tribes
Lucky Star Concho and Lucky Star Clinton casinos under the terms of
Amendment No. 11 until August 17, 2007.
The May 18
th
NIGC
approval was based on a May 18, 2007 decision of the Cheyenne and Arapaho Trial
Court finding Amendment No. 11 valid under the Tribes constitution. On May 21, 2007, the Governor of the Cheyenne
and Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Court
seeking to overturn the decision of the tribal Trial Court. On August 17,
2007, The Supreme Court reversed the Trial Court order and declared the
contract extension invalid. Also on August 17, 2007, the NIGC issued a decision
and order reversing its May 18
th
approval of the two-year contract
extension based on the tribal Supreme Court decision. Based on the decision of the NIGC, tribal
representatives took control of the casinos on Sunday, August 19, 2007. On August 21, 2007, Southwest appealed the
decision of the NIGC to reverse its approval of the two-year contract
extension. On August 24, 2007, the NIGC
rejected that appeal and affirmed its decision. Southwest has not managed the
casinos since August 17, 2007.
In
connection with obtaining the two-year extension on May 18, 2007, the Company
incurred approximately $438,000 of costs directly related to obtaining the
management contract. This amount was
recorded as an intangible asset on the Consolidated Balance Sheet to be
amortized over the two-year term of Amendment No. 11. As a result of the termination effective
August 17, 2007 the remaining unamortized costs of approximately $400,000 were
expensed consistent with Statement of Financial Accounting Standards No. 144
Accounting for the Impairment or Disposal of
Long-Lived Assets
(SFAS #144) and included as a separate
line-item as an impairment loss on the Consolidated Statement of Operations for
the three months ended September 30, 2007.
We had accounted for
11
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
these
costs as an intangible asset to be expensed over the two-year term of the
extension of the management contract beginning May 19, 2007. We used the
straight-line method of amortization, which was considered to be a systematic
and rational approach.
The
Company accounted for this contract and included the revenues and costs in its
operating segment Casino Management in accordance with Statement of Financial
Accounting Standards No. 131
Disclosures
about Segments of an Enterprise and Related Information
(SFAS #131),
see Note 16. The Company has also
disclosed information about this major customer in accordance with SFAS #131
paragraph #39. In connection with the
termination of this agreement, the Company applied Statement of Financial
Accounting Standards No. 142
Goodwill and
Other Intangible Assets
and SFAS #144 in recognizing the impairment
loss. The Company also considered SFAS
#144 paragraph #41 relating to the reporting of discontinued operations and has
determined that this does not meet those requirements and has reported the
transaction in continuing operations.
NOTE 9 CONSULTING
AGREEMENT WITH PALACE RESORTS
In September 2007, the
Company entered into a consulting agreement to work with Palace Resorts in
developing and opening a casino at the Moon Palace Casino, Golf and Spa Resort,
now under construction in Punta Cana on the easternmost tip of the Dominican
Republic. Under the consulting agreement, Southwest immediately began assisting
Palace Resorts in all phases of design, game selection, training and equipping
the casino that will be part of the 1,700-room resort scheduled to open in
2008. Southwest will receive $50,000 a month for 10 months beginning in October
2007. Palace Resorts is a leader in
providing world-class resort vacations at all-inclusive properties throughout
Cancun, the Riviera Maya, Nuevo Vallarta, Cozumel and soon, Punta Cana,
Dominican Republic.
NOTE 10
LINE OF CREDIT AND TERM LOAN
On April 16, 2007, the
Company entered into the Third Amendment to the Revolving Credit and Term Loan
Agreement with Crown Bank. The agreement has been amended to extend the
maturity date of the $450,000 revolving line of credit to April 30, 2008.
The amendment did not alter the terms of the $2.5 million term loan and the Company
made the final payment on the term loan on April 30, 2007. Additionally,
under the amendment, three principal officers of the Company each agreed to
increase their personal guarantees of the line of credit from $100,000 to
$150,000 plus expenses. As of September 30, 2007, no amounts were
outstanding under the Term Loan or the Revolving Credit facility.
The interest rate is Prime
+1%, and not less than 7.5%. Currently the interest rate is 8.75%.
At September 30, 2007, the full amount of the line, $450,000, was available to
be borrowed.
NOTE 11
REDEMPTION OF SECURITIES
The Company redeemed
357,000 shares of common stock in accordance with Article XI of the Companys
Articles of Incorporation effective January 22, 2007. The shares were
redeemed at a price of $0.90 per share based upon the closing stock price of
the Companys common stock as reported on January 22, 2007. The Company
recorded the redemption as a reduction to stockholders equity for the buy back
of shares. The shares of common stock are included in Treasury Stock in
the Consolidated Statements of Changes in Stockholders Equity as of September
30, 2007.
NOTE 12 EARNINGS (LOSS)
PER SHARE
For all periods, basic
earnings (loss) per share is calculated by dividing earnings (loss) by the
weighted-average number of common shares outstanding. Diluted earnings
per share for the three and nine months ended September 30, 2006, reflect the
effect of all potentially dilutive common shares outstanding by dividing net
earnings by the weighted-average of all common and potentially dilutive shares
outstanding. The Company had a net loss for the three and nine months
ended September 30, 2007; therefore a calculation of loss per share on a fully
diluted basis would be anti-dilutive.
The following
is a reconciliation of basic and diluted earnings per share:
|
|
Net Earnings
|
|
Weighted Average
Equity
|
|
Earnings
Per Share
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
|
|
Three months ended September
30, 2006:
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
559,983
|
|
19,688,656
|
|
$
|
0.03
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
Outstanding
Options and Warrants
|
|
|
|
976,059
|
|
|
|
|
|
$
|
559,983
|
|
20,664,715
|
|
$
|
0.03
|
|
12
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
Options
and warrants to purchase 1,395,000 shares of common stock at an exercise price
of $1.00 per share, options to purchase 675,000 shares at $0.65 and options to
purchase 50,000 shares of common stock at an exercise price of $0.75 per share
were not included in the computation of diluted earnings per share for the
three months ended September 30, 2006 because the exercise price was greater
than the average market price of common shares during the period. All of
these options were outstanding as of September 30, 2006.
|
|
Net Earnings
|
|
Weighted Average
Equity
|
|
Earnings
Per Share
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
|
|
Nine months ended September
30, 2006:
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
1,235,204
|
|
19,671,249
|
|
$
|
0.06
|
|
Effect of Dilutive Securities:
|
|
|
|
|
|
|
|
Outstanding Options and Warrants
|
|
|
|
1,019,308
|
|
|
|
|
|
$
|
1,235,204
|
|
20,690,557
|
|
$
|
0.06
|
|
Options and warrants to
purchase 1,395,000 shares of common stock at an exercise price of $1.00 per
share, options to purchase 675,000 shares of common stock at an exercise price
of $0.65 and options to purchase 50,000 shares of common stock at an exercise
price of $0.75 per share were not included in the computation of diluted
earnings per share for the nine months ended September 30, 2006 because the
exercise price was greater than the average market price of common shares
during the period. All of these options were outstanding as of September
30, 2006.
NOTE 13 INCOME TAXES
The Company adopted
Statement of Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007. Interpretation No.
48 clarifies the accounting for uncertain tax positions in accordance with SFAS
109, Accounting for Income Taxes. Pursuant to Interpretation No. 48,
the Company is required to recognize in its financial statements the largest
tax benefit of a tax position that is more-likely-than-not to be sustained on
audit, based solely on the technical merits of the position as of the reporting
date. Only tax positions that meet the more-likely-than-not threshold at that
date may be recognized. The term more-likely-than-not means a
likelihood of more than 50 percent.
The Company accounts for
interest and penalties (if any) as interest expense in the Statement of
Operations.
The Company does not have
any unrecorded tax benefits as of January 1, 2006 or September 30, 2007.
The Companys tax returns
for the tax years 2003 through 2006 remain subject to examination by major tax
jurisdictions. However, as the Company has net operating losses from
prior years these tax returns can also be examined once these net operating
losses are utilized in future tax filings.
Management evaluated its
probable ability to utilize deferred tax assets arising from net operating loss
carry forwards, deferred tax assets and other ordinary items and determined
that a valuation allowance was appropriate during the three and nine months
ended September 30, 2007 based upon the uncertainty and ultimate termination of
the Companys management contract with the Cheyenne and Arapaho Tribes, see
Note 8. As a result of this evaluation, a tax benefit was reduced
by a comparable valuation allowance for the three and nine months ended September
30, 2007. As of September 30, 2007, the Companys deferred tax asset is
zero.
At December 31, 2003, the
Company established a deferred tax asset relating to net operating
losses. As of December 31, 2005, management evaluated all evidence and
determined that a portion of the deferred tax assets relating to net operating
losses would be utilized in 2006 based upon forecasted income for the Company
in 2006. During the three and nine months ended September 30, 2006, the
Company recorded a tax provision to reduce the previously established deferred
tax asset.
NOTE 14
RELATED PARTY TRANSACTIONS
In addition to $150,000 of
unpaid bonuses, see Note 17, the Company has a liability to certain officers
and stockholders for unpaid compensation and expenses of $122,467 as of
September 30, 2007, relating to periods prior to December 31, 2003.
James B. Druck, Chief
Executive Officer and Director; Thomas E. Fox, President and Chief Operating
Officer; Jeffrey S. Halpern, Vice President of Government Affairs; Gus A.
Chafoulias, Director; and David H. Abramson, Director each participated in
our January 24, 2007 and February 26, 2007 private placement of common stock
with accompanying warrants. See Note 5.
13
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
The Company purchased
furniture and equipment from Berc and Fox for $25,000. The operations of Berc & Fox were sold in
January 2007 and as a result certain furniture and equipment were available for
purchase. Thomas Fox, the Companys
President, is a shareholder and officer in Berc & Fox Limited.
During the three months
ended September 30, 2007, the Company paid Jennifer Sparlin Druck $1,000 for
entertainment services at the Gold Rush Palladium. Ms. Druck is the wife of James Druck, CEO of
Southwest.
NOTE 15
PROJECT DEVELOPMENT COSTS
The Company continues to
pursue additional gaming opportunities and as a result continues to incur
project development expenses. For the three and nine months ended
September 30, 2007, development expenses were $99,112 and $351,683,
respectively. For the three and nine months ended September 30, 2006,
development expenses were $47,642 and $225,125, respectively.
NOTE 16 SEGMENT
INFORMATION
The Company has grouped
its operations into three segments, Casino Operations, Casino Management and
Project Development. The segment Casino
Operations includes the Companys operations in Cripple Creek, Colorado where
the Company operates two casinos and an outdoor amphitheatre. In July 2007 the Company disposed of a
casino, see Note 20. The segment Casino
Management relates to our management and consulting business. The segment Project Development relates to
the Companys investments in projects under development including any
acquisition efforts. These include North Metro; see Note 7, and other
development activities and their related specific costs. Corporate expenses are included as a
reduction in Casino Management income. Corporate expenses have not been allocated to
Casino Operations or Project Development.
Segment information
related to the three months ended September 30, 2007 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
4,345,959
|
|
$
|
434,658
|
*
|
$
|
|
|
$
|
4,780,617
|
|
|
|
|
|
|
|
|
|
|
|
Segmented profit (loss) before income taxes
|
|
813,141
|
|
(796,942
|
)#
|
(671,931
|
)
|
(655,732
|
)
|
Segmented assets
|
|
12,395,694
|
|
342,966
|
|
7,306,511
|
|
20,045,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
All
of the revenues related to our operating segment Casino Management during the
period were from our management contract with the Cheyenne and Arapaho Tribes
of Oklahoma that terminated effective August 17, 2007, see Note 8.
#
Approximately, $400,000 was
recorded as an impairment loss writing off all costs (previously reflected as
an intangible asset) directly related to our management contract with the
Tribes. This loss is shown in the
Consolidated Statement of Operations in the line-item impairment loss, see Note
8.
Segment information
related to the three months ended September 30, 2006 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
4,461,252
|
|
$
|
1,468,192
|
|
$
|
|
|
$
|
5,929,444
|
|
Segmented profit (loss) before income taxes
|
|
359,352
|
|
506,928
|
|
(91,309
|
)*
|
774,971
|
|
Segmented assets
|
|
13,489,529
|
|
1,357,680
|
|
4,664,550
|
|
19,511,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Included in Project Development in the line
item segment profit (loss) before income taxes is a tax benefit of $10,178
recorded in the loss of unconsolidated subsidiary, net of tax benefit shown on
the Consolidated Statement of Operations for the three months ended September
30, 2006 (see Note 7).
14
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
Segment information
related to the nine months ended September 30, 2007 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
11,812,906
|
|
$
|
3,566,109
|
*
|
$
|
|
|
$
|
15,379,015
|
|
Segmented profit (loss) before income taxes
|
|
650,620
|
|
(102,139
|
)#
|
(1,267,760
|
)
|
(719,279
|
)
|
Segmented assets
|
|
12,395,694
|
|
342,966
|
|
7,306,511
|
|
20,045,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
All of the revenues related
to our operating segment Casino Management during the period were from our management
contract with the Cheyenne and Arapaho Tribes of Oklahoma that terminated
effective August 17, 2007, see Note 8.
#
Approximately, $400,000 was
recorded as an impairment loss writing off all costs (previously reflected as
an intangible asset) directly related to our management contract with the
Tribes. This loss is shown in the
Consolidated Statement of Operations in the line-item impairment loss, see Note
8.
Segment information
related to the nine months ended September 30, 2006 follows:
|
|
Casino
Operations
|
|
Casino
Management
|
|
Project
Development
|
|
Total
|
|
Revenues
|
|
$
|
12,186,352
|
|
$
|
4,562,005
|
|
$
|
|
|
$
|
16,748,357
|
|
Segmented profit (loss) before income taxes
|
|
386,257
|
|
1,833,546
|
|
(369,257
|
)*
|
1,850,546
|
|
Segmented assets
|
|
13,489,529
|
|
1,357,680
|
|
4,664,550
|
|
19,511,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Included in Project Development in the line
item segment profit (loss) before income taxes is a tax benefit of $41,842
recorded in the loss of unconsolidated subsidiary, net of tax benefit shown on
the Consolidated Statement of Operations for the nine months ended September
30, 2006 (see Note 7).
NOTE 17
COMMITMENTS AND CONTINGENCIES
In 2004, the Company
purchased player tracking software and slot accounting software from IGT.
On December 29, 2005, the Company entered into an agreement with IGT to finance
$460,324 of the purchase price for this system over 48 months with interest
rate equal to the prime rate, which is currently 7.75%. In addition, the
Company agreed to purchase additional software for $200,000, which will allow
the Company to offer bonusing to its customers. The purchase is
contingent upon IGT receiving necessary approvals for the bonusing system from
the Colorado Division of Gaming.
Under the Companys
employment agreements with James B. Druck, CEO, Thomas E. Fox, President and
COO, and Jeffrey S. Halpern, Vice President of Government Affairs, which were
effective July 1, 2004, these executives can elect to continue their employment
in a reduced capacity, with continuing medical benefits and a salary equal to
their base pay at the time of termination for 12 months and not less than
$25,000 after 12 months if the Company terminates the executives employment
without cause or in connection with a change in control of the Company (as
defined in the employment agreement) or if the executive terminates his
employment with the Company for good cause (as defined in the employment
agreement). The initial term of these agreements expired July 1, 2006,
after which the agreement renewed and will continue to renew automatically for
additional one-year terms unless terminated.
The Company has entered into
employment agreements with certain other key employees of the Company. The
agreements provide for certain benefits to the employee as well as severance if
the employee is terminated without cause or due to a constructive termination
as defined in the agreements. The severance amounts depend upon the term
of the agreement and can be up to six months of base salary and bonus.
Bonuses:
On March 27, 2007 the
board of directors approved performance bonuses to officers and employees of
the Company in the amount of $385,000, which amount was recorded as an expense
effective that date. Of that amount, the Company has paid $210,000 during
the
15
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
nine months ended
September 30, 2007. Bonuses in the amount of $175,000 were to be paid on
or after July 1, 2007 when management determines the Company has sufficient
financial resources for payment. Unpaid bonuses in the amount of $175,000
are reflected as a liability at September 30, 2007.
Other:
The Company is involved in
various claims, legal actions and complaints arising in the ordinary course of
business. In the opinion of management, any losses that may occur from
these matters are adequately covered by insurance or are provided for in our
financial statements, and the ultimate outcome of these other matters will not
have a material effect on our financial position or results of operations.
NOTE 18
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted
Statement of Financial Accounting Standards Interpretation No. 48 Accounting
for Uncertainty in Income Taxes
(Interpretation
No. 48) effective January 1, 2007, see Note 13.
In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The Company is currently
evaluating the potential impact of this statement.
In February 2007, the FASB
released SFAS No. 159,
The Fair Value
Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115
This Statement permits entities to choose
to measure many financial instruments and certain other items at fair value.
This Statement is effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007. Early adoption is permitted as of the
beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, Fair Value Measurements. The Company is evaluating the impact of
this statement.
NOTE 19
CASINO ACQUISITION
On December 18, 2006,
Southwest Eagle, LLC (Southwest Eagle), a wholly-owned subsidiary of
Southwest Casino Corporation, entered into an Asset Purchase Agreement and a
long-term lease with Pinnacle Casinos and Resorts, LLC (Pinnacle).
Under the Asset Purchase Agreement, Southwest Eagle had agreed to acquire the
operating assets and lease the real property of the Double Eagle Hotel and
Casino and Gold Creek Casino in Cripple Creek, Colorado (collectively, the Double
Eagle).
On April 13, 2007, Southwest
Casino Corporation and its wholly-owned subsidiary Southwest Eagle notified
Pinnacle that Southwest had elected to terminate the Asset Purchase Agreement
between Southwest Eagle and Pinnacle dated December 18, 2006 and all related
agreements.
Southwest
terminated the Asset Purchase Agreement in response to notice Southwest
received on April 10, 2007 from Pinnacle that the separate Stock Purchase
Agreement under which Pinnacle was to acquire all of the outstanding capital
stock of Colorado Casino Resorts, Inc. (CCRI), the owner of the Double Eagle,
had terminated in accordance with its terms when Pinnacle did not make a
required payment. Because Pinnacle was unable to complete its proposed
acquisition of the CCRI stock in accordance with the Stock Purchase Agreement,
as amended, Pinnacle was also unable to perform its obligations under the Asset
Purchase Agreement with Southwest Eagle. The Company incurred $126,650 of
transaction costs specific to this acquisition. The Company wrote-off
this amount in the second quarter of 2007 when the negotiations ceased with the
sellers of the Double Eagle in early July 2007.
The Company had substantial doubt that it would be able to reach terms
on the Double Eagle with the sellers in late June 2007 and this was confirmed
in early July 2007. Thus the $126,650
transaction costs were written-off in the second quarter of 2007. This is
included as a separate line item under Other Income (Expense) in the
Consolidated Statement of Operations for the nine months ended September 30,
2007.
The
Company also incurred financing costs with a lender in the amount of
approximately $477,000. These financing
costs were initially associated with the financing of the original arrangements
to acquire the Double Eagle. Even though the proposed Double Eagle acquisition
ceased effective June 30, 2007, the financing arrangement and negotiations
continued. In July 2007 the Company
16
SOUTHWEST CASINO
CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2007
received
a revised term sheet from the lender that provided for a non-specific property
acquisition line of credit and also included a working capital amount available
immediately, as defined in the agreement.
As part of the terms of this new term sheet the Company wired an
additional expense deposit to the lender on August 6, 2007. The Company was scheduled to close on this
financing by the end of August 2007.
As a result of the
termination of the management agreement with the Cheyenne and Arapaho Tribes of
Oklahoma, effective August 17, 2007, the financing contemplated with this
lender did not occur and the arrangement was terminated. Thus the Company wrote-off amounts related to
the financing of $476,723 included as a separate line item within Other Income
(Expense) in the Consolidated Statement of Operations for the three months
ended September 30, 2007.
NOTE 20
SALE OF UNCLE SAMS CASINO
On June 25, 2007, the
Company entered into an agreement with the landlord to purchase the leased real
property on which it operated Uncle Sams Casino in Cripple Creek,
Colorado. The purchase agreement provided that the Company would not be
obligated to purchase the real property unless the Company assigned its rights
under the purchase agreement to a third party. On June 26, 2007, the
Company entered into an agreement to assign its rights under the purchase
agreement and the operating lease. On July 29, 2007 the Company closed
Uncle Sams Casino and on July 31, 2007 the Company assigned its rights under
the purchase agreement and lease and received an assignment fee of
approximately $487,000. The Company recognized a gain of $452,426 on this
transaction that is recorded in the Consolidated Statement of Operations during
the three months ended September 30, 2007 as a separate line item within Other
Income (Expense). The Company transferred the majority of the equipment
and slot machines to the Gold Rush and Gold Diggers casinos in the amount of
the net book value of approximately $58,000.
Additionally, the Uncle Sams employees were transferred to the Gold
Rush and Gold Diggers casinos and the customers were offered incentives to
migrate their play at Uncle Sams to the Gold Rush and Gold Diggers casinos.
The Company has recorded the
transaction involving Uncle Sams casino in continuing operations as the
Company reviewed SFAS #144 and determined that it did not meet the requirements
for accounting as discontinued operations.
The Company also reviewed Statement of Financial Accounting Standards
No. 146
Accounting for Costs Associated
with Exit or Disposal Activities
and determined no accruals were
necessary at June 30, 2007. The
transaction was completed and recorded in the third quarter of fiscal 2007.
17
Item 2. Managements
Discussion and Analysis or Plan of Operation
The following is a
discussion and analysis of the financial position and operating results of
Southwest Casino Corporation (referred to in this discussion, together with its
consolidated subsidiaries where appropriate, as Southwest Casino, Southwest,
the Company, we, our and us) for the three and nine months ended
September 30, 2007 and 2006.
Summary of Consolidated Operating Results:
For the three months ended
September 30, 2007, we had a net loss of $655,732 on revenues of $4,780,617
compared to net income of $559,983 on revenues of $5,929,444 for the same
period in 2006. This amounts to a basic loss per outstanding share during
the three months ended September 30, 2007 of $0.02 and basic and fully diluted
earnings per outstanding share during the three months ended September 30, 2006
of $0.03.
For the nine months ended
September 30, 2007, we had a net loss of $719,279 on revenues of $15,379,015
compared to net income of $1,235,204 on revenues of $16,748,357 for the same
period in 2006. This amounts to a basic loss per outstanding share of
$0.03 during the nine months ended September 30, 2007 compared to basic and
fully diluted earnings per outstanding share of $0.06 during the same period in
2006.
The net loss of $655,732 in
the three months ended September 30, 2007, compared to net income of $559,983
for the same period in 2006, primarily results from a reduction in revenues of
approximately $1 million from our management contract with the Cheyenne and
Arapaho Tribes of Oklahoma, which terminated on August 17, 2007, and increased
operating expenses of approximately $343,000.
We also incurred other expenses of $204,000 during the three months
ended September 30, 2007 compared to $318,000 in 2006. The significant
components of the $114,000 decrease related to a decrease in interest expense
of $120,000 and a gain on the disposition of the Uncle Sams casino of
$452,000, which were offset by the write off of financing costs of $477,000. During the three months ended September 30,
2006 we recognized income tax expense of $215,000 compared to $0 in 2007.
The net loss of $719,279 in
the first nine months of 2007, compared to net income of $1,235,204 for the
same period in 2006, primarily results from reduced revenues of approximately
$1 million from our management contract with the Cheyenne and Arapaho Tribes of
Oklahoma, which terminated on August 17, 2007, and increased operating expenses
of approximately $1.2 million related primarily to an increase in corporate and
project development expenses during 2007 compared to the same period in
2006. We also incurred other expenses of
$780,000 during the nine months ended September 30, 2007 compared to $901,000
in 2006. The significant components of the decrease of $121,000 related to a
decrease in interest expense of $252,000 and a gain on the disposition of the
Uncle Sams casino of $452,000, which were offset by the write off of
acquisition and financing costs of $603,000. During the nine months ended
September 30, 2006 we recognized income tax expense of $615,000 compared to $0
in 2007.
Overview:
Our principal business is
the management, operation and development of gaming facilities in emerging and
established gaming jurisdictions. Currently, we operate two casinos in
Cripple Creek, Colorado Gold Rush Hotel and Casino and Gold Diggers
Casino. Until July 28, 2007, we also operated Uncle Sams Casino in
Cripple Creek. Until August 17, 2007 we managed two Native American
gaming operations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma,
Lucky Star - Concho and Lucky Star Clinton.
We also own a 50% membership interest in North Metro Harness Initiative,
LLC, (North Metro). North Metro is building a harness racetrack and
50-table card room in Columbus, Minnesota on the north side of the Minneapolis
St. Paul Metropolitan area. North Metro secured financing for the
project and began construction in April 2007 and plans to begin harness racing
in Spring 2008 and open the card room after completing 50 days of live racing
(as required by Minnesota statue). In
September 2007, we entered into a consulting agreement to work with Palace
Resorts in developing and opening a casino at the Moon Palace Casino, Golf and
Spa Resort now under construction in Punta Cana on the easternmost tip of the
Dominican Republic. Under the consulting agreement, we will assist Palace
Resorts in all phases of design, game selection, training and equipping the
casino that will be part of the 1,700-room resort that is scheduled to open in
2008. Southwest will receive $50,000 a month for 10 months beginning in October
2007. Palace Resorts is a leader in
providing world-class resort vacations at all-inclusive properties throughout
Cancun, the Riviera Maya, Nuevo Vallarta, Cozumel and soon, Punta Cana,
Dominican Republic.
From May 19, 2007 to August
19, 2007, Southwest managed the Lucky Star Concho and Lucky Star Clinton
casinos under Amendment No. 11 to the Third Amended and Restated Gaming Management
agreement between Southwest and the Cheyenne and Arapaho Tribes of Oklahoma,
which extended that agreement for up to two years. On August 17, 2007, the Supreme Court of the
Cheyenne and Arapaho Tribes declared Amendment No. 11 invalid. Also on August 17, 2007, the National Indian Gaming
Commission reversed its prior approval
18
of Amendment No. 11. On August 24, 2007, the NIGC rejected
Southwests challenge to its decision and Southwest has not received management
fees from the Cheyenne and Arapaho Tribes since August 17, 2007. As a result of the termination of our
management contract with the Cheyenne and Arapaho Tribes of Oklahoma we believe
it is a necessity to seek additional debt and/or equity financing to fund our
future operations including project development costs. We have undertaken such an effort and believe
we will be able to raise the financing on terms acceptable to us and in an
appropriate timeframe; however we can provide no assurance that we will be able
to do so.
We continually evaluate
other management, consulting, development and acquisition opportunities related
to gaming that have the potential to generate new revenue streams for us.
Operating segments:
Our
executive officers review operating results, assess performance and make
decisions related to the allocation of resources on a property by property
basis; however, certain properties are combined into one operating segment for
financial reporting purposes as they meet the criteria for aggregation under
Statement of Financial Accounting Standards No. 131 paragraph 17. We have grouped the following properties into
the following two operating segments that are described in further detail
below:
Casino Management:
|
|
Casino Operations:
|
Lucky
Star Concho
|
|
Gold Rush/ Gold Diggers
Casinos
|
Lucky
Star Clinton
|
|
Uncle Sams Casino
|
Casino
Management:
We managed two casinos for
the Cheyenne and Arapaho Tribes of Oklahoma under the Third Amended and
Restated Gaming Management Agreement dated June 16, 1995 between us and the
Cheyenne and Arapaho Tribes of Oklahoma (the Tribes) until August 17, 2007.
On May 18, 2007, the
National Indian Gaming Commission approved Amendment No. 11 to the Third
Amended and Restated Gaming Management Agreement. Southwest continued to manage the Tribes
Lucky Star Concho and Lucky Star Clinton casinos under the terms of
Amendment No. 11 until August 17, 2007.
The May 18
th
NIGC
approval was based on a May 18, 2007 decision of the Cheyenne and Arapaho Trial
Court finding Amendment No. 11 valid under the Tribes constitution. On May 21, 2007, the Governor of the Cheyenne
and Arapaho Tribes filed an appeal to the Cheyenne and Arapaho Supreme Court
seeking to overturn the decision of the tribal Trial Court. On August 17,
2007, the Supreme Court reversed the Trial Court order and declared the
contract extension invalid. Also on August 17, 2007, the NIGC issued a decision
and order reversing its May 18
th
approval of the two-year contract
extension based on the tribal Supreme Court decision. Based on the decision of the NIGC, tribal
representatives took control of the casinos on Sunday, August 19, 2007. On August 21, 2007, Southwest appealed the
decision of the NIGC to reverse its approval of the two-year contract
extension. On August 24, 2007, the NIGC
rejected that appeal and affirmed its decision.
Southwest has not received management fees from the casinos since August
17, 2007.
Lucky Star - Concho
We earned management fees
of $266,457 and $896,449 from Lucky Star - Concho during the three months ended
September 30, 2007 and 2006, respectively. We earned management fees
of $2,045,984 and $2,809,052 from Lucky Star - Concho during the nine months
ended September 30, 2007 and 2006, respectively. The decrease in
management fees for the three and nine months ended September 30, 2007 compared
to the same period in the prior year is due to the amendment of our management
contract in May 2007 that changed the management fee structure and the subsequent
termination of the management contract on August 17, 2007.
Lucky Star - Clinton
We earned management fees of
$168,201 and $571,743 from Lucky Star - Clinton during the three months ended
September 30, 2007 and 2006, respectively. We earned management
fees of $1,520,125 and $1,752,953 from Lucky Star - Clinton during the nine
months ended September 30, 2007 and 2006, respectively. The
decrease in management fees for the three and nine months ended September 30,
2007 compared to the same period in the prior year is due to the amendment of
our management contract in May 2007 that changed the management fee structure
and the subsequent termination of the management contract on August 17, 2007.
19
Otoe-Missouria
Tribe of Indians
Southwest
entered into a Gaming Management Agreement with the Otoe-Missouria Tribe of
Indians under which Southwest was to manage the Tribes Seven Clans Paradise
Casino in Red Rock, Oklahoma, on March 24, 2006. The Otoe-Missouria Tribe submitted the Gaming
Management Agreement to the National Indian Gaming Commission, which must
approve it before it can be effective, on April 10, 2006. In response to comments from the NIGC,
Southwest and the Tribe submitted a revised agreement to the NIGC in August
2006. The NIGC provided additional
comments on and requested additional changes to the management agreement on
September 15, 2006. The Tribe did not respond
to the NIGC or to Southwests efforts to complete a revised management agreement.
On
July 11, 2007, the NIGC delivered a letter to Southwest and the Chairman of the
Tribe requesting that we submit a revised management agreement or withdraw the
request for approval of the current agreement within 30 days. Southwest met with representatives of the
Tribes Economic Development Authority (OMDA) on August 6, 2007 and discussed
the status of the management agreement.
The OMDA has told us that they do not intend to go forward with the
management agreement and we have withdrawn our request for NIGC review of this
management agreement. We continue to seek reimbursement from the Otoe-Missouria
of expenses incurred by Southwest while working with the Tribe in 2006.
Casino
operations
:
Gold
Rush/Gold Diggers Casino (GR/GD) Results
|
|
Three Months
Ended
September 30, 2007
|
|
Three Months
Ended
September 30, 2006
|
|
Percentage
Increase
(Decrease)
|
|
Nine Months
Ended
September 30, 2007
|
|
Nine Months
Ended
September 30, 2006
|
|
Percentage
Increase
(Decrease)
|
|
Casino revenues
|
|
$
|
4,035,628
|
|
$
|
3,957,770
|
|
2.0
|
%
|
$
|
10,767,126
|
|
$
|
10,856,649
|
|
(0.8
|
)%
|
Total revenues
|
|
4,241,304
|
|
4,166,323
|
|
1.8
|
%
|
11,271,345
|
|
11,412,467
|
|
(1.2
|
)%
|
Profit before
income taxes
|
|
504,286
|
|
516,049
|
|
(2.3
|
)%
|
653,338
|
|
888,994
|
|
(26.5
|
)%
|
Earnings margin
(*)
|
|
11.9
|
%
|
12.4
|
%
|
|
|
5.8
|
%
|
7.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The earnings
margin is calculated by dividing profit before income taxes by Total revenues.
Profit before income taxes
is determined by reducing Total revenues by, among other things, interest
expense on our capital lease at the Gold Rush and depreciation and amortization
expenses. The capital lease was carried
on our Consolidated Balance Sheet in the amount of approximately $7.5 million
as of September 30, 2007. Interest
expense was $183,000 and $561,000 for the three and nine months ended September
30, 2007 and $219,000 and $608,000 for the three and nine months ended
September 30, 2006. Depreciation and
amortization expenses were $350,000 and $1.1 million for the three and nine
months ended September 30, 2007 and $383,000 and $1.1 million for the three and
nine months ended September 30, 2006.
For the three months ended
September 30, 2007, GR/GDs total casino revenues increased by 2.0% as compared
to the same period last year. The Cripple Creek market increased by 2.6%
during this same time period compared to the same period in the prior
year. In addition we increased
marketing expenses as a result of closing Uncle Sams and offering incentives
to players in order to attract customers who played at Uncle Sams to play at
GR/GD. This resulted in a slight
decrease in our earnings margin.
Additionally, we closed
Uncle Sams casino on July 29, 2007. We transferred approximately eight
employees to our GR/GD properties. Thus certain salaries and expenses
previously incurred by Uncle Sams have been included with operations of the
GR/GD properties since the closure of Uncle Sams casino on July 29, 2007.
Additionally, the players/customers who played at Uncle Sams were
offered incentives to migrate their play to the Gold Rush and Gold Diggers
casino. We have estimated that we
retained approximately 40% - 70% of the revenues from those players who played
previously at Uncle Sams and now are playing at the Gold Rush and Gold Diggers
casinos. The Gold Rush and Gold Diggers
casinos had available capacity to absorb the players from Uncle Sams. The Uncle Sams brand name is no longer used
in our operations. However, since
inception we have used an integrated players club for all three Cripple Creek
casinos whereby the player could redeem points earned at one casino at any of
the casinos.
For the nine months ended
September 30, 2007, GR/GDs total casino revenues declined 0.8% as compared to
the same period last year. The decrease in revenues can be directly
attributed to bad weather in the months of January and April. During
these two months we suffered a decline in casino revenues of 24.5% for January
and a decline of 13.8% for April. By contrast the Cripple Creek
market was down 12.2% for January and essentially flat in April. Some of
our competitors have parking garages that gives them an advantage in bad
weather months. During this same time period, our earnings margin
declined from 7.8% to 5.8% from prior year, primarily due to lower revenues and
higher marketing expenses. The company
spent additional marketing dollars in May and June to
20
recapture customers
potentially lost during the bad weather months as well as increased marketing
in August as a result of closing Uncle Sams.
Uncle Sams
Casino
:
|
|
Three Months
Ended
September 30, 2007
|
|
Three Months
Ended
September 30, 2006
|
|
Nine Months
Ended
September 30, 2007
|
|
Nine Months
Ended
September 30, 2006
|
|
Total revenues
|
|
60,514
|
|
279,601
|
|
464,697
|
|
752,043
|
|
Profit (loss) before income taxes
|
|
370,728
|
|
(116,001
|
)
|
101,032
|
|
(413,012
|
)
|
Operating results at Uncle
Sams continued to deteriorate in 2007 because the property was small, detached
from the GR/GD and we did not make significant improvements to the
property. On June 25, 2007, we
entered into an agreement with the landlord to purchase the leased real
property on which we operated Uncle Sams Casino in Cripple Creek,
Colorado. The purchase agreement provided that we would not be obligated
to purchase the real property unless we assigned our rights under the purchase
agreement to a third party. On June 26, 2007, we entered into an
agreement to assign our rights under the purchase agreement and the operating
lease. On July 29, 2007, we closed Uncle Sams Casino and, on July 31,
2007, we assigned our rights under the purchase agreement and lease and
received an assignment fee of approximately $487,000. We recognized a
gain of $452,426 on this transaction that is recorded in the Consolidated
Statement of Operations during the three months ended September 30, 2007 as a
separate line item within Other Income (Expense) and included in the schedule
above in Profit (loss) before income taxes. We transferred the majority
of the equipment and slot machines to the Gold Rush and Gold Diggers casinos in
the amount of their net book value of approximately $58,000. Additionally, approximately eight employees
were transferred to the Gold Rush and Gold Diggers casinos and the customers
were offered incentives to migrate their play at Uncle Sams to the Gold Rush
and Gold Diggers casinos.
We also include within the
operating segment Casino Operations our outdoor amphitheatre at the Gold
Rush. Revenues from the amphitheatre are
less than 1% of total revenues.
Project Development
costs for the three months ended September 30, 2007 and 2006 were
$99,112 and $47,642, respectively. Project development costs for the nine
months ended September 30, 2007 and 2006 were $351,683 and $225,125,
respectively. The increase for the three and nine months ended September
30, 2007 is primarily a result of increased costs associated with the
management contract with the Cheyenne and Arapaho Tribes, see above discussion
under Casino Management, and costs associated with obtaining our consulting
agreement with Palace Resorts in September 2007.
Corporate expenses
were $803,589 and $741,101 during the three months ended September 30,
2007 and 2006, respectively, an increase of approximately $62,000.
Corporate expenses were $2,928,408 and $2,053,397 during the nine months ended
September 30, 2007 and 2006, respectively, an increase of approximately
$875,000.
The increase in corporate
expenses of approximately $62,000 during the three months ended September 30,
2007 over the comparable period in 2006 is primarily due to increased public
relations expense of approximately $60,000 and increased salary and benefit
expense of approximately $24,000, which were offset by a reduction of legal and
accounting fees of approximately $30,000 due primarily to timing of services
performed.
The increase in corporate
expenses of approximately $875,000 during the nine months ended September 30,
2007 over the comparable period in 2006 is primarily due to increased salary
and benefit expense of approximately $529,000 which included discretionary
performance bonuses approved by the board of directors in March 2007 of
approximately $385,000 (with no corresponding amount in the same period in
2006) and fees for investor relations and financial consulting services of
approximately $173,000. The bonus
approved and recorded in March 2007 consists of $210,000 that was paid in March
2007, and $175,000 to be paid on or after July 1, 2007 at such time as
management determines that we have sufficient financial resources for the
payment. The $175,000 is accrued as a liability at September 30, 2007.
Impairment loss
was approximately $400,000 for the three and nine months ended
September 30, 2007. The impairment loss
relates to the write-off of costs related to the termination of the management
contract with the Cheyenne and Arapaho Tribes of Oklahoma.
Interest Expense
was $187,410 and $307,699 for the three months ended September 30,
2007 and 2006, respectively, a decrease of approximately $120,000. Interest
expense was $640,233 and $892,222 for the nine months ended September 30, 2007
and 2006, respectively, a decrease of approximately $251,000. The
decrease is primarily due to lower interest from our $2.5 million term loan as
the loan was fully paid in April 2007.
21
Write off of acquisition and financing costs
of $476,723 and $603,373 during the three and
nine months ended September 30, 2007 relate to the write-off of costs
associated with the proposed acquisition of the Double Eagle and the write-off
of financing costs. See further
discussion below under Liquidity and Capital Resources.
Loss of unconsolidated subsidiary, net of tax benefit
represents our share of the losses of North
Metro, which were $96,096 and $43,667 during the three months ended September
30, 2007 and 2006, respectively, and $312,704 and $144,132 during the nine
months ended September 30, 2007 and 2006, respectively. The
increase in losses in 2007 compared to 2006 is primarily due to increased real
estate taxes in 2007 due to higher assessed land values following the purchase
of land by North Metro in late 2005.
Effective tax rate.
For the three and nine months ended September 30, 2007, we did not
record a tax benefit for the net loss as a result of our evaluation of deferred
tax assets and our ability to utilize the deferred tax assets in the
future. In the three and nine months ended September 30, 2006 we recorded
a tax provision of approximately $215,000 and $615,000. As of December
31, 2005, we evaluated all evidence and determined that a portion of the
deferred tax assets relating to net operating losses in previous years would be
utilized in 2006 based upon forecasted income for 2006. We evaluated the
valuation allowance against the deferred tax assets at September 30, 2007 and
concluded to continue to record a 100% valuation allowance because of the
termination of our management agreement with the Cheyenne and Arapaho Tribes,
effective August 17, 2007. As of September 30, 2007, our deferred tax
asset is zero.
Liquidity and Capital Resources:
We generated cash flow from
our Oklahoma management activities, which terminated in August 2007, and
continue to generate cash flow from our casino operations in Colorado. We
use the cash flows generated to pay off debt in accordance with our agreements,
fund reinvestment in existing properties for both refurbishment and replacement
of assets, and to pursue additional growth opportunities. To fund our
cash requirements we supplement the cash flows generated by our operations with
funds provided by financing activities.
On January 24, 2007 and
February 26, 2007, we entered into a Securities Purchase Agreement (SPA) with
certain institutional and other accredited investors, as defined in Rule 501 of
Regulation D promulgated under the Securities Act of 1933, as amended, under
which we sold in private placements an aggregate of 7.44 million shares of our
common stock with accompanying warrants to purchase an aggregate of 2.98 million
shares of our common stock, at a purchase price of $0.55 per share of common
stock. The warrants are exercisable for a period of five years, beginning
six months after the date of issuance, at an exercise price of $0.61 per
share. The number of shares issuable upon exercise of the warrants and
the exercise price of the warrants are adjustable in the event of stock splits,
combinations and reclassifications, but not in the event of the issuance by us
of additional securities, unless such issuance is pursuant to a rights offering
or pro rata distribution to all security holders except the investors.
The securities that were
issued in this private placement were not registered under the Securities Act
of 1933, as amended. However, under the terms of the Registration Rights
Agreements dated January 24, 2007 and February 26, 2007 between us and the
investors, we agreed to register the resale of the shares sold in the private
placement, including shares issuable upon exercise of the warrants. The
registration statement became effective on May 11, 2007. Under the
Securities Purchase Agreement, we and the investor parties have made other
covenants and representations and warranties regarding matters that are
customarily included in financings of this nature. If certain of our
obligations are not met, we have agreed to make pro-rata cash payments as
liquidated damages to each investor.
The private placement
resulted in net proceeds to us of approximately $3.94 million, after the
deduction of approximately $150,000 of direct offering expenses. The
placement agent agreed to accept the cash portion of the placement agent
commission in common stock and warrants on the same terms as the investors,
which resulted in the placement agent receiving approximately 517,000 shares of
common stock and warrants to purchase an aggregate of approximately 207,000
shares of common stock. In addition, the placement agent received a
warrant to purchase approximately 277,000 shares of common stock, which is
exercisable for a period of five years, beginning six months after the date of
issuance, at an exercise price of $1.00 per share.
The following officers and
directors participated in the private placement on the same terms as the other
investors: James B. Druck, Chief Executive Officer and Director; Thomas E. Fox,
President and Chief Operating Officer and entities in which Mr. Fox holds an
ownership interest; Jeffrey S. Halpern, Vice President of Government Affairs;
Gus A. Chafoulias, Director; and David H. Abramson, Director. Other than
with respect to their participation in this offering, there are no material
relationships between us and any of the other investors in the private
placement.
On April 20, 2007, North
Metro entered into a Credit Agreement (the Credit Agreement) with Black
Diamond Commercial Finance, L.L.C. (Black Diamond) as agent and lender.
Under the terms of the Credit Agreement, North Metro will borrow $41.7 million
to construct, equip and open its harness racetrack and card club facility in
Columbus, Minnesota on the north side of the Minneapolis St. Paul
metropolitan area. As part of the loan agreement the members of North Metro
agreed to complete aggregate membership
22
contributions of $20.8
million before closing the loan. The total cost of the project is expected to
approximate $62 million. As of September 30, 2007, Southwest contributed
$8.9 million of the total amount of $21.2 million contributed by the
members. Certain amounts related to non-construction costs continue to be
funded by the members. These amounts are not considered to be material.
While the Credit Agreement
does not provide for recourse against us in the case of a default by North
Metro, we have pledged our membership interest in North Metro and North Metro
pledged its membership interest in North Metro Hotel, LLC as security for
repayment of the loan under the terms of a Pledge Agreement with Black Diamond
(the Pledge Agreement).
We also entered into a
Subordination Agreement with Black Diamond (the Subordination Agreement)
under which we agreed that repayment of a $1.65 million membership preferred
capital contribution to North Metro, which North Metro was to repay to us out
of the first available revenue from operations, will be subordinated to the
payments due under the loan agreements.
In addition, we entered into
a Sponsor Support Agreement (the Support Agreement) under which each member
of North Metro agreed to contribute additional capital to North Metro if proceeds
from the loan are insufficient to complete construction and open the
facility. We believe the loan financing secured by North Metro will be
sufficient to construct and open the facility.
As a result of the
termination of our management contract with the Cheyenne and Arapaho Tribes of
Oklahoma (see above discussion under the operating segment Casino Management)
we believe it is necessary to seek additional debt and/or equity financing to
fund our future operations including project development costs. We have undertaken such an effort and believe
we will be able to raise the financing on terms acceptable to us and in an
appropriate timeframe, but can provide no assurance that we will be able do so.
We continue to review
additional opportunities to acquire or invest in companies, properties and
other investments that meet our strategic and return on investment
criteria. If we complete a material acquisition or investment, our
operating results and financial condition could change significantly in future
periods. In addition, any new opportunity we undertake would in all
likelihood require additional equity or debt financing.
On December 18, 2006, we
entered into an Asset Purchase Agreement and a long-term lease with Pinnacle
Casinos and Resorts, LLC (Pinnacle). Under the Asset Purchase Agreement, we
agreed to acquire the operating assets and lease the real property of the
Double Eagle Hotel and Casino and Gold Creek Casino in Cripple Creek, Colorado
(collectively, the Double Eagle). On
April 13, 2007, we notified Pinnacle that we had elected to terminate the Asset
Purchase Agreement.
We
terminated the Asset Purchase Agreement in response to notice we received on
April 10, 2007 from Pinnacle that the separate Stock Purchase Agreement under
which Pinnacle was to acquire all of the outstanding capital stock of Colorado
Casino Resorts, Inc. (CCRI), the owner of the Double Eagle, had terminated in
accordance with its terms when Pinnacle did not make a required payment.
Because Pinnacle was unable to complete its proposed acquisition of the CCRI
stock in accordance with the Stock Purchase Agreement, as amended, Pinnacle was
also unable to perform its obligations under the Asset Purchase Agreement with
us. In connection with this acquisition
we incurred $126,650 of transaction costs specific to this acquisition.
We wrote-off this amount in the second quarter of 2007. We had substantial doubt that we would be
able to reach terms on the Double Eagle with the sellers in late June 2007 and
this was confirmed when the negotiations ceased with the sellers of the Double
Eagle in early July 2007. Thus the
$126,650 transaction costs were written-off in the second quarter of 2007. This
is included as a separate line item under Other Income (Expense) in the Consolidated
Statement of Operations for the nine months ended September 30, 2007.
We
also incurred financing costs with a lender in the amount of approximately
$477,000. These financing costs were
initially associated with the financing of the original arrangements to acquire
the Double Eagle. Even though the proposed Double Eagle acquisition ceased
effective June 30, 2007, the financing arrangement and negotiations
continued. In July 2007 we received a
revised term sheet from the lender that provided for a non-specific property
acquisition line of credit and also included a working capital amount available
immediately, as defined in the agreement.
As part of the terms of this new term sheet we wired an additional expense
deposit to the lender on August 6, 2007.
We scheduled to close on this financing by the end of August 2007.
As a result of the
termination of the management agreement with the Cheyenne and Arapaho Tribes of
Oklahoma, effective August 17, 2007, the financing contemplated with this
lender did not occur and the arrangement was terminated. Thus we wrote-off amounts related to the
financing of $476,723 which are included as a separate line item within Other
Income (Expense) in the Consolidated Statement of Operations for the three
months ended September 30, 2007.
Net cash provided by
operating activities during the nine months ended September 30, 2007 was
$1,617,329 compared to $3,478,163 during the same period in the prior year, a
decrease of approximately $1,861,000. The decrease between periods is
primarily due to a
23
decrease in revenues of
approximately $1.4 million and an increase in operating expenses of
approximately $1.2 million, offset by timing of working capital items.
Net cash used in investing
activities for the nine months ended September 30, 2007 and 2006 was $2,783,712
and $843,036, respectively, an increase of approximately $1,941,000. The
increase in use of cash between the periods was due primarily to an increase in
our investment in North Metro of approximately $2,027,000 in connection with
the closing of the construction financing secured by North Metro in April
2007. We also had additional costs of
approximately $439,000 associated with obtaining our two-year extension of the
Cheyenne and Arapaho management contract, which was subsequently terminated on
August 17, 2007. These costs were offset by proceeds from the sale of
Uncle Sams casino of approximately $490,000.
Net cash provided by
financing activities for the nine months ended September 30, 2007 was
$1,181,637 compared to net cash used in financing activities for the nine
months ended September 30, 2006 of $2,074,891. During the nine months
ended September 30, 2007 we had the following financing activities:
We completed an equity financing resulting in
proceeds of approximately $4.0 million, see further discussion above.
We made payments of approximately $1.5
million on long-term borrowings compared to approximately $2.0 million during
the nine months ended September 30, 2006.
We paid costs of approximately $322,000
related to the redemption of 357,000 shares of common stock in accordance with
Article XI of our Articles of Incorporation effective January 22, 2007.
The shares were redeemed at a price of $0.90 per share based upon the closing
stock price of our common stock as reported on January 22, 2007. We
recorded the redemption as a reduction to stockholders equity for the buy back
of shares. The shares of common stock are included in Treasury Stock in
the Consolidated Statements of Changes in Stockholders Equity as of September
30, 2007.
We made payments of approximately $559,000
related to financing and acquisition costs, see discussion above.
We made payments on our line of credit of
$446,292 during the nine months ended September 30, 2007 compared to $0 in the
first nine months of 2006.
We made payments of $110,000 during the nine
months ended September 30, 2006 to three officers related to unpaid
compensation from prior periods. No such amount was paid during the same
period in 2007.
Line of Credit.
On October 20, 2005, we established a $450,000 line of credit
with Crown Bank of Minneapolis, Minnesota. The line of credit is due
April 30, 2008 with a variable interest rate at one percent above prime
but not less than 7.5% (8.75% at September 30, 2007). As of September 30,
2007, the outstanding balance was $0. Our three principal officers have
guaranteed up to $450,000 of this line of credit.
Term Note
.
On October 20, 2005, the Company entered into a term loan to borrow $2.5
million. The loan terminated on April 30, 2007 and had a variable interest rate
of one percent above prime but not less than 7.5%. Twelve shareholders of the
Company, including our three principal officers and a member of our board of
directors, guaranteed the loan. As of April 30, 2007 the loan was paid in full.
Equipment Loan.
On December 23, 2005, the Company negotiated a loan of $460,324
to pay off outstanding payables in connection with the installation of a player
tracking system at our three casinos in Cripple Creek, Colorado. The loan is
for a term of 48 months with interest equal to the prime rate, which is 7.75%
as of September 30, 2007. The outstanding balance as of September
30, 2007 was approximately $268,000.
Seasonality:
We believe that the
operations of all casinos managed or owned by us will be affected by seasonal
factors, including holidays, weather and travel conditions.
Effects of Current Economic and Political Conditions:
Competitive
Pressures:
Many casino operators are
either entering or expanding in our markets thereby increasing competition. As
companies have completed new or expanded projects, supply has sometimes grown
at a faster pace than demand, and competition has increased significantly.
Furthermore, several operators, including Southwest, have plans for additional
developments or expansions in our markets.
24
Although, the short-term
effect on Southwest of these competitive developments generally has been
negative, we are not able to determine the long-term impact, whether favorable
or unfavorable, that development and expansion trends and events will have on
current or future markets. We believe that the geographic diversity of our
operations, our service training, our rewards and customer loyalty programs,
and our continuing efforts to improve our facilities will insure continued
customer loyalty and will enable us to face the competitive challenges present
within our industry.
The Governor of Colorado
recently signed a bill that removes the exemption for casinos from the states
2006 smoking ban, effective January 1, 2008. We expect the extension
of the ban to Colorado casinos will have some negative impact on business volumes
at our Cripple Creek property, the magnitude of which we cannot predict at this
time.
Political
Uncertainties:
The casino entertainment
industry is subject to political and regulatory uncertainty. From time to
time, individual jurisdictions and Native American Tribes we do business with
have considered actions, legislation or referendums that could adversely impact
our operations. The likelihood or outcome of similar actions, legislation
and referendums in the future is difficult to predict.
The casino entertainment
industry represents a significant source of tax revenues to the various
jurisdictions in which casinos operate. From time to time, various state
and federal legislators and officials have proposed changes in tax laws, or in
the administration of tax laws, that would affect the industry. It is not
possible to determine with certainty the scope or likelihood of possible future
changes in tax laws or in the administration of tax laws. If adopted,
changes in tax law could have a material adverse effect on our financial
results.
Significant Accounting Policies and Estimates:
We prepare our Consolidated
Financial Statements in conformity with accounting principles generally
accepted in the United States. Certain of our accounting policies,
including, but not limited to, the estimated lives assigned to our assets, the
determination of bad debt, asset impairment, valuation of stock option or
warrant awards, and income taxes, require that we apply significant judgment in
defining the appropriate assumptions for calculating financial estimates.
By their nature, these
judgments are subject to an inherent degree of uncertainty. Our judgments
are based on our historical experience, terms of existing contracts, our
observance of trends in the industry, information provided by our customers and
information available from other outside sources, as appropriate. We
cannot assure you that our actual results will not differ from our
estimates. For a discussion of our significant accounting policies and
estimates, please refer to Managements Discussion and Analysis or Plan of
Operation and Notes to Consolidated Financial Statements presented in the 2006
Financial Statements included in our Annual Report on Form 10-KSB.
New Accounting Pronouncement
:
We adopted Statement of
Financial Accounting Standards Interpretation No. 48
Accounting for Uncertainty in Income Taxes
(Interpretation No. 48) effective January 1, 2007, which did not have a
significant impact to our financial statements.
In September 2006, the FASB
issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements which is effective for fiscal years beginning after
November 15, 2007 and for interim periods within those years. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. We are currently
evaluating the potential impact of this statement.
In February 2007, the FASB
released SFAS No. 159,
The Fair Value
Option for Financial Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement No. 115
. This Statement permits entities to
choose to measure many financial instruments and certain other items at fair
value. This Statement is effective as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FASB Statement No.
157, Fair Value Measurements. We are evaluating the impact of this
statement.
Forward-Looking Statements:
This Quarterly Report on
Form 10-QSB contains forward-looking statements. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. These statements often contain words such as may, will, project,
might, expect, believe, anticipate, intend, could, would, estimate,
continue or pursue, or the negative or other variations of those words or
comparable terminology. In particular, they include statements relating to,
among other things, future actions, new
25
projects, strategies, future
performance, the outcome of contingencies such as legal proceedings and future
financial results. We have based these forward-looking statements on our
current expectations and projections about future events.
We caution the reader that
forward-looking statements involve risks and uncertainties that cannot be
predicted or quantified and, consequently, actual results may differ materially
from those expressed or implied in the forward- looking statements. These risks
and uncertainties include, but are not limited to, the following factors as
well as other factors described from time to time in our reports filed with the
Securities and Exchange Commission:
the approval, continuation or extension of
management contracts with Tribal partners;
our ability to build and maintain healthy
personal and professional relationships with tribes and their officials;
the potential change of policies and
personnel of tribal governments, which could adversely affect our
relationships;
the effects of competition, including
location of competitors and operating and market competition;
access to and the cost of available and
feasible financing;
our ability to recoup costs of capital
investments through higher revenues;
success of our customer tracking and customer
loyalty programs;
abnormal gaming holds;
litigation outcomes and judicial actions,
including gaming legislation, referenda and taxation;
the effect of economic, credit and capital
market conditions on the economy in general, and on gaming companies in
particular;
construction factors, including delays,
zoning issues, environmental restrictions, soil and water conditions, weather
and other hazards, site access matters and building permit issues;
the effects of environmental and structural
building conditions relating to the Companys properties;
changes in laws (including increased tax
rates), regulations or accounting standards, third-party relationships and
approvals, and decisions of courts, regulators and governmental bodies; and
Any forward-looking statements
speak only as of the date made. We undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Risk Factors
In reviewing this quarterly
report on Form 10-QSB, you should carefully consider the matters concerning
Southwest Casino Corporation described under the heading Risk Factors in the
annual report on Form 10-KSB filed by the Corporation on March 21, 2007, which
are incorporated in this document by reference.
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Item
3. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
The companys principal
executive officer (Chief Executive Officer) and principal financial officer
(President and Chief Operating Officer) have evaluated the companys disclosure
controls and procedures as of September 30, 2007, and have concluded that these
controls and procedures are effective to ensure that information required to be
disclosed by the company in the reports that it files or submits under the
Securities Exchange Act of 1934 (as defined in Exchange Act Rules 13a15(e) and
15d15(e)) is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms.
These disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
the company in the reports that it files or submits is accumulated and
communicated to management, including the principal executive officer and the
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
(b)
Changes in Internal Controls over Financial Reporting
During the nine months ended
September 30, 2007, no change occurred in the companys internal control over
financial reporting that materially affected, or is likely to materially
affect, the companys internal control over financial reporting.
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