UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
X Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from January 1, 1998 to June 30, 1998.
Commission File Number 0-21071
NEVSTAR GAMING & ENTERTAINMENT CORPORATION
(Name of Small Business Issuer in its Charter)
Nevada 88-0309578
(State or Other Jurisdiction (IRS Employer Identification
No.) of Incorporation or Organization)
313 Pilot Road, Suite B, Las Vegas Nevada 89119 (702) 269-1325
(Address of Principal Executive Offices) (Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $0.01 par value
Redeemable Common Stock Purchase Warrants
(Titles of Classes)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Rule 405 of
Regulation S-B contained in this form, and no disclosure will be contained , to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
The issuer's revenues for the six-month transition period ended June 30, 1998
were: $0.
There were 3,899,672 outstanding shares of common stock, par value $0.01 per
share, as of September 30, 1998. The aggregate market value of the voting
Common Stock of the registrant held by non-affiliates of the registrant, as of
September 30, 1998, was $3,406,000 based on the last sales price on such date.
DOCUMENTS INCORPORATED BY REFERENCE: The responses to Part III of this Form 10-
KSB are incorporated by reference to the registrant's proxy statement for its
1998 Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: Yes____ No X <PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
NevStar Gaming & Entertainment Corporation is a company formed to acquire,
develop, construct, own and manage hotel/casino projects. The Company's
strategy is to concentrate its efforts on "niche" markets such as "local" or
"neighborhood" casinos. The Company obtained its license and related approvals
from the Nevada Gaming Commission to conduct gaming at its initial hotel/casino,
Mesquite Star Hotel and Casino (the "Mesquite Star") in Mesquite, Nevada,
pursuant to an Order of Registration, dated June 23, 1998. On July 1, 1998, the
Mesquite Star, opened for business and the Company began receiving revenues from
operations. The Mesquite Star is located on an approximately 25-acre property
in Mesquite, Nevada (the "Mesquite Property"). See "THE MESQUITE PROPERTY."
The Company was incorporated under the laws of the State of Nevada on December
2, 1993 under the name Mesquite Gaming Corp. On October 3, 1995, the Company
changed its name to NevStar Gaming Corporation, and on September 18, 1997,
changed its name to NevStar Gaming & Entertainment Corporation. From its
incorporation through June 30, 1998, the Company had no revenues from
operations.
INITIAL PUBLIC OFFERING. On September 24, 1997, the Company executed its
initial public offering (the "IPO") of 1,725,000 units (the "Units") raising net
proceeds of $7,738,648. Each Unit was sold for $5.50 and consisted of one share
of the Company's Common Stock and two Redeemable Common Stock Purchase Warrants
(each a "Warrant" and collectively, the "Warrants"). Initially, each Warrant
entitled its registered holder to purchase, at any time, through September 17,
2002, one share of Common Stock at a price of $5.50 per share (the "Initial
Exercise Price"). The Warrants are subject to redemption by the Company at $.05
per Warrant on 30 days prior written notice to the Warrantholders, if the
closing bid price of the Common Stock as reported in the National Association of
Security Dealers, Inc. Automated Quotation System ("NASDAQ") Small Cap Market
averages in excess of $11.00 (the "Initial Notice Price") for a period of 20
consecutive trading days ending within 15 days prior to the notice of
redemption. Both the Initial Exercise Price and the Initial Notice Price are
subject to adjustment under certain circumstances. On July 1, 1998, due to
issuances of additional Common Stock and warrants, the Warrants were adjusted to
become the right to purchase 1.1 shares of Common Stock at a price of $5.06 per
share. The Common Stock and the Warrants are listed on the NASDAQ Small Cap
Market under the symbols NVST and NVSTW, respectively.
In connection with the IPO, the representative underwriter was issued a warrant
to purchase 76,278 units, each consisting of one share of Common Stock and four
Common Stock purchase warrants. The exercise price to purchase these units and
the exercise price for the warrants included in these units are both $8.03.
THE MESQUITE PROPERTY. Mesquite, Nevada is located on Interstate 15 on the
border of Nevada and Arizona, approximately 80 miles from Las Vegas and 37 miles
from St. George, Utah. The Mesquite Property is adjacent to the Interstate 15
and East Sandhill Road Interchange. The Company has attempted to distinguish
the Mesquite Star from other casinos in the Mesquite area by its emphasis on the
"old west" and by a casual, friendly atmosphere catering to middle income, value
oriented customers. The "old west" feel is evident from a customer's first
sight of the facade of the Mesquite Star, which resembles a main street in an
old west town. The Company has reinforced this western theme throughout the
customer's stay with the use of western memorabilia in its interior decor,
country/western music and the promotion of special events and activities such as
rodeos and bull riding.
The newly constructed Mesquite Star consists of 210 rooms and suites, with a
swimming pool, and a public area of approximately 34,300 square feet, featuring
approximately 12,000 square feet of casino space initially containing 452 slot
machines, 10 table games and Keno, a specialty restaurant, a 160-seat coffee
shop, a gift shop, a hotel registration lobby and other amenities.
Phase I of the Mesquite Star Project utilizes about 11 acres of the
approximately 25 acre site, including ground level parking for 624 cars. The
remaining 12.5 acres (after giving effect to the parcel sales discussed below)
is available for future development. Phase II development may include an
additional 400 rooms, 55,000 square feet of additional public and gaming area,
and a recreational vehicle park. Any future development is dependent upon the
Company obtaining all necessary permits and financing therefor, as well as the
suitability of the market for such development.
On September 11, 1998, the Company closed escrow to sell approximately 27,100
sq. ft. of the Mesquite Property to an unrelated third party for development as
a drugstore site. The gross purchase price for the parcel was $450,000. As
part of the transaction, NevStar received approximately 5,199 square feet of
adjacent property which is being acquired by the drugstore site developer but
which is not needed for the drugstore project.
The Company is currently in escrow to sell approximately 41,000 sq. ft. of the
Mesquite Property adjacent to the above-referenced drug store site to an
unrelated third-party for possible development as a fast food site. The gross
purchase price for the parcel is $444,888, including the initial refundable
deposit of $100,000 which was received by the Company on September 30, 1998.
The escrow is scheduled to close on or before October 31, 1998. The sale is
conditioned upon a number of items, the most significant of which are the
completion of a parcel map making the parcel a separate legal lot under the
subdivision laws of the State of Nevada and a partial release of the parcel from
the lien of all existing deeds of trust.
MESQUITE MARKET. Mesquite is an incorporated city within Clark County, Nevada
and is located on Interstate 15 near the banks of the Virgin River and the
Arizona border, 80 miles north of Las Vegas and 37 miles south of St. George,
Utah. Mesquite encompasses approximately 11 square miles and has traditionally
been an agricultural community with farming, ranching and dairying as the base
of its economy. In recent years, travel, tourism, recreation and retirement
have significantly grown in economic importance to this community.
The major streets within Mesquite are Mesquite Boulevard and Sandhill Road,
which constitutes a 4-lane highway running from the west end of the City until
it turns north at the east end of Mesquite, where the Mesquite Property is
located. At the Mesquite Property, Sandhill Road is presently a two-lane
highway. There are two interchanges with Interstate 15 in Mesquite, one on the
west end of Sandhill Road, and the other on the east end of Mesquite Boulevard
directly adjacent to the Mesquite Property.
The Company believes Mesquite is becoming a full-service destination resort area
recognized as an ideal year-round location for visitors and retirees.
Championship golf courses, hunting, fishing and gaming offer Mesquite area
residents and tourists a variety of recreational activities. Other features
include a mild climate, a low tax structure and a favorable cost of living. In
addition, Mesquite is a short driving distance from other major attractions,
including boating and fishing located at Lake Mead National Park and Quail Creek
Reservoir, three presently existing golf courses located in Mesquite, and seven
additional golf courses located in St. George, Utah approximately 37 miles away,
ski resorts located approximately 110 miles away, and various national and state
parks located 40 miles away in the case of Snow Canyon State Park, and
approximately 180 miles from Grand Canyon National Park. The climate in
Mesquite is excellent for recreation. The sun shines approximately 85% of the
time and the average daily maximum temperature is 77 degrees, and the average
daily minimum temperature is 55 degrees. Average annual rainfall is
approximately 4.34 inches. Winter daytime temperatures are pleasant with an
average high of 60 degrees. The temperature on an average summer day often
rises past 100 degrees.
In 1997, approximately 9,300 people lived in the City of Mesquite. The average
annual population growth rate was 30% for the 1992-1996 period. Mesquite's
population is projected to reach approximately 14,000 by the year 2000.
Washington County, where St. George, Utah is located, which is one area where
the Company intends to focus its marketing efforts, has grown from a population
of approximately 22,000 in 1980 to approximately 63,400 in 1994 and continues to
enjoy rapid growth. Clark County, where Las Vegas is located, and which the
Company also expects to be a focus of its marketing efforts, has grown from
approximately 460,000 in 1980 to approximately 1,200,000 in 1997 and also
continues to enjoy rapid growth. Also, since the Mesquite Star is strategically
located along Interstate 15, the Company intends to focus marketing efforts
towards the estimated 3,790,000 motor vehicles that will annually pass by the
facility on Interstate 15.
The border town of Mesquite has similarities to other border towns in Nevada,
including Stateline, which is located on Interstate 15 in southwestern Nevada
and Wendover, which is located on Interstate 80 in northeastern Nevada. Like
Mesquite, both Stateline and Wendover started with one casino/motel, rapidly
developed additional properties, and have experienced high occupancy and
increased gaming revenues.
The City of Mesquite is also serviced by Greyhound Bus Lines and a local
airport, two miles north of downtown, which has a 5,100 foot runway. The
airport is a private plane airport, which can bring potential customers through
private air traffic. At present, air service to Mesquite is limited primarily
to private planes and to small charter service. The airport is owned and
operated by the City of Mesquite. There are no plans for major expansions to
this airport in the near future. The City of Mesquite has announced that it
will construct a recreation facility on property contiguous to the Mesquite
Property. The Las Vegas Convention and Visitors Authority Board has voted to
award the City of Mesquite a $2.5 million grant towards the funding of this
recreational facility. The Mesquite recreational facility is currently in the
planning stage with the City of Mesquite.
BUSINESS AND MARKETING STRATEGY. The Company focuses its marketing efforts for
the Mesquite Star in the following markets:
Interstate 15 Travelers
St. George, Utah Area
Las Vegas and Clark County Area
Mesquite Resident Market
The primary focus of the Company's marketing efforts for the Mesquite Star will
be Interstate 15 travelers. At present, Mesquite derives most of its market
from the highway travelers and residents of nearby local communities. The
driving time from Las Vegas to Mesquite is approximately one hour and 15
minutes, and the driving time from St. George, Utah to Mesquite is approximately
one-half hour.
The Company has a membership agreement with Best Western International, Inc.
("Best Western"), for brand and reservations affiliation for the Mesquite Star.
The agreement is effective through December 31, 1999 and is renewable
annually. Best Western's worldwide reservation system and frequent travel
program, Gold Crown International, serve 600,000 members in North America.
The Best Western nationwide reservations system, along with the display of
the familiar Best Western logo to the motoring public as they travel along
Interstate 15, is expected to increase the competitive edge of the Mesquite
Star in its market
niche.
The Company has a $620,000 capital lease contract, expiring February 18, 2003
with Mikohn Gaming Corporation with respect to its 10-story high exterior sign
at the Mesquite Star. The sign provides travelers with dynamic color video
graphics and messages from its highly visible location positioned adjacent to
Interstate 15 and the Mesquite East Interchange. The sign carries the Mesquite
Star's western theme, lettering and logo. The sign is expected to attract the
attention of travelers in and near Mesquite, Nevada, thereby increasing the
visibility and business potential of the Mesquite Star.
The Mesquite Star is one of the first casinos visible to southbound traffic on
Interstate 15 from Utah and Arizona, but is one of the last to be seen by
northbound traffic. The Nevada Welcome Center is located across Mesquite
Boulevard from the Mesquite Property. This is the first welcome center that
southbound travelers on Interstate 15 encounter in this area. It attracts
travelers off the highway, which could be an advantage for the Mesquite
Property. The extent to which traffic will be able to easily cross Sandhill
Road to the Mesquite Property is yet to be determined. The ready flow of
traffic from the Welcome Center and the other land uses adjacent to it
(including a Budget Inn) would be beneficial to the Mesquite Property.
Otherwise, most of this traffic is likely to turn right onto Sandhill Road and
proceed under the Interstate 15 bridge to the Virgin River Hotel/Casino and
Bingo, and Rancho Mesquite Hotel and Casino to the north.
A new Smith's grocery store is located to the southeast of the Mesquite Property
on Sandhill Road. This store, at this location, is anticipated to increase
residential traffic in the proximate area, which could be an advantage for the
Mesquite Property. It is important to have access to the Mesquite Property from
several locations to enhance accessibility by traffic in both directions on
Sandhill Road. There is an existing Denny's restaurant, Arby's restaurant and
Texaco gas station within one block of the Mesquite Star, with a Kentucky Fried
Chicken restaurant planned in the same area.
The Company has positioned itself between Si Redd's Oasis Resort Hotel/Casino
and the Virgin River Hotel/Casino and Bingo, on the one hand, which are low-rise
properties with detached rooms, and Casa Blanca Resort Casino Spa, on the other
hand, which is a high-rise hotel resort. The Company believes it will attract
customers who will enjoy the Company's hotel and casino as an alternative to the
motel environment and the increased cost of the resort alternative. The Company
believes that it is competitive with and similar in size and scope to the
recently opened Rancho Mesquite Hotel and Casino, except that Rancho's casino is
detached from the related lodgings, while the Mesquite Star's casino is attached
to its hotel. The Mesquite Star's room rates are competitive with the room
rates currently charged by all the other hotel/casino properties in Mesquite.
Washington County, Utah, which contains the City of St. George, is a rapidly
growing retirement and resort community. The St. George, Utah area has been
recognized as a fast growing and desirable retirement area in the southwestern
United States. The Company believes that a significant segment of the current
customers of Si Redd's Oasis Resort Hotel/Casino, Virgin River Hotel/Casino and
Bingo, Casa Blanca Resort Casino Spa, and the Rancho Mesquite Hotel and Casino
(collectively the "Competing Mesquite Casinos") currently come from the Utah
markets. To the Company's knowledge, the State of Utah has no present or
proposed gaming activities.
Another significant segment of the Competing Mesquite Casinos' customers
currently come from the Nevada market, including the Las Vegas area. The
Company believes that Mesquite is a recognized weekend retreat for people in Las
Vegas because of its recreational attractions and quiet resort-like atmosphere.
The weekend rates and occupancy for the Competing Mesquite Casinos are higher
than weekday rates. The Company intends to also focus on this market and to
entice customers from Las Vegas during weekdays with special promotional
packages.
The Company also anticipates attracting local customers comprised of Mesquite
residents and hotel/casino employees. The top three employers in Mesquite are
Casa Blanca Resort Casino Spa, Si Redd's Oasis Resort Hotel/Casino, and Virgin
River Hotel/Casino and Bingo, which collectively employ approximately 2,860
people.
The Company promotes special events, such as rodeos and bull riding as well as
the existing attractions and amenities located in the Mesquite area, including
the championship golf courses, which are open to the public, as well as a local
horseback riding ranch, gun club and a petting zoo.
The Company believes that the early 1998 opening of the Rancho Mesquite Hotel
and Casino created critical mass in the Mesquite area, which will enable
Mesquite to become more recognized and attractive as a destination resort area,
and attract more customers to Mesquite. See "Competition."
Representative elements of the Company's strategy as currently identified,
include, but are not limited to, the following key principles:
Strategic Location. Management of the Company believes that its location,
convenient access and ample parking are critical factors in attracting
interstate traffic, local patronage and repeat visitors. The Mesquite Star is
strategically located as the moderately priced hotel/casino on Interstate 15 and
the Mesquite Eastern Interchange, and management believes that the location
provides the Company with a competitive advantage over other Mesquite
hotel/casinos. Travelers are targeted through signage along Interstate 15. The
Company also promotes the City of Mesquite and the Mesquite Star as a getaway
retreat for people in Las Vegas because of its recreational attraction and quiet
resort-like atmosphere.
Differentiating its Product from Competition. Management focuses the Company's
marketing efforts of the Mesquite Star towards attempting to differentiate its
advantages apart from other hotel/casinos in Mesquite, with a particular
emphasis on a new moderately priced hotel, providing quality services, the "old
west" theme, and its related special events and promotions.
Focus on Repeat Customers. Management believes generating customer satisfaction
and loyalty is a critical component of the Company's business strategy. The
Company intends to attract customers from the areas of St. George, Utah and Las
Vegas, Nevada, as well as Mesquite residents, through promotional programs,
focused marketing efforts and convenient location. Although perceived value
will attract a customer to the Mesquite Star initially, actual value will
generate customer satisfaction and loyalty. Management believes that actual
value will become apparent during the customer's visit through an enjoyable and
high quality entertainment experience.
Affordable Quality. Management is committed to providing a quality
entertainment experience for its customers at a moderate price. Management
believes that the value offered by the Mesquite Star's hotel, restaurants and
buffet is a major factor in attracting gaming customers. The Company offers
generous portions of high quality food and specialty menu items at reasonable
prices. In addition, the Company provides a high level of value to its hotel
guests by offering moderately priced rooms which are well-appointed relative to
comparably priced hotels in Mesquite. Management believes that providing
affordable quality to customers contributes significantly to casino patronage.
Emphasis on Slot Play. An integral part of the Company's business strategy is
an emphasis on slot machine play in a friendly and convenient atmosphere. In
addition, the Company has installed wide area linked progressive games, which
offer players significantly higher jackpots. The Company also offers casino
gaming tournaments to attract and retain frequent gaming customers.
Specialty Promotions. The Company plans to engage in specialty promotions and
marketing activities consistent with its old west theme, including potentially
sponsoring rodeo and bullriding events in Mesquite, Nevada, centered at the
Mesquite Star.
COMPETITION IN GENERAL. Gaming is an international industry that has continued
to expand in the United States, with the focal point in Las Vegas, Nevada.
Gaming activities include traditional full-service casinos, state or national
Native American Indian sponsored lotteries, bingo games, riverboat gaming,
small-stakes casino gaming, international gaming, gaming on cruise ships in
international waters, and Native American Indian gaming.
Other forms of gaming conducted in certain areas of the United States include
parimutuel betting on horse racing, dog racing and jai-alai; sports bookmaking;
and card rooms. The gaming industry, including the development, operation and
management of gaming sites and casinos, is highly competitive. The Company's
gaming-related activities, including casino site development, operation and
management will compete with other forms of gaming in Mesquite, Nevada, as well
as in Las Vegas, throughout the States of Nevada and California, and throughout
the United States. Major expansions or enhancements of existing properties or
the construction of new properties by competitors could have a material adverse
effect on the Company's business. In addition, on November 3, 1998, voters in
California will vote on a proposal to allow Native American Indian Gaming in
California. The Company believes that, if voters approve the ballot initiative,
Native American Indian Gaming will be a major competitor for the Las Vegas
Market. The gaming industry is currently undergoing significant changes in
operations, amenities and technological advances, and it is impossible to
accurately predict future trends or changes in the industry.
The gaming industry in Mesquite also competes with other forms of gaming,
including low-stakes bingo games operated by non-profit organizations and pull-
tab games; sports betting; riverboat gaming; parimutuel betting on horse racing,
dog racing and jai-alai; state sponsored lotteries; and international gaming on
cruise ships in international waters. One consequence of the growth in the
gaming industry has been the increased pressure on state legislatures to allow
competitive gaming activity in one form or another. Several states have
approved or are considering approval of land-based casinos, riverboat gaming or
dockside casinos. Increased support is also present in a number of states for
approval of video slot machines for bars, restaurants and resorts. The Company
believes that the legalization of unlimited land-based casino gaming in or near
any major metropolitan area, such as Chicago or Los Angeles, could have a
material adverse effect on its hotel-casino business. The development of
casinos, lotteries and other forms of gaming in other states, particularly in
areas close to Nevada, such as California, could adversely affect the Company's
operations.
In addition, non-gaming entertainment competes with the gaming industry for the
public's disposable income. These other forms of entertainment affect the
demand for gaming in Mesquite and the opportunities the Company has to develop
other hotel/casinos. As a result of such competition, the business and
financial condition of the Mesquite Star and other projects may be adversely
affected.
COMPETITION IN MESQUITE, NEVADA. Currently, there are four other hotel/casinos
in Mesquite, including Si Redd's Oasis Resort Hotel/Casino, Virgin River
Hotel/Casino and Bingo, Casa Blanca Resort Casino Spa, and the Rancho Mesquite
Hotel and Casino. In addition to the four existing major casino hotels, there
is one small casino/motel and four small motels located in the Mesquite area.
Additional competitors may enter this market and compete with the Company for
customers and market share if the City of Mesquite changes its zoning and allows
additional properties to be used for hotel/casino operations.
Si Redd's Oasis Resort Hotel/Casino has grown from 28 rooms in 1981 to 1028
rooms. Si Redd's Oasis Resort Hotel/Casino contains eight hotel buildings, six
swimming pools, three spas, two 18-hole championship golf courses, trap, skeet,
and sporting clays, the Arvada Ranch, rodeo area, tennis courts, health club and
spa, three whirlpool spas, four restaurants, two casino bars, a video arcade,
miniature golf, gift shop, an R.V. Park, 10,276 square feet of meeting
facilities, and a 24-hour, full-service, 40,000 square foot casino featuring
over 700 slot and poker machines, two crap tables, two roulette wheels, 22
blackjack tables, four poker tables, and other betting games.
Virgin River Hotel/Casino and Bingo is located directly across Interstate 15
from the proposed Mesquite Star. Virgin River Hotel/Casino and Bingo was built
in 1991 with 152 rooms and has subsequently expanded to 723 rooms. Virgin River
Hotel/Casino and Bingo features two outdoor pools and three spas, live
entertainment, dancing, a restaurant, two movie theaters, an R.V. Park, 3,300
square feet of convention/meeting facilities, and an approximately 27,900 square
foot casino with approximately 600 slot machines, more than 10 table games, a
500-seat bingo area and a race and sports book, a convenience store, a truck
stop and a gas station.
Casa Blanca Resort Casino Spa, which opened in July 1995 as Player's Island
Resort Casino and Spa, consists of a 40,000 square foot casino, 500 rooms, 18
suites with Jacuzzi tubs, four three-bedroom detached bungalows, an 18 hole
championship golf course under development, four restaurants, a 450-seat show
room, a full-service spa and mineral bath, tennis courts, a swimming pool, gift
and retail stores, arcades, 8,850 square feet of banquet and conference
facilities, a 50 unit full-service R.V. park and a parking lot with a capacity
for 1800 automobiles.
Rancho Mesquite Hotel and Casino consists of 215 hotel rooms, a 35,000 square
foot casino and two restaurants. Rancho Mesquite Hotel and Casino is part of
the Holiday Inn chain and will be direct competition for the Mesquite Star. The
Rancho Mesquite hotel opened in November 1996 and the casino opened in February
1997. Like the Mesquite Star, the Rancho Mesquite Hotel and Casino is located
near Mesquite's eastern interchange to Interstate 15.
The Competing Mesquite Casinos have larger facilities and more amenities than
the Mesquite Star. Therefore, they provide significant competition for the
Mesquite Star. Rancho Mesquite Hotel and Casino has facilities which are
comparable to those of the Mesquite Star, has the advantage of having commenced
operations at an earlier point in time and also provides significant competition
for the Mesquite Star.
The Las Vegas Convention & Visitors Authority ("LVCVA") recently completed an
analysis of lodging and meeting demand in Mesquite for the City of Mesquite. In
their report, the LVCVA estimated that occupancy for the local rooms supply
generally was in the 70 percent range during the week (Sunday through Thursday)
and in the 90 percent range on weekends and holiday periods. These ranges
equate to an annual occupancy average in the mid-70 percent range.
OTHER COMPETITION IN NEVADA. The Mesquite Star also faces increasing
competition from all other casinos and hotels in the greater Las Vegas area
including competitors located on the Las Vegas Strip, on the Boulder Highway, in
Henderson, and in downtown Las Vegas. The Las Vegas competitors generally have
substantially greater name recognition and financial marketing resources than
the Company. Competition includes a number of hotel-casinos targeted primarily
toward local residents, as well as numerous non-hotel gaming facilities targeted
toward local residents. As of December 31, 1997, there were approximately 44
major gaming properties located on or near the Las Vegas Strip, 15 located in
the downtown area, five located on the Boulder Highway and 15 located in other
areas in or near Las Vegas. In recent years, several new hotel-casinos have
opened and several major expansion projects have commenced or been completed.
Other expansions are in progress or are planned. For example, in 1997, New
York-New York Hotel & Casino opened with 2,033 rooms, Harrah's Las Vegas
completed an expansion of 986 rooms, and Caesars Palace completed an expansion
of 1,200 rooms. According to the LVCVA, the Las Vegas hotel-motel room
inventory was 105,304 as of December 31, 1997 and both construction of new
properties and expansion of existing hotel-casinos are expected to increase this
inventory to approximately 122,777 rooms by 1999. By the year 2000, nine new
hotel-casinos, of which four are currently under construction, and on expansion
project will have added over 19,000 rooms to Las Vegas. The Company also
competes with gaming establishments in Laughlin, Nevada, as well as other
stateline locations in Stateline and Wendover, Nevada. In addition, a new
proposed development for two to four casinos situated in a 275-acre river front
village scene has been proposed for the town of Glendale, Nevada, which is 54
miles northeast of Las Vegas on Interstate 15. This development, if completed,
along with any future casino developments in other cities or towns on Interstate
15, will compete with the Mesquite Star and, consequently, may adversely affect
the business of the Company.
NORTH LAS VEGAS PROPERTY. Pursuant to the Option Agreement ("North Las Vegas
Option Agreement") among the Company, Desert Mesa Land Partners, Ltd., a Nevada
limited partnership ("Desert Mesa"), and High Mesa Development, Inc., a Nevada
corporation ("High Mesa"), dated April 23, 1996, Desert Mesa has granted the
Company an option (the "Option") to purchase from Desert Mesa an indirect 20%
ownership interest in the North Las Vegas Property. Desert Mesa, High Mesa and
the Company have amended the Option Agreement to provide extensions of time in
which the Company may exercise the Option until December 31, 1998. The Company
would be entitled to acquire the 20% ownership interest in the North Las Vegas
Property indirectly through ownership of a membership interest in a newly formed
Nevada limited liability company (the "LLC"), which LLC would purchase direct
title to the North Las Vegas Property. Desert Mesa's general partner is a
Nevada corporation in which Dr. Richard Tam, a director of the Company, is an
officer and a 35% stockholder. Dr. Tam is also an officer and 52.7% stockholder
of High Mesa. See "EQUITY AND DEBT FINANCING - Kelley Loan," Item 9 "DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS," Item 11. "SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," and Item 12. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
The North Las Vegas Property is one portion of an approximately 118-acre parcel
of commercially zoned real property (with gaming overlay zoning) owned directly
or indirectly by Desert Mesa (the "Parcel"). Newly enacted legislation
affecting casino developments in Clark County, Nevada, which are not in the Las
Vegas Strip corridor (including the North Las Vegas Property), impose additional
zoning requirements on the property and require the developers of the property
to obtain local approvals for use of the property for gaming activities no later
than December 31, 1998. Desert Mesa intends that the LLC will develop and
construct an approximately 200 room hotel on the North Las Vegas Property, which
will include approximately 30,000 to 40,000 square feet of public area space,
containing a casino, restaurants and other amenities (the "Project"). A limited
partnership affiliated with Desert Mesa and High Mesa opened an approximately
500,000 square foot shopping center to be developed on 55 acres of the 118-acre
parcel.
The Company has an option to purchase a 20% membership interest in the LLC for a
formula based upon the total square footage ultimately included in the Property,
the result of which is currently estimated to be approximately $2,178,000 (the
"Option Purchase Price"). No appraisal of the North Las Vegas Property was
conducted in order to determine the Option Purchase Price; instead, the Option
Purchase Price was determined based on arms-length negotiation and comparison to
completed real estate purchases in the vicinity.
As consideration for the grant of the Option, in September 1997, the Company (i)
gave Desert Mesa a promissory note in the amount of $200,000 which shall be
convertible into $200,000 in cash on or before December 31, 1998, for planning,
engineering, promotional expenses and design work with respect to the Project
(the "Development Funds") pursuant to an agreed-upon budget; and (ii) agreed to
pay roughly 21.2% of all property taxes and assessments accruing with respect to
the Parcel after the date of the North Las Vegas Option Agreement through the
earlier of termination of the Option or closing of the Company's purchase of an
interest in the LLC. The Development Funds are non-refundable and will not be
applied to the Option Purchase Price, but are reimbursable from the LLC to the
Company in connection with the development and financing of the Project.
Preliminary development of the Project will require funds substantially in
excess of the Development Funds. The Company can elect, in its sole discretion,
to advance additional development funds pursuant to budgets approved by Desert
Mesa, in which case any additional advances would be reimbursed from the LLC to
the Company in connection with the development and financing of the Project.
In connection with the transfer of the North Las Vegas Property to the LLC,
Desert Mesa has agreed to pay a brokerage fee equal to 10% of the total
consideration paid to Desert Mesa to Sterling Realty and Scripps Resources
International, Inc. ("Scripps"). Scripps is controlled by James Shadlaus, who
is a consultant to the Company.
If the Company consummates the purchase of its interest in the LLC, Desert Mesa
will concurrently sell the North Las Vegas Property to the LLC, which would be
owned as follows: (i) 20% by the Company, (ii) 15% by Desert Mesa, (iii) 25% by
High Mesa, and (iv) 40% by future equity investors ("Equity Investors")
contributing equity to the LLC in the minimum amount of $18,000,000 in cash.
Such Equity Investors have not been located, and there can be no assurance that
such Equity Investors will be located at any time in the future. The Company
has a first right of refusal to acquire up to an additional 30% ownership
interest in the LLC on the same terms as the Equity Investors or any other
future equity investor. If either any investor group contributing equity to the
Company requires an ownership percentage in excess of 40% or the Company
requires additional capital in the future, all the then-existing members of the
LLC would be diluted on a pro-rata basis.
The Company and High Mesa would be co-managing members of the LLC ("Managing
Members"), with the remaining members having non-managing membership interests
in the LLC. As Managing Members, the Company and High Mesa would jointly manage
the overall activities of the LLC including, but not limited to, development and
construction of the Project.
If the Company exercises the Option, the Company has agreed to exert its best
efforts to arrange for $25,000,000 of capital for construction of the Project
from a reputable financing source ("Construction Financing") within 360 days of
the closing of the Company's purchase of its interest in the LLC. If the
Company exercises the Option, then the Company will be entitled to the following
rights: (i) with respect to the period before the Project is open to the public
("Opening"), the Company would have the right to co-develop and co-manage the
Project with High Mesa; and (ii) with respect to the period after the Opening,
the Company would have the right to be hired by the LLC as manager of the hotel,
restaurant, casino and other aspects of the Project pursuant to the terms of a
non-binding Letter of Intent attached to the Desert Mesa Option Agreement ("LLC
Letter of Intent") and a definitive Management Agreement mutually acceptable to
both Desert Mesa and the Company to be executed in the future. The Company will
receive no compensation for preopening co-development and co-management
services.
In consideration for the Company's management services, the Company would
receive the following compensation: (i) three percent of net sales (comprised of
gross revenues (including revenues from all non-gaming sources and net gaming
wins) less promotional allowances, sales, occupancy and use taxes, gaming taxes
assessed on revenues and license fees paid on gaming equipment); (ii) five
percent of earnings before interest, taxes, depreciation and amortization
("EBITDA") before provision for the EBITDA based management fee but after
deducting the three percent management fee ("Adjusted EBITDA"); and (iii)
incentive compensation, which would be a percentage of the Adjusted EBITDA in
excess of the projected budgeted amount, which the parties would negotiate in
connection with the preparation of a definitive Management Agreement.
Under the LLC Letter of Intent, the initial term of the Management Agreement
would commence on execution of the Management Agreement and continue for five
years thereafter, with automatic renewals for additional one-year terms (each a
"Renewal Term") unless either party gave notice six months prior to any
termination date. If the LLC gives notice of the termination of the Management
Agreement at the expiration of the initial term or any Renewal Term, the LLC
Letter of Intent provides that the Company would continue to receive a
management fee for the next five years payable annually in arrears based on the
total fees paid to the Company for the full fiscal year prior to termination
("Base Year") as follows:
Year 1 100% of fees for the Base Year
Year 2 80% of fees for the Base Year
Year 3 60% of fees for the Base Year
Year 4 40% of fees for the Base Year
Year 5 20% of fees for the Base Year
The LLC Letter of Intent provides that, notwithstanding the foregoing, no
continuing management fees would be payable if the ratio of Adjusted EBITDA to
all equity invested by the LLC in the Project is less than an average cumulative
simple interest return of 15% during the period from commencement of the first
Renewal Term through the date the LLC gives notice of termination. The LLC
Letter of Intent states that the Management Agreement may be terminated by the
LLC "for cause" (as defined in the LLC Letter of Intent), as a result of which
the Company would not be entitled to any management fees after such
termination.
The Company believes the rights granted to the Company under the North Las Vegas
Option Agreement may create an additional hotel/casino management opportunity.
Under the North Las Vegas Option Agreement, the Company's management rights with
respect to the Project vest upon the Company's purchase of an interest in the
LLC. Competition in the North Las Vegas market has increased significantly with
numerous parties proposing to operate hotels/casinos in North Las Vegas. The
Company's decision whether or not to exercise the Option and manage the Project
is subject to the Company's further due diligence investigation into all
business, financial and legal aspects of the North Las Vegas Property, the
Parcel, and the Project.
NEVADA REGULATION AND LICENSING. The ownership and operation of casino gaming
facilities in Nevada are subject to: (i) the Nevada Gaming Control Act and the
regulations promulgated thereunder (collectively, the "Nevada Act"); and (ii)
various local regulation. The Company's gaming operations are subject to the
licensing and regulatory control of the Nevada Gaming Commission (the "Nevada
Commission"), the Nevada State Gaming Control Board (the "Nevada Board"), and
the City of Mesquite, Nevada. The Nevada Commission, the Nevada Board and the
City of Mesquite, Nevada are collectively referred to as the "Nevada Gaming
Authorities."
Pursuant to an Order of Registration, dated June 23, 1998, the Company, its
directors, officers and principal stockholders obtained the license and related
approvals from the Nevada Commission to conduct gaming at the Mesquite Star.
The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) to provide a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.
The Company, as the operator of a casino, is required to be and has been
licensed by the Nevada Gaming Authorities. The gaming license requires the
periodic payment of fees and taxes, and is not transferable. The Company has
been registered with the Nevada Commission as a publicly traded corporation (a
"Registered Corporation") and is corporate gaming licensee. The Company is
required to periodically submit detailed financial and operating reports to the
Nevada Commission and furnish any other information which the Nevada Commission
may require. Registration with and licensure by the Nevada Commission are
privileges under Nevada law and may be denied for any cause deemed reasonable by
the Nevada Commission. Appeals of licensing decisions by the Nevada Commission
are not permitted under Nevada law.
The Nevada Gaming Authorities may investigate any individual who has a material
relationship to, or material involvement with, the Company in order to determine
whether such individual is suitable or should be licensed as a business
associate of a gaming licensee. Officers, directors and certain key employees
of the Company must file applications with the Nevada Gaming Authorities and may
be required to be licensed or found suitable by the Nevada Gaming Authorities.
The Nevada Gaming Authorities may deny an application for licensing for any
cause which they deem reasonable. A finding of suitability is comparable to
licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. Changes in licensed positions
must be reported to the Nevada Gaming Authorities and in addition to their
authority to deny an application for a finding of suitability or licensure, the
Nevada Gaming Authorities have jurisdiction to disapprove a change in a
corporate position.
If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company, the Company would have to sever all relationships
with such person. In addition, the Nevada Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or of questions pertaining to
licensing are not subject to judicial review in Nevada.
The Company is required to submit detailed financial and operating reports to
the Nevada Commission. Substantially all material loans, leases, sales of
securities and similar financing transactions by the Company are reported to, or
approved by, the Nevada Commission.
If it is determined that the Nevada Act was violated by the Company, its gaming
licenses and approvals could be limited, conditioned, suspended or revoked,
subject to compliance with certain statutory and regulatory procedures. In
addition, the Company and the persons involved could be subject to substantial
fines for each separate violation of the Nevada Act at the discretion of the
Nevada Commission. Further, a supervisor could be appointed by the Nevada
Commission to operate the Company's gaming properties and, under certain
circumstances, earnings generated during the supervisor's appointment (except
for the reasonable rental value of the Company's gaming properties) could be
forfeited to the State of Nevada. Limitation, conditioning or suspension of any
gaming license or the appointment of a supervisor could (and revocation of any
gaming license would) materially adversely affect the Company's gaming
operations.
Any beneficial holder of the Company's voting securities, regardless of the
number of shares owned, may be required to file an application, be investigated,
and have his suitability as a beneficial holder of the Company's voting
securities determined if the Nevada Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of investigation incurred by
the Nevada Gaming Authorities in conducting any such investigation.
The Nevada Act requires any person who acquires more than five percent of the
Company's voting securities to report the acquisition to the Nevada Commission.
The Nevada Act requires that beneficial owners of more than ten percent of the
Company's voting securities apply to the Nevada Commission for a finding of
suitability within 30 days after the Chairman of the Nevada Board mails the
written notice requiring such filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
ten percent, but not more than fifteen percent, of the Company's voting
securities may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall not be deemed to hold
voting securities for investment purposes unless the voting securities were
acquired and are held in the ordinary course of business of an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the board of directors of the Company,
any change in the Company's corporate charter, bylaws, management, policies or
operations of the Company, or any of its gaming affiliates, or any other action
which the Nevada Commission finds to be inconsistent with holding the Company's
voting securities for investment purposes only. Activities which are not deemed
to be inconsistent with holding voting securities for investment purposes only
include: (i) voting on all matters voted on by stockholders; (ii) making
financial and other inquiries of management of the type normally made by
securities analysts for informational purposes and not to cause a change in its
management, policies or operations; and (iii) such other activities as the
Nevada Commission may determine to be consistent with such investment intent.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.
Any person who fails or refuses to apply for a finding of suitability or a
license within 30 days after being ordered to do so by the Nevada Commission or
the Chairman of the Nevada Board may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the Common Stock of the Company
beyond such period of time as may be prescribed by the Nevada Commission may be
guilty of a criminal offense. The Company is subject to disciplinary action if,
after it receives notice that a person is unsuitable to be a stockholder or to
have any other relationship with the Company, the Company (i) pays that person
any dividend or interest upon voting securities of the Company, (ii) allows that
person to exercise, directly or indirectly, any voting right conferred through
securities held by that person, (iii) pays remuneration in any form to that
person for services rendered or otherwise, or (iv) fails to pursue all lawful
efforts to require such unsuitable person to relinquish his voting securities
for cash at fair market value. The Company's Restated Articles of
Incorporation, as amended, provide that if a stockholder who is found unsuitable
by the Nevada Commission fails to dispose of all stock owned by such stockholder
within 30 days, the Company has the option to redeem the shares held by such
stockholder at a price per share equal to the fair market value of such shares,
as defined in the Restated Articles of Incorporation, as amended.
The Nevada Commission may, in its discretion, require the holder of any debt
security of the Company to file applications, be investigated and be found
suitable to own the debt security. If the Nevada Commission determines that a
person is unsuitable to own such security, then pursuant to the Nevada Act, the
Company can be sanctioned, including the loss of its approvals, if without the
prior approval of the Nevada Commission, it: (i) pays to the unsuitable person
any dividend, interest, or any distribution whatsoever; (ii) recognizes any
voting right by such unsuitable person in connection with such securities; (iii)
pays the unsuitable person remuneration in any form; or (iv) makes any payment
to the unsuitable person by way of principal, redemption, conversion, exchange,
liquidation, or similar transaction.
The Company is required to maintain a current stock ledger in Nevada which may
be examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Nevada Commission has the
power to require the Company's stock certificates to bear a legend indicating
that the securities are subject to the Nevada Act.
The Company may not make a public offering of its securities without the prior
approval of the Nevada Commission, if the securities or proceeds therefrom are
intended to be used to construct, acquire, or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. Any such
approval, if granted, does not constitute a finding, recommendation, or approval
by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of
the prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.
Changes in control of the Company through merger, consolidation, stock or assets
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he obtains control, may not occur without the prior approval of
the Nevada Commission. Entities seeking to acquire control must satisfy the
Nevada Board and Nevada Commission in a variety of stringent standards prior to
assuming control. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction.
The Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees may be injurious to stable and productive
corporate gaming. The Nevada Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon
Nevada's gaming industry and to further Nevada's policy to: (i) assure the
financial stability of corporate gaming operators and their affiliates; (ii)
preserve the beneficial aspects of conducting business in the corporate form;
and (iii) promote a neutral environment for the orderly governance of corporate
affairs. Approvals are, in certain circumstances, required from the Nevada
Commission before the Company can make exceptional repurchases of voting
securities above the current market price thereof and before a corporate
acquisition opposed by management can be consummated. The Nevada Act also
requires prior approval of a plan of recapitalization proposed by the Company's
Board of Directors in response to a tender offer made directly to the Company's
stockholders for the purposes of acquiring control of the Company.
License fees and taxes, computed in various ways depending on the type of gaming
or activity involved, are payable to the State of Nevada and to the counties and
cities in which the Nevada licensee's respective operations are conducted.
Depending upon the particular fee or tax involved, these fees and taxes are
payable either monthly, quarterly or annually and are based upon either: (i) a
percentage of the gross revenues received; (ii) the number of gaming devices
operated; or (iii) the number of table games operated. A casino entertainment
tax is also paid by casino operations where entertainment is furnished in
connection with the selling of food or refreshments. Nevada licensees that hold
a license as an operator of a slot route, or a manufacturer's or distributor's
license, also pay certain fees and taxes to the State of Nevada.
Any person who is licensed, required to be licensed, registered, required to be
registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation of
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease in the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if it knowingly violates any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fails to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engages in activities that
are harmful to the State of Nevada or its ability to collect gaming taxes and
fees, or employs a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
OTHER REGULATIONS. The Company's businesses are subject to various federal,
state and local laws and regulations in addition to gaming laws. These laws and
regulations include, but are not limited to, restrictions and conditions
concerning alcoholic beverages, environmental matters, employees, currency
transactions, taxation, zoning and building codes, and marketing and
advertising. Such laws and regulations could change or could be interpreted
differently in the future, or new laws and regulations could be enacted.
Material changes, new laws or regulations, or material differences in
interpretations by courts or governmental authorities could adversely affect the
operating results of the Company.
CAPITAL NEEDS. The Company's immediate capital requirements include the amounts
needed to pay off the cost of completing, opening and operating the Mesquite
Star, as described below. The development, construction and operation of the
Mesquite Star was and is capital intensive.
Continued operation of the Company is dependent on its ability to (i) generate
positive operating revenues from the Mesquite Star or (ii) procure additional
financing in the form of equity and debt. To the extent that the funds
generated are insufficient to fund the Company's obligations, the Company could
be required to adopt one or more alternatives, such as obtaining additional
financing, to the extent permitted by the terms of its loan agreements, reducing
or delaying planned construction or capital expenditures, restructuring debt or
obtaining additional equity capital. There can be no assurance that any of
these alternatives could be obtained on satisfactory terms, and any resort to
alternative sources of funds could impair the Company's competitive position and
reduce its future financial viability. Any equity financing could result in
dilution to the Company's then-existing stockholders. Sources of debt financing
may result in higher interest expense. Any financing, if available, may be on
terms unfavorable to the Company. If adequate funds are not obtained, the
Company may be required to reduce or curtail certain improvements and/or
operations. There is no assurance that required revenue will be generated or
that additional financing, if required, can be obtained on terms favorable to
the Company. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
DEBT FINANCING. The following is a summary of the Company's debt financing in
tabular form as of September 30, 1998:
Type of Principal
Financing Amount Interest Rate Principal Terms Security
The First $5,450,000 Prime plus 2.5% Monthly payments First lien on
Credit Bank Loan per annum of interest only the Mesquite
until July 27, Property and
1999 at the Company's
which time all assets
principal and
accrued interest
is due (subject
to three-year
extension)
The Kelley $7,285,000 Greater of prime Monthly payments Second lien on
Debt plus 3% or 11% of interest only the Mesquite
(Before unamortized per annum (payable Property and
original in cash the Company's
issue or shares of assets subject
discount of Common Stock) to PMJ right
$560,000) until August 15, to participate
1999, at which pari passu
time all with respect
principal and to payments
accrued interest received by
is due the Company or
proceeds from
the Mesquite
Property
pursuant to an
Intercreditor
Agreement
PMJ Debt $1,099,000 Greater of prime Monthly payments Third lien on
plus 3% or 11% of interest only the Mesquite
per annum until September Property
19, 1999, at subject to
which time all PMJ's right to
principal and participate
accrued interest pari passu
is due with the
Kelley Loan
with respect
to payments
received by
the Company or
proceeds from
the Mesquite
Property
pursuant to an
Intercreditor
Agreement
The North Las
Vegas Note $ 200,000 Non-interest Due December
bearing 31, 1998 Unsecured
In addition , see information regarding an additional Kelly-Tam Loan Commitment,
the Hon Debt and AF Construction Debt in the paragraphs which follow this
tabular presentation.
LEASE FINANCING. Capital and Operating Lease Contracts, at September 30, 1998
follow:
Capital leases:
Mikohn Lighting
and Sign lease,
highway sign $ 620,000 10.0% Monthly payments UCC-1
of $12,500 for Equipment
56 months, security
plus $125,000 on interest
January 31, 2000;
purchase option
of $125,000 at
end of term.
Telerent lease $1,218,000 11.5% Monthly payments UCC-1
Furniture and of $33,980 for Furniture
Equipment 36 months; then and equipment
$12,917 for 24 security
months; purchase interest
option at FMV at
end of term.
NEC Telephone
Equipment $213,000 11.5% Monthly payments UCC-1
of $7,109 for 34 Equipment
months, $1 purchase Security
option at end of term Interest
Operating Leases:
PDS Lease $1,417,000 N/A Monthly payments UCC-1
Gaming equipment of $41,598 for Furniture
and furniture 36 months; purchase and equipment
option for FMV at security
end of term. Interest
IGT Lease, $1,028,000 N/A Monthly payments UCC-1
gaming devices of $29,782 for Equipment
36 months; purchase security
option of approx- interest
mately 20% at end
of term.
GSI Lease $ 262,000 N/A Monthly payments UCC-1
Computers of $9,072 for Equipment
and software 60 months. FMV security
purchase option interests
at end of term.
In addition, the Company has various other less significant operating leases
covering office space, gaming devices and other equipment.
FIRST CREDIT BANK. In January, 1998 the Company obtained a $5,000,000
construction loan to finance the development and construction of the Mesquite
Star which was increased by Four Hundred Fifty Thousand Dollars ($450,000) to a
total of Five Million Four Hundred Fifty Dollars ($5,450,000) in June of 1998
(the "Secured Financing"). The Secured Financing consists of a $5,450,000
construction loan from First Credit Bank (the "First Credit Loan") secured by a
first deed of trust and UCC-1 fixture filings on the Mesquite Property. The net
proceeds of this loan have been utilized to construct and furnish the Mesquite
Star Hotel and Casino.
Under the terms of the First Credit Bank Construction Loan Agreement, as
amended, between First Credit Bank and the Company (the "Bank Loan Agreement"),
the First Credit Loan is an 18-month construction loan in the principal amount
of $5,450,000 and bears interest at a fluctuating rate of interest per annum
equal to the sum of prime plus 2.5%. Pursuant to the First Credit Bank Loan
Agreement, upon maturity of the 18-month construction loan, the Company could
request and obtain a three-year extension of the First Credit Loan (the "Three-
Year Loan") if certain specified conditions are met, including: (i) the timely
completion of construction of the Mesquite Star project, (ii) the Company's full
payment and performance of the Company's loan obligations to First Credit Bank
during the 18-month construction phase, and (iii) payment of a loan extension
fee of $50,000 (the "Loan Extension Fee"), plus additional costs and fees
associated with the closing of the Three-Year Loan. The Company has paid a
total of $232,000 in fees.
The Company had also agreed to pay $75,000 to a third party at the closing of
the First Credit Loan, consisting of an initial $50,000 fee for arranging the
First Credit Loan and an additional $25,000 fee for assistance in the extension
thereof. However, the Company has advised such third party that it will be
necessary for the third party to obtain all necessary approvals relating to the
payment of the fee from the Nevada Commission before any fee will be paid. Under
the First Credit Conditional Loan Commitment, accrued and unpaid interest is
payable monthly during the 18-month loan period, with the outstanding principal
balance of the loan, plus accrued and unpaid interest and any other unpaid fees,
due at the end of the 18-month period (unless, as specified above, the First
Credit Loan is converted to the Three-Year Loan). If the Company qualifies for
and obtains the Three-Year Loan, then in addition to regular monthly payments of
interest, the Company would be required to make regular monthly payments of
principal in the amount of $30,000 each beginning 30 days after the extension of
the First Credit Loan, with all accrued and unpaid interest and principal plus
any other unpaid fees due upon maturity of the Three-Year Loan.
KELLEY LOAN
Pursuant to the Amended and Restated Convertible Loan Agreement dated April 18,
1996 between the Company and Dr. Kelley (the "Kelley Loan Agreement"), the
Company, Dr. Kelley and, pursuant to the Participation and Intercreditor
Agreement (as discussed below), Dr. Tam, agreed to lend the Company the
principal amount of $5,750,800 evidenced by a convertible promissory note (the
"Kelley Note").
Pursuant to the Participation and Intercreditor Agreement dated April 18, 1996
between Dr. Kelley and Dr. Tam ("Participation and Intercreditor Agreement"),
Dr. Tam agreed to participate with Dr. Kelley as a lender under the Kelley Loan
Agreement. Under the Participation and Intercreditor Agreement, Dr. Kelley and
Dr. Tam agreed to each loan 50% of all loan proceeds, on the terms set forth in
the Kelley Loan Agreement and receive one-half of the repayments and benefits
thereof, including any warrants issued in connection therewith or shares
received upon conversion of the Kelley Note. Subsequent to April 1996, Dr.
Kelley and Dr. Tam advanced in equal amounts an additional $500,000 to the
Company as additional loans secured by deeds of trust. In August 1997, the
Kelley Loan and the subsequent advances (collectively, the "Kelley Debt") were
restructured. The Kelley Debt was extended and is now payable over an
approximate two-year period ending August 15, 1999 and the convertibility of the
Kelley Note was eliminated. The Kelley Loan is secured by a first deed of trust
and the Company's assets and the later advances by several subordinate deeds of
trust on the Company's property in Mesquite, Nevada. All of the Kelley deeds of
trust have been subordinated to the construction deed of trust in favor of First
Credit Bank. The extended Kelley Debt bears interest at the greater of the
prime rate of interest plus three percent or 11%, and is payable on a monthly
basis, interest only, until August 15, 1999, at which time all principal and
accrued interest is due and payable. The Company had the option (which it has
exercised) to make interest payments on the Kelley Debt (in equal amounts to
Drs. Kelley and Tam) in the form of shares of Common Stock (to be valued at the
average closing price of the Common Stock on the NASDAQ Small Cap Market for the
five business days preceding the interest payment date) up to a cumulative
$525,000 in interest. Interest from September 24, 1997 through September 30,
1998 in the amount of Five Hundred Twenty-five Thousand Dollars ($525,000) was
paid in the form of approximately 88,822 shares of Common Stock issued to each
of Drs. Tam and Kelley.
The Kelley Debt which is owed equally to Drs. Kelley and Tam can be summarized
as follows: (i) $5,750,800 in principal amount secured by a deed of trust on the
Company's real property and its other assets; (ii) $300,000 in principal amount
secured by a deed of trust on the Company's real property; (iii) $250,000 in
principal amount secured by a deed of trust on the Company's real property; and
(iv) $25,000 in principal amount secured by a deed of trust on the Company's
real property. All accrued and unpaid interest on the Kelley Debt as of the
closing of the Company's September 1999 initial public offering in the amount of
$959,812 was added to principal and bears interest at the stated rate. As of
September 30, 1998, the principal and accrued interest on the Kelley Debt was
$7,285,000.
On March 31, 1998, Drs. Kelley and Tam, both shareholders, executed a financing
commitment to lend the Company up to $1,000,000 on the terms set forth therein.
The obligations of Drs. Kelley and Tam under the commitment were conditioned
upon the execution of legal documentation satisfactory to the parties and their
counsel. The loan is to bear interest at the greater of either the Bank of
Hawaii prime rate of interest plus 3% per annum, or 12% per annum with a
$10,000 commitment fee. The loan is to be secured by a deed of trust
encumbering the Company's property in Mesquite, Nevada and governed by the terms
of a New Kelley Loan Agreement. Advances can be obtained for current working
capital purposes upon 20 days advance notice no sooner than June 1, 1998 and no
later than March 26, 1999. There were no amounts outstanding under this
commitment at June 30, 1998.
On June 12, 1998, Drs. Kelly and Tam executed a second financing commitment to
lend the Company up to $1,000,000. As consideration, the Company granted
warrants to purchase 125,000 shares of common stock of the Company at an
exercise price of $2.50 per share. The loan is to bear interest at the greater
of either the Bank of Hawaii prime rate of interest plus 3% per annum, or 12%
per annum. The loan is to be secured by a deed of trust encumbering the
Mesquite Hotel and Casino. The agreement calls for a reduction of the commitment
by the net sum received by NevStar from the sale of shares of common stock
pursuant to the Private Placement. There was no amount outstanding under this
commitment at June 30, 1998.
On September 30, 1998 a letter of commitment ("New Loan") was entered into with
Drs. Kelly and Tam replacing the March 31, 1998 and June 12, 1998 commitments
(see note 4). The New Loan is for $1,000,000 with interest at 12% and defers
payment of accrued interest of $215,000 on the Kelly Debt until the New Loan is
due in April, 1999. The deferred interest will accrue interest at 12% per
annum.
As consideration for the commitment and the initial advance on October 1, 1998,
the Company granted 32,250 warrants to purchase shares of the Company's common
stock at a purchase price of $2.50 per share, and 60,000 warrants to purchase
shares of the Company's common stock at a purchase price of $2.00 per share. For
each additional $100,000 advance, the lenders shall receive 15,000 warrants to
purchase shares of common stock at $2.00 per share. An initial advance of
$400,000 was made on October 1, 1998 and was net of a commitment fee of $10,000
and legal fees of $20,000. A condition to subsequent advances is that the
mechanics lien discussed in Item 3 herein be removed from the Mesquite Property.
PMJ DEBT
Immediately following its incorporation, the Company delivered promissory notes
to PMJ Enterprises, Inc. in the amount of $2,758,000 in partial consideration
for the transfer of the Mesquite Property to the Company. Within 90 days
thereafter, PMJ Enterprises, Inc. was paid $2,200,000 in cash. On May 26, 1995,
PMJ Enterprises, Inc. made a loan in an amount equal to $500,000 to the
Company. This total indebtedness in the principal amount of $1,058,000
constitutes the PMJ Debt.
In 1997, the PMJ Debt was restructured. The PMJ Debt consists of two notes
secured by a single deed of trust which has a subordinate lien on the Mesquite
Property combined with a right to participate pari passu with the Kelley Debt
with respect to payments received by the Company or proceeds from the Mesquite
Property pursuant to an Intercreditor Agreement. Approximately $41,000 of
accrued interest was added to the principal amount of the note. The PMJ Debt
bears interest at the greater of prime rate of interest plus three percent or
11%, and is payable on a monthly basis, interest only, until September 24, 1999,
at which time all principal and accrued interest is due and payable.
HON DEBT
By letter dated April 27, 1998, Dr. Sam Hon agreed to lend the Company up to Two
Hundred Fifty Thousand ($250,000) pro rata with funds advanced pursuant to the
March 27, 1998 loan commitment from Drs. Kelley and Tam for current and future
working capital purposes, no sooner than June 1, 1998 and no later than March
26, 1999 (the "Hon Loan Commitment"). A condition to any advance pursuant to
such Hon Loan Commitment requires the Company to possess all gaming licenses
required to fully operate the Mesquite Star Hotel and Casino. The Hon Loan
bears interest at the greater of Bank of Hawaii prime plus three percent or
twelve percent, is secured by a deed of trust on the Mesquite Property, and is
all due and payable on August 24, 1999. The Company received an initial advance
of One Hundred Thousand ($100,000) (minus an origination fee of $2,500) on or
about August 25, 1998. In connection with entering into the Hon Loan Commitment
and in connection with the initial advance made pursuant thereto, Dr. Hon
received a warrant to purchase 32,850 shares of Common Stock at an exercise
price of $2.00 per share.
A.F. CONSTRUCTION. A.F. Construction Company, Inc. ("AF Construction") was the
general contractor for the construction of the Mesquite Star Hotel/Casino. A.F.
Construction was owed a total of $853,000 for its work on the Project. On May
14, 1998, the Company entered into an agreement with A.F. Construction Company,
Inc. to accept a Promissory Note in installment payments totaling $600,000 in
connection with amounts owing to AF Construction Company, Inc. In connection
with this promissory note, as of September 30, 1998, A.F. Construction has been
issued warrants to purchase 37,500 shares of Common Stock of $2.25 per share.
A.F. Construction filed a mechanic's lien against the Mesquite Property in the
amount of $853,452.65 on August 27, 1998. In addition, a subcontractor of A.F.
Construction Company, Leo Cook d.b.a. Master Plumbing & Mechanical, filed two
duplicate mechanic's liens on August 31, 1998 and September 8, 1998 in the
amount of $240,298.30. The Company believes the $240,298.30 claim is included
in the A.F. Construction Company, Inc. $853,452.65 amount.
MIKOHN SIGN
In February 1998, the Company entered into a Capital Lease Agreement with Casino
Excitement, Inc. (dba Mikohn Lighting & Sign), concerning the lease, ownership,
location, installation, operation and maintenance of a double-faced, 99 foot
high, pylon sign (the "Sign") at the Mesquite Property ("Mikohn Agreement").
The Mikohn Agreement term is from July 1, 1998 through February 28, 2003 and
includes a monthly rental rate of $12,500 per month, with the first payment due
on November 1, 1998. In addition, the Company has agreed to pay an additional
$50,000 in April 1998 (which represents rent from July 1, 1998 to October 1,
1998) and an additional $125,000 prior to January 31, 2000. At the end of the
term of the Mikohn Agreement, the Company shall have the option to purchase the
sign for $125,000. In addition, the Company shall have the option to purchase
the sign for the net present value of the remaining lease payments (including
the end of term option amount of $125,000) discounted at 10%, plus an additional
sum of $25,000, at any time during the term.
IGT. The Company has entered into a 36-month operating lease agreement with
IGT, dated April 8, 1998 concerning 159 IGT slot machines with a capital amount
of approximately $1,028,000 which commences ninety days following the
commencement of gaming operations. The lease requires monthly payments of
$29,782 and contains an option to purchase the equipment at its fair market
value.
PDS FINANCIAL CORPORATION. Under an operating lease dated April 23, 1998,
approximately $1,274,000 of equipment was leased from PDS Financial Corporation
("PDS") (the "PDS Financing"), with a fair market value of approximately
$850,000 of furniture, fixtures and equipment and approximately $567,000 for 122
gaming devices from the PDS Slot Source inventory program. The noncancellable
36-month lease is to start July 1, 1998. One payment of approximately $41,598
was due upon execution of the lease, with the first monthly lease payment due
August 1, 1998. The lease is to include a purchase option at the fair market
value of the assets under lease to be determined at the end of the lease term.
TELERENT. On April 12, 1998, the Company executed a capital lease commitment
with Telerent covering a capital cost for furniture, carpets and equipment of
approximately $1,218,000 which will require monthly payments for the initial 36-
months of $33,980, then payments of $12,917 for the remaining 24 months. Fair
market value is $1,168,000. The lease requires, among other things, a 1%
commitment fee, and a security interest, and a mortgagee's waiver, covering such
furniture, carpet and equipment.
CNB CAPITAL LOAN COMMITMENT. In order to consolidate its debt financing
obligations, the Company has entered into a conditional loan commitment with CNB
Capital, Inc. ("CNBC") to make a real estate first mortgage loan secured by the
Mesquite Property. The loan commitment provides that the Company would form a
single-purpose entity to be wholly owned by the Company to which all of the real
property, furniture, fixtures, and equipment (excluding gaming equipment)
comprising the Mesquite Star Hotel/Casino would be transferred. The gross
principal amount of the loan (from which all costs and fees would be deducted)
would be up to a maximum of $20,000,000 or certain lower amounts based upon an
appraisal of the assets or debt-service coverage ratios. The proceeds of the
loan would be required to be used to pay off all of the Company's debt with the
balance, if any, used to provide working capital. The term of the loan would be
approximately three (3) years, provide for interest-only payments based upon an
interest rate equal to the six month LIBOR rate plus 3.5%. Provided certain
conditions were satisfied, the Company would have the right to convert the loan
to a fixed-term, first mortgage loan amortized over twenty (20) years, all due
in ten (10) years, at an interest rate of 275 basis points over the
corresponding U.S. Treasury Bill fixed rate as of the date of closing of the
conversion. The commitment is subject to a number of conditions precedent,
including, but not limited to, receipt by the lender of (i) its Credit
Committee's approval, (ii) a loan repurchase agreement from a purchaser of
lender's choice, (iii) acceptable appraisal of the value of the Mesquite
Property, (iv) acceptable environmental and engineering reports, (v) acceptable
financial and operating information from the Borrower, and (vi) acceptable legal
and title documentation. Subject to the satisfaction of all conditions, the
Company and CNBC have tentatively scheduled loan closing for October 31, 1998.
The Company's success , among other things, is substantially dependent on
closing the CNBC Loan Commitment, or obtaining alternative debt or equity
financing, and on generating stabilized earnings from operating the Mesquite
Star
ACQUISITIONS. The Company may, when and if the opportunity arises, pursue the
acquisition of other gaming businesses. If such an opportunity arises, the
Company may use a portion of its working capital and/or the issuance of its debt
or equity securities for that purpose. There can be no assurance that such
financing will be available on acceptable terms, or at all. Except for the
North Las Vegas Option Agreement (See "North Las Vegas Option Agreement"), the
Company has no binding commitments with respect to any such acquisition at the
present time. Further, there is no assurance that any further acquisition will
be made, including, but not limited to, any acquisition under the North Las
Vegas Option Agreement. Although the Company does not currently contemplate any
acquisitions from affiliates other than the North Las Vegas Option Agreement, it
may in the future consider such other acquisitions, which would be made only on
terms no less favorable to the Company than could be obtained from non-
affiliates for comparable properties.
MESQUITE STAR BULL. In December 1997, the Company entered into a License
Agreement with the Meehan Family Trust, of which James D. Meehan, a director of
the Company is trustee, and an unrelated third party pursuant to which the
Company acquired a license to commercially exploit the picture, likeness and
name of a bull to promote the Company's businesses, activities and image to the
public. The name of the bull is "Mesquite Star." As consideration for the
grant of the license, the Company issued 6,250 shares of Common Stock to each of
the Meehan Family Trust and the unrelated third party in 1998.
EMPLOYEES. As of September 30, 1998, the Company had approximately 300
employees. The Company employs approximately 296 employees for the Mesquite
Star, including managers, casino personnel, restaurant personnel, facilities
personnel, security and surveillance personnel, housekeeping personnel and
administrative personnel. The Company also employs part-time workers as needed.
None of the Company's employees are represented by a labor union. Management
considers its labor relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently owns one parcel of real property, the Mesquite Property,
which consists of approximately 25 acres in Mesquite, Nevada. See "DESCRIPTION
OF BUSINESS - MESQUITE PROPERTY." The Company also holds a lease from the State
of Nevada (the "Nevada Lease") for property consisting of 1.1 acres. The Nevada
Lease may be terminated at any time by the State of Nevada upon 90 days' notice
to the Company. The leased property is located east of the Company's property
on Sandhill Road and may be used solely for parking and landscaping. The
Company is using the leased property for parking and landscaping. In addition,
the Company has a NDOT right-of-way occupancy permit dated May 23, 1995 which
allows ingress and egress into and from the Mesquite Property.
The Company also holds an option to purchase an indirect 20% ownership interest
in the North Las Vegas Property. See "DESCRIPTION OF BUSINESS - NORTH LAS VEGAS
PROPERTY."
ITEM 3. LEGAL PROCEEDINGS.
No material legal proceedings to which the Company is a party or to which the
property of the Company is subject are pending and no such proceedings are known
by the Company to be contemplated. A.F. Construction filed a mechanic's lien
against the Mesquite Property in the amount of $853,452.65 on August 27, 1998.
In addition, a subcontractor of A.F. Construction Company, Leo Cook d.b.a.
Master Plumbing & Mechanical, filed two duplicate mechanic's liens on August 31,
1998 and September 8, 1998 in the amount of $240,298.30. The Company believes
the $240,298.30 claim is included in the A.F. Construction Company, Inc.
$853,452.65 amount. See Item 1. Description of Business - "A.F. Construction."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable - None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the high and low bid quotations for the Common
Stock as reported on the NASDAQ Small Capitalization market for each calendar
quarter for the periods indicated.
1998: HIGH LOW
Quarter Ended June 30, 1998 $4.56 $2.81
Quarter ended March 31, 1998 $3.75 $1.75
1997: HIGH LOW
Quarter Ended December 31, 1997 $4.84 $1.81
Quarter Ended September 30, 1997 $5.00 $4.00
(September 19, 1997 - September 30, 1997)
As of September 30, 1998, there were 243 record holders of Common Stock.
The Company has never paid and has no present plans to pay any cash dividends on
its Common Stock. The Company currently intends to retain its earnings to
finance the growth and development of its business. Further, the Kelley Loan
Agreement prohibits the payment of dividends. If such prohibitions are removed
or modified in the future, the payment of any dividends will be at the
discretion of the Company's board of Directors and will depend upon, among other
things, future earnings, operations, capital requirements, the general financial
condition of the Company and the general business conditions.
The Common Stock of the Company began trading on September 19, 1997 on the
NASDAQ Small Capitalization Market under the symbol "NVST."
Recent Sales of Unregistered Securities:
Between January 1, 1998 and June 30, 1998, the Company sold securities to a
limited number of persons, as described below, except for unexercised Stock
Options or Warrants granted by the Company. Except as indicated, there were no
underwriters involved in the transactions and there were no underwriting
discounts or commissions paid in connection therewith. The purchasers of
securities in each such transaction were all Accredited Investors, as defined in
Rule 501 promulgated under the Securities Act of 1933, as amended, and
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with the distribution thereof, and
appropriate legends were affixed to the certificates for the securities issued
in such transactions. Further, each purchaser represented that he was aware
that the shares were not registered under the Securities Act of 1933 as amended,
and cannot be reoffered or sold until they have been so registered or until the
availability of the exemption therefrom has been established to the satisfaction
of the Company. Accordingly, the Company believes that the transactions listed
in this section are exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, and the regulations promulgated thereunder,
as private transactions which did not involve a public offering of securities.
All purchasers of securities in each such transaction had adequate access to
information about the Company.
Common Stock Sold.
1. As of January 2, 1998, and May 23, 1998 the Company issued an
aggregate of 16,162 shares of Common Stock, in consideration of legal and
advertising services provided to the Company.
2. On January 5, 1998 and July 28, 1998 the Company issued an aggregate
of 27,281 shares of Common Stock in exchange for 38,973 shares of Convertible
Series A Preferred Stock.
3. As of January 8, 1998, the Company issued 12,500 shares of Common
Stock in connection with the acquisition of a license with respect to the
Mesquite Star Bull. See Item 1. Description of Business -- Mesquite Star Bull.
4. As of September 30, 1998, the Company issued 88,822 shares of Common
Stock as payment of interest to each of Drs. Kelley and Tam pursuant to the
Kelley Loan Agreement. See Item 1. Description of Business Kelly Debt.
5. On June 24, 1998 and July 1, 1998, the Company completed the sale in
a private placement of an aggregate of 274,000 shares of Common Stock at a sale
price of $2.50 per share. Schneider Securities, Inc. acted as the Company's
placement agent in connection with this placement and received a commission in
the amount of $68,000 and a 3% non-accountable expense allowance in the amount
of $20,550. In addition, Schneider Securities, Inc. was issued a warrant to
purchase 15,568 shares of Common Stock at $4.13 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS
It should be noted that this document contains forward looking statements that
are subject to risks and uncertainties. Forward looking statements include
certain information relating to the Company's general business strategy,
expansion plans, new opportunities, projected operating performance and
liquidity, as well as information contained elsewhere in this Report where
statements involve the use of the words "believe", "expect", "anticipate",
"estimate" or expressions of similar import. For such statements, the Company
claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. The forward-
looking statements in this document are subject to risks and uncertainties that
could cause the assumptions underlying such forward-looking statements and the
actual results to differ materially from those expressed or implied by the
statements. The most important factors that could prevent the Company from
achieving its goals and cause assumptions underlying the forward-looking
statements and the actual results of the Company to differ materially from those
expressed in or implied by those forward-looking statements include, without
limitation and in addition to those discussed in the various documents filed by
the Company with the Securities and Exchange Commission, the following: (i) the
highly competitive nature of the public gaming and entertainment market, which
includes the market for the small to medium size or niche hotel/casinos, in
which the Company plans to operate and the ability of the Company to
successfully compete in this market with other hotel/casino companies for the
most desirable hotel/casino customers and share of the geographical market; (ii)
the ability of the Company to successfully implement its expansion strategy;
(iii) the need to raise future working capital and the uncertainty of additional
funding (whether through financial markets, collaborative or other arrangements
with strategic partners, or from other sources); (iv) the speculative nature of
other gaming projects; (v)dependence on key personnel; and (vi) the Company's
ability to generate sufficient cash flows, operating profits, and other income
in order to fulfill its obligations for repayment of debt.
OVERVIEW
NevStar Gaming & Entertainment Corporation is a company formed to acquire,
develop, construct, own and manage hotel/casino projects. The Company's
strategy is to concentrate its efforts on "niche" markets such as "local" or
"neighborhood" casinos. The Company obtained its license and related approvals
from the Nevada Gaming Commission to conduct gaming at its initial hotel/casino,
Mesquite Star Hotel and Casino (the "Mesquite Star") in Mesquite, Nevada,
pursuant to an Order of Registration, dated June 23, 1998.
The newly constructed Mesquite Star consists of 210 rooms and suites, with a
swimming pool, and a public area of approximately 34,300 square feet, featuring
approximately 12,000 square feet of casino space initially containing 452 slot
machines, 10 table games and Keno, a specialty restaurant, a 160-seat coffee
shop, a gift shop, a hotel registration lobby and other amenities.
During the period from inception (December 2, 1993) through the six month period
ended June 30, 1998, the Company's only source of income has been interest
income. The Company has accumulated losses from operations of approximately
$10,817,000 from inception through June 30, 1998. On July 1, 1998, the Mesquite
Star, opened for business and the Company began receiving revenues from its
operations.
REGULATION AND LICENSING
The ownership and operation of casino gaming facilities in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder; and (ii) various local regulation. The Company's gaming operations
are subject to the licensing and regulatory control of the Nevada Gaming
Commission, the Nevada State Gaming Control Board (the "Nevada Board"), and the
City of Mesquite, Nevada.
Pursuant to an Order of Registration, dated June 23, 1998, the Company, its
directors, officers and principal stockholders have obtained the necessary
licenses, approvals and findings of suitability to own and operate the Mesquite
Star.
PLAN OF OPERATION
Mesquite Star
July, 1998- June, 1999
The Mesquite Star Hotel and Casino opened for business on July 1, 1998. Results
of operations, which are not stabilized, have not generated net income or
positive cash flow at September 30, 1998. The Company intends to continue
conducting special events and promotional activities which may attract more
guests and visitors to the property. Although occupancy and revenues have
recently improved, there can be no assurance that the Company's plan of
operation for the Mesquite Star will be successful.
The Company's success is substantially dependent on closing the loan pursuant to
the loan commitment, or obtaining alternative debt or equity financing, the net
proceeds from the exercise of the Warrants, or otherwise during 1998, to
continue to implement its business plan, including the North Las Vegas Option.
There can be no assurance the Company will be able to generate sufficient funds
from these or other sources.
North Las Vegas Option
In September of 1997, the Company issued a $200,000 note payable, due March 15,
1998, which has been extended to December 31, 1998, which provides the Company
an option to purchase a 20 percent indirect interest in a 25-acre parcel of
unimproved real property in the city of North Las Vegas, Nevada. Upon payment of
this note, these funds are expected to be used for planning, engineering,
promotional expenses and design work with respect to this project and are non-
refundable and not applicable to the option purchase price, but are reimbursable
in connection with the development and financing of the project. For additional
information on this property see Item 1. Description of Business, North Las
Vegas Property.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its capital requirements through the
sale of securities to private investors, the proceeds of secured loans and
through its Initial Public Offering. The Company has used the $7,739,000 of net
proceeds received from its Initial Public Offering, $5,450,000 of secured
financing and approximately $6,100,000 of furniture and equipment capital or
operating lease financing and contracts payable to fund construction,
furnishing, and pre-opening costs and expenses of the Mesquite Star Hotel and
Casino, which opened to the public on July 1, 1998.
During the six month period ended June 30, 1998, the Company completed the sale
in a private placement of an aggregate of 274,000 shares of Common stock at a
sale price of $2.50 per common share, providing the Company with $597,000 net
proceeds.
Subsequent to June 30, 1998, on September 11, 1998, the Company closed escrow to
sell approximately 27,100 sq. ft. of the Mesquite Property to an unrelated third
party for development as a drug store site. The gross purchase price for the
parcel was $450,000. As part of the transaction, NevStar is to receive
approximately 5,199 square feet of adjacent property which is being acquired by
the drugstore site developer but is not needed for the drugstore project.
The Company is currently in escrow to sell approximately 41,000 sq. ft. of the
Mesquite Property adjacent to the above-referenced drug store site to an
unrelated third-party for possible development as a fast food site. The gross
purchase price for the parcel is $444,888. Subsequent to June 30, 1998, on
September 30, 1998, $100,000 of the purchase price was released by the purchaser
to the Company. The escrow is scheduled to close on or before October 31, 1998.
By letter dated April 27, 1998, Dr. Sam Hon agreed to lend the Company up to two
hundred fifty thousand ($250,000) pro rata with funds advanced pursuant to the
March 27, 1998 loan commitment from Drs. Kelley and Tam for current and future
working capital purposes, no sooner than June 1, 1998 and no later than March
26, 1999 (the "Hon Loan Commitment"). The Company received an initial advance,
subsequent to June 30, 1998, of one hundred thousand ($100,000) (minus an
origination fee of $2,500) on or about August 25, 1998.
On September 30, 1998 a letter of commitment ("New Loan") was entered with Drs.
Kelly and Tam replacing the March 31, 1998 and June 12, 1998 Commitments. The
New Loan is for $1,000,000 with interest at 12% and defers payment of accrued
interest of $215,000 on the previous loan agreements until the new loan is due
in April, 1999. An initial advance of $400,000 was made, subsequent to June 30,
1998, on October 1, 1998 and was net of a commitment fee of $10,000 and legal
fees of $20,000.
On September 30, 1998, the Company entered into a loan commitment with a lender
for a real estate first mortgage loan of approximately $20,000,000 which, is
contingent upon multiple conditions being met. If funded, the proceeds will be
utilized, among other things, to repay the Company's existing real estate notes
payable, to repay a construction payable, to provide a principal and interest
reserve during the early months of the mortgage loan, and for general corporate
purposes. Although since July 1, 1998, revenues are being generated by the
Mesquite Star Hotel & Casino, the Company's success is substantially dependent
on closing the loan pursuant to this loan commitment, or obtaining alternative
debt or equity financing, the net proceeds from the exercise of the Warrants, or
otherwise during 1998, to continue to implement its business plan, including the
North Las Vegas Option. There can be no assurance the Company will be able to
generate sufficient funds from these or other sources.
Current Accounting Developments
The FASB issued Statement No.131, Disclosures about Segments of an Enterprise
and Related Information, which modifies the disclosure requirements for
reportable segments and is effective for years ending after December 31, 1997.
The Company has not yet determined which operating segments it will have upon
commencing operations.
Year 2000 Contingency Disclosed
The Company has conducted a review of its computer systems to identify systems
that could be affected by the year 2000 issue, and is developing a remediation
plan to resolve the issue.
The issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data and cause a system to
fail.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial position and
results of operations.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements: Page
Independent Auditor's Report 35
Balance Sheets at June 30, 1998 and December 31, 1997 36
Statements of Operations for the six month periods
ended June 30, 1998 and 1997 and the period
from inception (December 2, 1993)
to June 30, 1998 37
Statements of Stockholders' Equity for
the period from inception (December 2, 1993)
to December 31, 1997 and the six month
Period ended June 30, 1998 38-39
Statements of Cash Flows for the six month periods
ended June 30, 1998 and 1997, and the period from
inception (December 2, 1993) to June 30, 1998 40-42
Notes to financial statements 43-60
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
NevStar Gaming & Entertainment Corporation
Las Vegas, Nevada
We have audited the accompanying balance sheets of NevStar Gaming &
Entertainment Corporation, a development stage company, as of June 30, 1998 and
December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the six months ended June 30, 1998 and from the date
of inception to June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NevStar Gaming & Entertainment
Corporation as of June 30, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the six months ended June 30, 1998 and from
the date of inception to June 30, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1, the Company is a
development stage enterprise that commenced operations on July 1, 1998. The
company's success is substantially dependent on generating positive operating
earnings and cash flows from the Mesquite Star Hotel and Casino in Mesquite,
Nevada and obtaining additional financing in the form of equity or debt. This
raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to these matters are described in Note
12. The financial statements do not include any adjustments that might result
from the outcome from these uncertainties.
/s/McGladrey & Pullen, LLP
McGladrey & Pullen, LLP
Las Vegas, Nevada
October 8, 1998
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Balance Sheets
June 30, 1998 and December 31, 1997
(Dollars in Thousands)
1998 1997
ASSETS
Cash and cash equivalents $ 962 $ 4,133
Refunded equipment deposits 459 -
Property and equipment(notes 2,4,7 and 12) 22,842 13,049
Prepaid expenses and other assets(notes 3 and 9) 1,217 431
$25,480 $17,613
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable(note 4) $ 1,409 $ 1,883
Accrued expenses 189 60
Accrued interest(notes 4 and 12) 275 242
Notes payable(notes 4 and 10) 16,625 7,800
Total liabilities 18,498 9,985
Stockholders' Equity(notes 4, 5, 6 and 12):
Series A convertible non-voting preferred
stock, $.01 par value per share. Designated
1,500,000 shares. Issued and outstanding
64,500 and 77,500 shares at June 30, 1998
and December 31, 1997, respectively 1 1
Common stock, $.01 par value per share.
Designated 50,000,000 shares. Issued and
outstanding 3,607,491 and 3,428,433 shares at
June 30, 1998 and December 31, 1997, respectively,
and 274,000 shares committed to be issued at
June 30, 1998 39 34
Additional paid-in capital 17,759 16,124
Deficit accumulated during the development-stage (10,817) (8,531)
Total stockholders' equity 6,982 7,628
Commitments and contingencies (notes 8 and 11).
$25,480 $17,613
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Operations
Six Month Periods Ended June 30, 1998 and 1997 and
Period From Inception (December 2, 1993)
to June 30, 1998
(Dollars in Thousands, Except Per Share Amounts)
Period from
Inception
(December 2,1993)
to
1998 1997 June 30,1998
(Unaudited)
Revenues $ - $ - $ -
Costs and expenses:
Compensation and related costs(note 6) 890 160 2,769
Professional fees 224 49 607
Outside consultants(note 6) 53 25 1,059
Extension fees on notes payable(note 4) - 475 475
Offering costs(note 5) - - 975
Rents(note 8) 108 21 314
Amortization - 193 704
Commitment fees(note 6) 214 - 214
Interest, net(notes 2,4,6 and 10) 268 814 2,410
Other 584 111 1,475
2,341 1,848 11,001
Interest income 55 1 184
Net loss $(2,286) $(1,847) $(10,817)
Loss per common share(note 5) $ (0.65) $ (2.78)
Weighted average number
of common shares outstanding(note 5) 3,543,381 664,051
See accompanying notes to financial statements.
<TABLE>
<CAPTION>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Stockholders' Equity
Period From Inception (December 2, 1993)
to December 31, 1997 and
Six Month Period Ended June 30, 1998
(Dollars in Thousands)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued inception:
For cash - $ - 235,849 $ 2 $ 20 $ - $ 22
For property(note 7) - - 288,260 3 24 - 27
Preferential dividend
to majority shareholder
(note 7) - - - - (588) - (588)
Proceeds from private
placement offering,net 1,483,344 15 - - 4,963 - 4,978
Issuance of common stock - - 4,193 - 10 - 10
Issuance of common stock
stock warrants and
options(notes 4 and 6) - - 5,241 - 2,939 - 2,939
Issuance of common stock
in connection with
bridge financing(note10) - - 185,808 2 306 - 308
Proceeds from public
offering, net(note 5) - - 1,725,000 17 7,722 - 7,739
Conversion of preferred
stock(note 5) (1,405,844) (14) 984,082 10 4 - -
Notes payable and
accrued interest
forgiven by
shareholders(note 4) - - - - 724 - 724
Net loss from inception
to December 31, 1997 - - - - - (8,531) (8,531)
Balance December 31,1997 77,500 1 3,428,433 34 16,124 (8,531) 7,628
</TABLE>
<TABLE>
<CAPTION>
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Stockholders' Equity (Continued)
Period From Inception (December 2, 1993)
to December 31, 1997 and
Six Month Period Ended June 30, 1998
(Dollars in Thousands)
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
in payment of accrued
interest (note 4) - - 141,296 2 404 - 406
Issuance of common stock
in payment of marketing
and legal costs
and expenses - - 28,662 - 104 - 104
Net proceeds from private
placement of common
stock (note 5) - - 274,000 3 594 - 597
Conversion of preferred
stock(note 5) (13,000) - 9,100 - - - -
Common stock
options and warrants
(note 6) - - - - 533 - 533
Net loss - - - - - (2,286) (2,286)
Balance, June 30, 1998 64,500 $ 1 3,881,491 $ 39 $17,759 $(10,817) $ 6,982
</TABLE>
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Cash Flows
Six Month Periods Ended June 30, 1998 and 1997 and
Period From Inception (December 2, 1993)
to June 30, 1998
(Dollars in Thousands)
Period from
Inception
(December 2,1993)
to
1998 1997 June 30,1998
(Unaudited)
Cash flows from operating activities:
Net loss $(2,286) $(1,847) $(10,817)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization - 193 704
Accretion of discount on notes payable 224 228 886
Common stock options and
warrants expenses 355 - 2,099
Loss on investment - - 34
Extension fees on notes payable(note 4) - 475 475
Increase in prepaid expenses,
and other assets (936) (466) (1,588)
Increase in accounts
payable and accrued expenses 1,057 696 3,040
Cash used in operating activities (1,586) (721) (5,167)
Cash flows from investing activities:
Purchase of property and equipment (6,141) (332) (12,763)
Purchase of investment - - (34)
Cash used in investing activities (6,141) (332) (12,797)
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Cash Flows (continued)
Six Month periods Ended June 30, 1998 and 1997 and
Period From Inception (December 2, 1993)
to June 30, 1998 (Continued)
(Dollars in Thousands)
Period from
Inception
(December 2,1993)
to
1998 1997 June 30,1998
(Unaudited)
Cash flows from financing activities:
Proceeds allocated to:
Warrants and original issue discount - 308 551
Convertible notes and bridge financing - 1,092 2,054
Issuance of notes payable 5,435 9 10,873
Proceeds from preferred stock offering - - 4,978
Principal repayments of notes payable - (23) (6,088)
Proceeds from issuance of
common stock(note 5) 597 - 8,368
Change in construction costs payable (1,476) (281) (1,810)
Cash provided by
financing activities 4,556 1,105 18,926
Increase (decrease) in cash
and cash equivalents (3,171) 51 962
Cash and cash equivalents, beginning 4,133 3 -
Cash and cash equivalents, ending $ 962 $ 54 $ 962
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Statements of Cash Flows (continued)
Six Month periods Ended June 30, 1998 and 1997 and
Period From Inception (December 2, 1993)
to June 30, 1998 (Continued)
(Dollars in Thousands)
Period from
Inception
(December 2,1993)
to
1998 1997 June 30,1998
(Unaudited)
Supplemental schedule of non-cash
investing and financing
activities (notes 4,6,7 and 8):
Issuance of note payable for an
option agreement $ - $ - $ 200
Value allocated to warrants granted - - 57
Accrued interest added to note
principal - - 1,001
Default interest on notes waived
by shareholders - - 274
Accrued interest paid with common stock 406 - 406
Accounts payable paid with common stock 104 - 104
Note payable forgiven by shareholders - - 450
Value of warrants recorded as
original issue discount - - 896
Extension and commitment fees
on notes payable and warrants 178 475 857
Property, equipment and other assets
Purchased on account 364 - 364
Construction costs incurred and payable 853 - 853
Additions to furniture & equipment:
Financed with installment notes payable 514 - 514
Financed with capital lease obligations 2,052 - 2,052
Acquisition of property:
Notes payable assumed - - 2,442
Issuance of notes payable - - 2,758
Issuance of common stock - - 28
Preferential dividend - - (588)
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
(A Development Stage Company)
Notes to Financial Statements
Six Month Periods Ended June 30, 1998 and 1997 (Unaudited)
and Period From Inception (December 2, 1993)
to June 30, 1998
(1) Nature of Business and Summary of Significant Accounting Policies
NevStar Gaming & Entertainment Corporation is a development stage company formed
in December 1993 to develop, construct, own and manage hotel casino
properties.
The Company obtained its license and related approvals from the Nevada Gaming
Commission to conduct gaming at the Mesquite Star Hotel and Casino in Mesquite,
Nevada, pursuant to an Order of Registration dated June 23, 1998. The Company
opened its initial development project, the Mesquite Star Hotel and Casino, in
Mesquite, Nevada, on July 1, 1998.
The newly constructed Mesquite Star Hotel and Casino consists of 210 rooms and
suites, a swimming pool and spa, and a public area of approximately 34,000
square feet, featuring about 12,000 feet of casino space which initially
contains 452 slot machines, 10 table games and Keno, and a speciality
restaurant, a 160 seat coffee shop, a video arcade, gift shop, hotel
registration lobby and other amenities.
The ownership and operation of casino gaming facilities in Nevada are subject
to: (i) the Nevada Gaming Control Act and the regulations promulgated thereunder
(collectively, the "Nevada Act"); and (ii) various local regulations. The
Company's gaming operations are subject to the licensing and regulatory control
of the Nevada Gaming Commission (the "Nevada Commission"), the Nevada State
Gaming Control Board (the "Nevada Board"), and the City of Mesquite, Nevada.
The Nevada Commission, the Nevada Board and the City of Mesquite, Nevada are
collectively referred to as the "Nevada Gaming Authorities."
On September 30, 1998, the Company entered into a loan commitment with a lender
for a real estate first mortgage loan of approximately $20,000,000 which is
contingent on multiple conditions being met. If funded, the proceeds will be
utilized, among other things, to repay the Company's existing real estate notes
payable, to repay a construction payable, to provide a principal and interest
reserve during the early months of the mortgage loan, and for general corporate
purposes. The Company's success, among other things, is substantially dependent
on closing the loan pursuant to this loan commitment, or obtaining alternative
debt or equity financing, and on generating stabilized earnings from operating
the Mesquite Star Hotel and Casino, which opened July 1, 1998 (See note 12).
Interim financial statements
The accompanying statements of operations and cash flows for the six month
period ended June 30, 1997 have not been audited. However, these financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB of Regulation S-B. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, the accompanying interim
financial statements reflect all material adjustments (consisting only of normal
recurring accruals) necessary for a fair statement of the results for the
interim period presented. Certain items in the financial statements have been
reclassified to conform to the current period presentation.
A summary of the Company's significant accounting policies follows:
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents represents amounts held in banks and money market
accounts and short-term cash investments such as certificates of deposit with
maturities of less than three months. The fair value of cash and cash
equivalents approximates cost. The Company maintains cash in bank accounts
which, at times, exceeds federally insured limits. The Company has experienced
no losses relating to these excess amounts of cash in banks.
Property and equipment
Property and equipment is stated at cost.
Loan commitment and origination costs
Such costs are amortized over the term of the corresponding debt based on a
method that approximates the effective interest method.
Accounting for impairment of long-lived assets
Long-lived assets to be held and used by the Company and certain identifiable
intangibles are reviewed for impairment on an annual basis.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carry forwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets and liabilities are adjusted for the effect of changes in tax laws and
rates on the date of enactment.
As of June 30, 1998, the Company has recorded approximately $1,880,000 of
compensation and consulting expenses for financial statement purposes,which are
not currently deductible for federal income tax purposes. Temporary differences
of approximately $5,526,000 resulted from expensing start-up and organization
costs for financial statement purposes which are capitalized for federal income
tax purposes. In addition, the Company has recorded approximately $2,290,000 of
expenses which are not deductible for federal income tax purposes. These
expenses relate primarily to offering costs on the withdrawn IPO, original issue
discount, and an extension fee and default interest on notes payable. At
June 30, 1998, the Company had approximately $1,100,000 of net operating
losses of which approximately $550,000 expires in each year ended in 2011 and
2012. The deferred tax asset of approximately $2,250,000 arising from temporary
differences has been offset by an equal valuation allowance. No tax expense
(benefit) is recorded as a result of increases in the valuation allowance.
Net loss per common share
Net loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding. The 224,748 incremental
common shares attributed to outstanding options and warrants, for 1998, as
computed under the treasury stock method, have not been included in the loss per
common share calculations. In addition, the 64,500 shares of outstanding
convertible preferred stock have not been included in the loss per share
calculations. Pursuant to FASB Statement No.128 Earnings per share,
no adjustment is made for diluted earnings per share purposes since the Company
is reporting a net loss and common stock equivalents would result in anti-
dilutive per share amounts.
Fair value of financial instruments
The Financial Accounting Standards Board issued FASB Statement No.107,
Disclosures about Fair Value of Financial Instruments, which became effective
December 31, 1995. This Statement requires the disclosure of fair values for
all financial instruments as defined in the Statement for which it is
practicable to estimate fair value.
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, accounts payable and accrued expenses, approximate
fair value because of their short maturity. The fair value of notes payable to
banks, equipment contracts payable and other notes payable to third parties
approximates their carrying amounts based on the contractual terms (i.e.
interest rate, maturity date and other terms) which approximate current market
conditions at June 30, 1998. Management has determined that it is not
practicable to estimate the fair value of the other debt as of June 30, 1998 due
to the related party nature of these agreements.
Accounting for stock-based compensation
The Company adopted FASB Statement No.123, Accounting for Stock-Based
Compensation. Statement No. 123 establishes financial accounting and reporting
standards for stock-based compensation plans, such as stock options and stock
purchase plans. The Statement generally suggests but does not require
stock-based compensation arrangements for employees be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. Transactions with
non-employees shall continue to be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable. Companies that do not elect to change
their accounting for stock-based compensation for employees are required to
disclose the effect on net income and earnings per share as if the provision of
Statement No.123 were applied. The Company has decided not to adopt the
accounting provisions of this Statement for
employees' stock-based compensation arrangements.
Change of Fiscal Year End
On April 1, 1998, the Company's Board of Directors approved changing the
Company's fiscal year end from December 31 to June 30, effective June 30, 1998.
Current accounting development
The FASB issued Statement No.131, Disclosures about Segments of an Enterprise
and Related Information, which modifies the disclosure requirements for
reportable segments and is effective for years ending after December 31, 1997.
The Company has not yet determined which operating segments it will have upon
commencing operations.
(2)Property and Equipment
Property and equipment, consisting of land, buildings, and furniture and
equipment of The Mesquite Star Hotel and Casino, (which opened for business on
July 1, 1998), follows:
June 30, December 31,
1998 1997
(Dollars in Thousands)
Land $ 4,710 $ 4,710
Buildings and improvements 15,021 8,339
Furniture and equipment 3,111 -
$22,842 $13,049
The land is a 25.2 acre site in Mesquite NV ("Mesquite land"). Buildings and
improvements includes architectural and engineering plans, permits and approval
costs, on and off-site infrastructure improvements, and grading and foundation
work at the site. Interest capitalized during the six month period ended June
30, 1998 and during the period from (inception) December 2, 1993 to June 30,
1998 was approximately $664,000 and $2,159,000, respectively. Construction of
the facility was substantially curtailed from July, 1996 to September 30, 1997.
Interest charged to expense, instead of to construction, was approximately
$1,479,000, during that period. During the six month period ended June 30, 1998,
interest of $44,000 was charged to expense, because construction was
substantially completed at June 15, 1998.
(3) Prepaid Expenses and Other Assets
Prepaid expenses and other assets follow: June 30, December 31,
1998 1997
(Dollars in Thousands)
Option to develop land(note 9) $ 257 $ 257
Loan commitment fees and debt issue costs 402 46
Prepaid consulting fees 18 54
Prepaid expenses, deposits and other 540 74
$1,217 $ 431
(4) Notes Payable
Notes payable is summarized as follows:
June 30, December 31,
1998 1997
(Dollars in thousands)
Note payable to bank, secured by first deed
of trust on the Mesquite property, bank
prime rate, plus 2.5% (11% at June 30, 1998)
due July 27, 1999, with conditional terms
to extend maturity to July 27, 2002(A) $ 5,436 $ -
Notes payable to shareholders secured by
deeds of trust on the Mesquite land.
Interest payable monthly, either at the
greater of the Bank of Hawaii prime interest
rate (8.5 percent at June 30, 1998) plus
3 percent, or 11 percent. Principal
is due August, 1999.(B) 7,285 7,285
Note payable to a former shareholder, secured
by deed of trust on the Mesquite property.
Interest payable monthly, at the greater
of the Bank of Hawaii prime interest
rate (8.5 percent at June 30, 1998) plus
3 percent, or 11 percent. Principal is due
on the earlier of September, 1999; the date
of refinancing of any other lien secured by
the property which is junior in priority to
the lender's deed of trust; or the date that
the property is sold.(C) 1,099 1,099
Note payable to shareholder, unsecured and
non-interest bearing, due December, 1998.(D) 200 200
12% note payable, due no later than May 15, 1999 (E) 600 -
10% to 12% Equipment contracts payable,
collateralized by slot machines and related
equipment due in monthly payments over
12 to 36 months 514 -
Capital lease obligations, collateralized
by property and equipment due in monthly
payments over 36 to 60 months (note 8) 2,051 -
______ ______
$17,185 $ 8,584
Less: unamortized original issue discount (B) 560 784
$16,625 $ 7,800
(A) In January, 1998 the Company obtained a $5,000,000 construction loan to
finance the development and construction of the Mesquite Star (the "Secured
Financing"). The Secured Financing consists of a $5,000,000 construction loan
from First Credit Bank (the "First Credit Loan") secured by a first deed of
trust and UCC-1 fixture filings on the Mesquite Property. In connection with
the Secured Financing, the former shareholder debt and the shareholder loans
have subordinated to the new first deed of trust on the Mesquite Property.
Under the terms of the First Credit Bank Construction Loan Agreement between
First Credit Bank and the Company (the "Bank Loan Agreement"), the First Credit
Loan is an 18-month construction loan in the principal amount of $5,000,000
which bears interest at a fluctuating rate of interest per annum equal to the
sum of prime plus 2.5%. Pursuant to the First Credit Bank Loan Agreement, upon
maturity of the 18-month construction loan, the Company could request and obtain
a three-year extension of the First Credit Loan (the "Three-Year Loan") if
certain specified conditions are met, including: (i) the timely completion of
construction of the Mesquite Star project, (ii) the Company's full payment and
performance of the Company's loan obligations to First Credit Bank during the
18-month construction phase, and (iii) payment of a loan extension fee of
$50,000 (the "Loan Extension Fee"), plus additional costs and fees associated
with the closing of the Three-Year Loan.
The principal was increased from $5,000,000 to $5,450,000 by First Credit
Bank, by letter dated March 27, 1998, and was subsequently funded.
(B) Following the closing of the IPO in September of 1997, the shareholders
agreed to extend the terms of the notes based on the terms described above.
In addition, accrued interest of approximately $960,000 was added to the
principal amount of the notes and approximately $274,000 of accrued default
interest was waived by the shareholders. The corresponding credit entry for
this transaction was to additional paid-in capital. In consideration of this
extension, the Company issued these shareholders warrants to acquire a total of
400,000 shares of common stock at an exercise price of $2.75 per share.
Original issue discount in the amount of $896,000 was recorded for the granting
of these warrants and $224,000 of this discount was expensed during the six
month period ended June 30, 1998.
The loan agreement with the shareholders provides the Company with the option of
making up to $525,000 in interest payments due after the closing of the IPO in
the form of common stock. The Company must pay interest in cash and not in
common stock to the extent there is sufficient positive cash flows from
operations in excess of working capital needs. The shares of common stock
issued pursuant to this loan agreement are valued based on the average
closing price of the Company's common stock for five business days preceding the
interest payment due date. The Company issued approximately 141,000
shares of common stock during the six month period ended June 30, 1998 in
payment of accrued interest of approximately $406,000 (which included $241,000
of interest which was accrued at December 31, 1997). The Company intends to
issue approximately 36,000 additional common shares in payment of accrued
interest of approximately $119,000 subsequent to June 30, 1998.
In addition, the shareholders forgave $450,000 of a $475,000 note payable (which
was issued as a loan extension fee in 1997 by the Company and charged to expense
on the Statement of Operations) following the closing of the IPO. The
corresponding credit entry for this transaction was to additional paid-in
capital.
(C) Following the closing of the IPO in September of 1997, this note was
extended under the terms described above. In addition, approximately $41,000 of
accrued interest was added to the principal amount of the note.
(D) In September of 1997, the Company issued a $200,000 note payable as
consideration for the option to purchase an indirect interest in a North Las
Vegas property. The corresponding debit entry for this transaction was to other
assets (See Notes 3 and 9).
Interest expense paid or accrued to the shareholders was approximately
$420,000 for the six month period ended June 30, 1998. Interest expense paid or
accrued to the former shareholder was approximately $67,000 for the six month
period ended June 30, 1998.
(E)On May 14, 1998, the Company entered into an agreement with A.F. Construction
Company, Inc. ("AF"), and issued a note, dated May 15, 1998, for $600,000
covering amounts due in connection with construction of the Mesquite Star Hotel
& Casino. The note bears interest at the greater of the Bank of Hawaii prime
rate plus 3%, or 12%, per annum and can be extended by the Company monthly until
April 15, 1999. As consideration for accepting the note, AF was granted warrants
to purchase 15,000 shares of the Company's common stock at $2.25 per common
share (See note 6). In addition, for each 1 month extension of the note AF shall
be issued additional warrants to purchase up to 7,500 of the Company's common
shares (in increments of 1,250 for each $100,000 principal amount, or pro rata
portion thereof, that remains outstanding). The Company has granted warrants to
purchase an aggregate of 37,500 of the Company's common shares to AF through
September 15, 1998 and presently elected to extend payment of the $600,000 note
principal to October 15, 1998.
The Company owes AF an additional sum of approximately $253,000, which is
included in accounts payable at June 30, 1998, arising during completion of the
Mesquite Star Hotel & Casino in June, 1998. AF filed a mechanic's lien against
the Mesquite Property in the amount of approximately $853,000 on August 27,
1998. As a result of this mechanics lien, the Company is in violation of related
covenants on all of their real estate secured debt. The Company intends to repay
this $853,000 from refinancing proceeds (see note 12).
On March 31, 1998, Drs. Kelley and Tam, both shareholders, executed a financing
commitment to lend the Company up to $1,000,000 on the terms set forth therein.
The obligations of Drs. Kelley and Tam under the commitment were conditioned
upon the execution of legal documentation satisfactory to the parties and their
counsel. The loan is to bear interest at the greater of either the Bank of
Hawaii prime rate of interest plus 3% per annum, or 12% per annum with a
$10,000 commitment fee. The loan is to be secured by a deed of trust
encumbering the Company's property in Mesquite, Nevada and governed by the terms
of a new loan agreement. Advances can be obtained for current working capital
purposes upon 20 days advance notice no sooner than June 1, 1998 and no later
than March 26, 1999. There were no amounts outstanding under this commitment at
June 30, 1998. (See note 6 for information on warrants issued pursuant to this
commitment. See note 12 for subsequent events pursuant to this commitment).
On June 12, 1998, Drs. Kelly and Tam executed a second financing commitment to
lend the Company up to $1,000,000. The loan is to bear interest at the greater
of either the Bank of Hawaii prime rate of interest plus 3% per annum, or 12%
per annum. The loan is to be secured by a deed of trust encumbering the
Mesquite Hotel and Casino. The agreement calls for a reduction of the commitment
by the net sum received by NevStar from the sale of shares of common stock
pursuant to the June 30, 1998 private placement (see note 5). The net sum
received reduced the available amount to $404,000 as of June 30, 1998. (See note
6 for warrants issued in connection with the commitment and note 12 for
subsequent agreement). There was no amount outstanding under this commitment at
June 30, 1998.
On April 27, 1998 an unrelated third party executed a financing commitment to
loan the Company up to $250,000 with per annum interest of the greater of either
the Bank of Hawaii prime rate plus 3%, or 12%. The commitment is secured by a
deed of trust on the Mesquite Star Hotel & Casino. Interest is payable monthly
in arrears and the principal and accrued interest is due one year from the
initial draw date. There was no amount outstanding under this commitment at June
30, 1998.
As of June 30, 1998, annual maturities of notes and contracts payable (exclusive
of capital lease obligations) follow: (Dollars in Thousands)
June 30, 1999 $ 1,163
June 30, 2000 13,960
June 30, 2001 11
$15,134
(5) Capital Stock
Initial Public Offering
On September 24, 1997, the Company completed an initial public offering ("IPO")
of 1,725,000 units consisting of one share of Common Stock and two redeemable
Common Stock Purchase Warrants at $5.50 per unit. The registered holder of each
Warrant may purchase, at any time, over a five-year period commencing on
September 18, 1997, one share of the Company's Common Stock at a price of $5.50
per share. Commencing 90 days from September 18, 1997, the Warrants are subject
to redemption by the Company at $0.05 per Warrant on 30 days prior written
notice to the Warrant holders, if the closing price of the Common Stock as
reported in the NASDAQ Automated Quotation System Small Cap Market averages in
excess of $11.00 for a period of 20 consecutive trading days ending within 15
days prior to the notice of redemption. The net proceeds to the Company of
$7,739,000 were after underwriting discounts, commissions, and other costs
associated with the offering.
Authorized shares
The Company has authority to issue an aggregate of 100,000,000 shares, of which
50,000,000 shares have been designated as Common Stock with $0.01 par value and
1,500,000 shares have been designated as Series A Convertible Non-Voting
Preferred Stock with a $0.01 par value. The Company is not required to pay any
dividends on the preferred stock.
In June of 1997, the Company's shareholders approved a 1 for 9.54 reverse stock
split which became effective concurrently with the consummation of the IPO. All
share and per share amounts presented in these financial statements have been
adjusted for this reverse stock split.
Preferred stock
In June of 1997, the Company delivered an exchange offer to the holders of the
preferred shares which gave them the right to convert each of the preferred
shares into common stock at a ratio of .7 shares of common stock for every 1
share of preferred stock. As of June 30, 1998, 1,418,844 preferred shares
have been exchanged for 993,182 shares of common stock and the capital stock
accounts have been adjusted accordingly.
Common stock
In May 1995, certain stockholders of the Company granted the Company an option
to purchase a total of 171,514 shares of the Company's common stock for a
purchase price of $2.38 per share. In December, 1995, the Company exercised
that option, but the transaction was never completed due to the withdrawal of a
planned IPO in 1996. As a result, the Company delivered "termination of option
agreements" to such stockholders and executed agreements had been received from
each of these stockholders at December 31, 1997.
During the six month period ended June 30, 1998, the Company completed the sale
in a private placement of an aggregate of 274,000 shares of Common stock at a
sale price of $2.50 per common share. Total net proceeds received or deposited
in escrow for the Company was approximately $597,000 at June 30, 1998.
(6) Stock Options, Warrants and Other Rights
Stock Options
The Company's shareholders approved the 1997 Stock Incentive Plan ("the Plan")
for a total of 1,266,994 shares in June of 1997. The outstanding options under
a former stock option plan have been incorporated into the 1997 Plan and no
further options will be made under it. The incorporated options will continue
to be governed by their existing terms. Stock options, stock appreciation
rights and other stock-based awards may be granted under this new Plan. Awards
under the Plan may be made to Company employees, directors, officers and
consultants of the Company. The Plan confers upon the Compensation Committee
(as Plan Administrator) the discretion to determine the number of the shares
applicable to each option, the term of each option, and the time or times during
its term when the option becomes exercisable. The Plan requires that the
exercise price for awards made subsequent to the closing of the IPO be at fair
market value at the date of grant. No option may be granted under the plan
after July, 2007. Summarized information for employee stock option plans, for
the six month periods ended June 30 1998 and 1997, follows:
Six Month Period Ended
June 30,
1998 1997
(Unaudited)
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at beginning of period 1,068,000 $ 3.27 151,596 $ 8.59
Granted 57,500 2.32 - -
Canceled or relinquished - - - -
Exercised - - - -
Outstanding at end of period 1,125,500 $ 3.22 151,596 $ 8.59
Options exercisable at end of period 200,606 - 133,580 -
Available for grant at end of period 31,898 78,360
Weighted-average fair value of
options granted during the period $ 1.24
The following table summarizes information about stock options outstanding at
June 30, 1998:
Weighted
Options Number Weighted Weighted Average
Granted With Outstanding Average Average Remaining
Exercise June 30, Exercise Fair Contractual
Prices 1998 Price Value Life(years)
Equal to market price 90,500 $ 2.22 $0.92 9.50
Less than market price 1,025,000 3.28 2.10 9.00
Greater than market price 10,000 5.50 0.52 9.25
1,125,500 9.00
In July of 1997, options to purchase 151,596 shares of common stock granted
under the prior stock option plan were canceled and replaced by granting
1,025,000 options under the 1997 Plan with the modification of certain terms.
147,058 of these options vested concurrent with the July 1, 1998 opening of the
Mesquite Star Hotel and Casino, and 877,942 options vest over five years.
Additional compensation (and a corresponding credit to additional paid-in
capital) of approximately $495,000 will be recorded as the services are
provided. Approximately $137,000 and $0 of such compensation expense was
recorded during the six month periods ended June 30, 1998 and 1997,
respectively.
Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based
Compensation ("SFAS 123"), is effective for years beginning after 1995, and
provides, among other things, that companies may elect to account for employee
stock options using a fair value method or continue to apply the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"). The
Company adopted SFAS 123, and elected to continue to account for employee stock
options under APB 25. Accordingly no compensation costs related to employee
stock options has been recognized pursuant to the fair value method.
The following table discloses the Company's pro forma net loss and net loss per
share assuming compensation cost for employee stock options had been determined
pursuant to the fair value method described in SFAS 123. The table also
discloses the weighted average assumptions used in estimating the fair value of
each option grant on the date of grant using the Black-Scholes option pricing
model, and the estimated weighted average fair value of the options granted.
The model assumes no expected future dividend payments on the Company's common
stock for the options granted.
Six Month Period Ended
June 30,
1998 1997
(Unaudited)
(Dollars in thousands
except per share amounts)
Net loss:
As reported $(2,286) $ (1,847)
Proforma (2,400) (1,847)
Net loss per common share:
As Reported $ (0.65) (2.78)
Proforma (0.68) (2.78)
Weighted average assumptions (1998 only):
Expected stock price volatility 35.00%
Risk-free interest rate 6.50%
Expected option lives (years) 3 to 5
Estimated fair value of options granted $1.24
A summary of option activity with non-employees for the six month periods ended
June 30, 1998 and 1997 follows:
Six Month Period Ended
June 30,
1998 1997
(Unaudited)
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
Outstanding at beginning of period 99,596 $ 4.00 27,906 $ 3.60
Granted 10,000 2.20 - -
Canceled or relinquished - - - -
Exercised - - - -
Outstanding at end of period 109,596 $ 3.83 27,906 $ 3.60
Options exercisable at end of period 101,263
In July of 1997, 7,862 shares of common stock previously granted under the prior
stock option plan to a consultant were canceled and replaced by granting 75,000
options under the 1997 Plan with the modification of certain terms.
Approximately $5,000 of consulting expense (and a corresponding entry to
additional paid-in capital) was recorded during the year ended June 30, 1998.
In addition, shareholders agreed to relinquish 17,948 shares of stock options
and all debt conversion rights in connection with the extension of the debt
following the closing of the IPO as discussed in Note 4.
Warrants
During the six month period ended June 30, 1998, the Company granted certain
shareholder/lenders 75,000 warrants to purchase common stock of the Company at
an exercise price of $2.00 per share, representing a commitment fee for the
issuance to the Company of a $1,000,000 loan commitment. Accordingly,
approximately $109,000 was recorded as a commitment fee, which is reflected in
other assets, and a corresponding credit to paid in capital. The contractual
maturity of the warrants is approximately 5 years at June 30, 1998.
As consideration for a $1,000,000 stand by letter of commitment in June, 1998,
the Company granted certain shareholder/lenders warrants to purchase 125,000
shares of common stock of the Company at an exercise price of $2.50 per share.
The commitment fee expense arising from this transaction of $214,000 was charged
to expense during the six month period ended June 30, 1998. The terms of this
commitment, among other things, provided the Company the ability to draw any
shortfall in proceeds from its $1,000,000 maximum private placement of common
stock, against the letter of commitment, up to a maximum of $1,000,000. At June
30, 1998, the Company successfully raised net proceeds of approximately $597,000
from the offering (See note 12 for subsequent events related to this stand by
commitment).
Also during 1998, the Company granted to an unrelated third party lender, 17,850
warrants to purchase common stock at an exercise price of $2.00 per share as
consideration for a $250,000 commitment letter. The Company recorded
approximately $34,000 as commitment fees related to this transaction, which is
carried in other assets with a corresponding credit to paid in capital. The
remaining contractual maturity of such warrants is approximately 5 years at June
30, 1998. Subsequent to June 30, 1998, the Company drew down $100,000 against
this commitment.
In 1998, the Company issued 15,000 warrants at an exercise price of $2.25 per
share, in connection with a note payable to a vendor. The Company recorded
approximately $34,000 as commitment fees related to this transaction, which is
carried in other assets with a corresponding credit to paid in capital. The
Company also issued a warrant agreement to the private placement underwriter for
15,568 common shares with an exercise price of $4.13 per common share. The
remaining contractual maturity for such warrants is 5 years at June 30, 1998.
In connection with the private placement of the Series A preferred stock in
1994, the Company issued warrants to purchase 15,547 shares of the Company's
common stock at $44.07 per share. The remaining contractual life for these
warrants is approximately eight months at June 30, 1998.
Warrants to purchase 13,102 and 26,205 shares of the Company's common stock at
$9.54 and $18.51 per share, respectively were issued in 1995 in connection with
a note payable which was later purchased by shareholders. The remaining
contractual life for these warrants is approximately two years as of June 30,
1998.
In addition to the 400,000 warrants granted in 1997 to shareholders in
consideration of the notes payable extension as discussed in Note 4, the Company
granted shareholder warrants to purchase 79,839 shares of the Company's common
stock at an exercise price of $0.25 for various consulting services provided to
the Company. Approximately $342,000 of consulting expense (and a corresponding
credit entry to additional paid-in capital) was recorded during the year ended
December 31, 1997 relating to this transaction. Also, a shareholder was granted
warrants to purchase 20,000 shares of the Company's common stock at an exercise
price of $2.00 per share for assisting with the arrangement of the North Las
Vegas Option (See Notes 3 and 9). The Company recorded approximately $57,000 in
other assets (and a corresponding credit entry to additional paid-in capital) in
1997 relating to this transaction. The remaining contractual maturity for these
warrants is approximately four years at June 30, 1998.
In connection with the IPO that closed in 1997, the representative underwriter
was issued a warrant agreement entitling the underwriter to purchase 76,278
units, each comprised of one share of common stock and four common stock
purchase warrants. The exercise price of the units is $8.03 as is the exercise
price for the warrants included in the units. The remaining contractual
maturity for these units is approximately 3 years as of June 30, 1998.
A summary of all common shares under issued stock options and warrants, at
June 30, 1998 follows:
Number of common shares
Stock options 1,235,096
Warrants issued in connection
with IPO(note 5 and 12) 3,450,000
Warrants underlying underwriter's warrant 305,112
Shares underlying underwriter's warrant 76,278
Other warrants 803,111
Total 5,869,597
(7) Related Party Transactions
The Mesquite land was acquired from a company related through common ownership
on December 2, 1993 in exchange for 288,260 shares of common stock, assumption
of $2,442,000 of notes payable and the issuance of an additional note payable
for $2,758,000.
The historical cost of the land acquired from the related company was
approximately $4,639,000 which includes the original purchase price of the land
of approximately $3,083,000 plus improvements and capitalized costs of
approximately $1,556,000. The difference between the historical cost basis and
the cost to the Company to acquire the property of approximately $588,000 has
been treated as a preferential dividend. The land costs have been reduced by
this amount with a corresponding reduction to additional paid-in capital.
This same related party loaned the Company $500,000 in 1995 and the total notes
payable to this related party at June 30, 1998 is approximately $1,099,000
as reflected in Note 4. In July 1997, the makers of the other notes payable,
reflected in note 4, purchased 280,398 shares of common stock from this related
party at a purchase price of $1.68 and became shareholders of the Company.
(8) Commitments and Contingent liabilities
Leases
The Company leases both real estate and furniture and equipment used in its
operations and classifies those leases as either operating or capital leases
following the provisions of SFAS No. 13, "Accounting for Leases."
Mesquite Star Hotel & Casino equipment leased under capital leases, included in
furniture and equipment was $2,061,000 at June 30, 1998. There was no
amortization of assets held under capital leases at June 30, 1998.
The following is a schedule of future minimum lease payments for capital and
operating leases (with initial or remaining terms in excess of one year) as of
June 30, 1998:
Capital Operating
Leases Leases
(Dollars in thousands)
Years ending June 30,
1999 $ 580 $ 865
2000 755 1,018
2001 616 981
2002 321 240
2003 246 109
Thereafter 26 27
Total minimum lease payments $2,544 $3,240
Less: amount representing interest
(at imputed rates from 10% to 11.5%) (493)
Present value of net minimum capital
lease payments $2,051
Employment agreements
The Company has employment agreements with two of its officers. The terms of the
agreements are for five years and contain minimum base level salary requirements
and include provisions where both officers upon termination are eligible for
severance pay and certain other benefits as outlined in the agreements.
(9) North Las Vegas Option Agreement
The Company entered into a option agreement in April, 1996 that provides the
Company the option to purchase an indirect 20% ownership interest, (which is
estimated to be approximately $2,200,000) in a 25-acre parcel of unimproved real
property located in the city of North Las Vegas, Nevada. As discussed in Note
4, the Company issued a $200,000 note payable as consideration for the option.
The option expires in September of 1999. Upon payment of the note, the funds
are expected to be used for planning, engineering, promotional expenses and
design work with respect to the project and are non-refundable and not
applicable to the option purchase price, but are reimbursable in connection with
the development and financing of the project. One of the Company's shareholders
has an ownership interest in the above property.
(10) 1997 Bridge Financing
On September 24, 1997, the Company repaid all the bridge financing plus the
accrued interest, and the entire discount on such financing was expensed in
1997.
The Company obtained $1,000,000 of the bridge financing in February, 1997. The
Company also received $400,000 of additional bridge/construction financing in
April and May of 1997. For each $25,000 cash investment (a unit), an investor
received a $25,000 senior promissory note and 3,318 shares of common stock. The
notes required interest at 8% per annum, and were due in full on the earlier of
(1) two years from the date of the notes; (2) within ten business days following
the closing of the proposed IPO; or (3) financing of the Company totaling $4
million or more in gross proceeds. Notes totaling $1,050,000 were secured by
deeds of trust on the Mesquite property and $350,000 was secured by an
assignment of contract for a mechanics lien on the Mesquite property for
$400,000.
The Company allocated approximately $308,000 of the proceeds of the combined 56
units to equity which resulted in an original issue discount in the same amount
amortized over the expected life of the notes. The proceeds allocated to
equity were determined based on the estimated fair value of the common stock
when the units were issued.
(11) Year 2000(unaudited)
The Company has conducted a review of its computer systems to identify systems
that could be affected by the year 2000 issue, and is developing a remediation
plan to resolve the issue. The issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous data
and cause a system to fail.
Based on the review of the computer systems, management does not believe the
cost of remediation will be material to the Company's financial position and
results of operations.
(12) Subsequent Events and Financing
On September 30, 1998, the Company entered into a loan commitment with a lender
for a real estate first mortgage loan of approximately $20,000,000 which is
contingent on multiple conditions being met. If funded, the proceeds will be
utilized, among other things, to repay the Company's existing real estate notes
payable, to pay the A.F. Construction payable, to provide a principal and
interest reserve during the early months of the mortgage loan, and for general
corporate purposes.
Sales of Land
On September 11, 1998, pursuant to an escrow agreement with an unrelated party,
the Company sold a portion of the Mesquite land (about 26,000 square feet) for
$450,000 and a parcel of land adjacent to the Mesquite Land (5,199 square feet).
The Company will record a gain on this sale during the quarter ended September
30, 1998.
The Company has also entered into an agreement with an unrelated party to sell a
separate parcel of Mesquite land (about 41,000 square feet) for approximately
$445,000, including the initial refundable deposit of $100,000 which was
received by the Company on September 30, 1998. The escrow is expected to close
on October 31, 1998. Upon close of escrow, the Company will record a gain on
this sale.
Warrant Agreement Adjustment
On June 24, 1998 and July 1, 1998, the Company completed the sale in a private
placement of an aggregate of 274,000 shares of common stock at a sale price of
$2.50 per common share. The issuance of this 274,000 shares of common stock
subsequent to June 30, 1998 (but committed at June 30, 1998), when aggregated
with certain other issuances of common stock and warrants to purchase common
stock by the Company since September 24, 1997, in accordance with Section
9(f)(ii) of the Warrant Agreement, have resulted in the following adjustments as
of July 1, 1998 to the purchase price and the number of shares of common stock
purchasable upon exercise of each warrant. In accordance with Section 9(a) of
the Warrant Agreement, the purchase price of common stock purchasable upon
exercise of the warrants has been adjusted from $5.50 to $5.06 per common share,
and therefore the number of shares of common stock purchasable upon exercise of
each warrant has been adjusted from 1.0 to 1.1 common shares.
Resignation of Officer and Director
Jeffrey L. Gilbert, President and Chief Operating Officer and a Director of the
Corporation, resigned from all positions with NevStar effective September 25,
1998, in order to pursue other opportunities. Mr. Gilbert will, however,
continue to serve NevStar as a consultant to assist the Company in certain
projects and transitional matters. The Board of Directors has named its Chairman
and Chief Executive Officer, Dr. Michael J. Signorelli, as President to replace
Mr. Gilbert. The vacancy on the Board of Directors caused by Mr. Gilbert's
resignation has not yet been filled.
As part of Mr. Gilbert's severance agreement he will receive $100,000 in
severance compensation and his 265,000 stock options fully vested on September
25, 1998. The Company will record the expense pursuant to the severance
agreement during the quarter ended September 30, 1998.
Related Party Commitment
On September 30, 1998 a letter of commitment ("New Loan") was entered into with
Drs. Kelly and Tam replacing the March 31, 1998 and June 12, 1998 commitments
(see note 4). The New Loan is for $1,000,000 with interest at 12% and defers
payment of accrued interest of $215,000 on the previous loan agreements until
the new loan is due in April, 1999. The deferred interest will accrue interest
at 12% per annum also. As consideration for the commitment and the initial
advance, the Company granted 32,250 warrants to purchase shares of the Company's
common stock at a purchase price of $2.50 per share, and 60,000 warrants to
purchase shares of the Company's common stock at a purchase price of $2.00 per
share. For each additional $100,000 advance, the lenders shall receive 15,000
warrants to purchase shares of common stock at $2.00 per share. An initial
advance of $400,000 was made on October 1, 1998 and was net of a commitment fee
of $10,000 and legal fees of $20,000.
Leases
The Company entered into two operating lease agreements subsequent to June 30,
1998. The commitment totals $214,000 under such leases.
Plan of Operation
The Mesquite Star Hotel and Casino opened for business on July 1, 1998. Results
of operations, which are not stabilized, have not generated net income or
positive cash flow at September 30, 1998. The Company intends to continue
conducting special events and promotional activities which may attract more
guests and visitors to the property. Although occupancy and revenues have
recently improved, there can be no assurance that the Company's plan of
operation for the Mesquite Star will be successful.
The Company's success is substantially dependent on closing the loan pursuant to
this loan commitment, or obtaining alternative debt or equity financing, the net
proceeds from the exercise of the Warrants, or otherwise during 1998, to
continue to implement its business plan, including the North Las Vegas Option.
There can be no assurance the Company will be able to generate sufficient funds
from these or other sources.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Incorporated by reference to the Proxy Statement for the Company's 1998
Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to the Proxy Statement for the Company's 1998
Annual Meeting of Stockholders.
ITEM 11 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to the Proxy Statement for the Company's 1998
Annual Meeting of Stockholders.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 3 - Articles of Incorporation and By-Laws
3.1. Restated Articles of Incorporation of the Company, filed October 3, 1995
(filed as Exhibit 3.2 to Pre-Effective Amendment No. 2 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
3.2. Certificate of Amendment to Restated Articles of Incorporation of the
Company, filed September 18, 1997 (filed as Exhibit 3.2.1 to Amendment No.
5 to Registration Statement No. 333-518-LA and incorporated herein by
reference)
3.3. Bylaws of the Company, dated December 2, 1993 (filed as Exhibit 3.3 to
Amendment No. 2 to Registration Statement No. 333-518-LA and incorporated
herein by reference)
3.4. Certificate of Amendment to Bylaws of the Company, dated July 23, 1997
(filed as Exhibit 3.4 to Amendment No. 5 to Registration Statement No.
333-518-LA and incorporated herein by reference)
Exhibit 10 - Material Contracts
10.1. Employment Agreement between Mr. Signorelli and the Company, dated
January 2, 1996 (filed as Exhibit 10.67 to Amendment No. 2 to
Registration Statement No. 333-518-LA and incorporated herein by
reference)
10.2. First Amendment of Employment Agreement between Michael J.
Signorelli and the Company, dated June 30, 1997 (filed as Exhibit
10.110 to Amendment No. 5 to Registration Statement No. 333-518-LA
and incorporated herein by reference)
10.3. Employment Agreement between Jeffrey L. Gilbert and the Company,
dated January 2, 1996 (filed as Exhibit 10.68 to Amendment No. 2 to
Registration Statement No. 333-518-LA and incorporated herein by
reference)
10.4. First Amendment of Employment Agreement between Jeffrey L. Gilbert
and the Company, dated June 28, 1996 (filed as Exhibit 10.106 to
Amendment No. 4 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.5. Second Amendment of Employment Agreement between Jeffrey L. Gilbert
and the Company, dated August 13, 1996 (filed as Exhibit 10.107 to
Amendment No. 4 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.6. Third Amendment of Employment Agreement between Jeffrey L. Gilbert
and the Company, dated February 24, 1997 (filed as Exhibit 10.108 to
Amendment No. 4 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.7. Fourth Amendment of Employment Agreement between Jeffrey L. Gilbert
and the Company, dated June 30, 1997 (filed as Exhibit 10.109 to
Amendment No. 5 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.8. Standard Form Agreement between Owner and Architect (the Company and
Rissman & Rissman Associates), dated August 23, 1994 (filed as
Exhibit 10.60 to Amendment No. 2 to Registration Statement No. 333-
518-LA and incorporated herein by reference)
10.9. Standard Form of Agreement between Owner and Contractor (the Company
and A.F. Construction Company), dated August 30, 1994 (filed as
Exhibit 10.61 to Amendment No. 2 to Registration Statement No. 333-
518-LA and incorporated herein by reference)
10.10. Warrant Agent Agreement, dated September 18,1997, between the
Company and American Stock Transfer & Trust Company (filed as
Exhibit 4.8 to Amendment No. 5 to Registration Statement No. 333-
518-LA and incorporated herein by reference)
10.11. 1997 Stock Incentive Plan (filed as Exhibit 10.103 to Amendment No.
5 to Registration Statement No. 333-518-LA and incorporated herein
by reference)
10.12. Convertible Loan Agreement dated August 14, 1995 between the Company
and Richard Kelley (filed as Exhibit 10.51 to Amendment No. 2 to
Registration Statement No. 333-518-LA and incorporated herein by
reference)
10.13. Amended and Restated Convertible Loan Agreement dated April 18, 1996
among the Company, Richard R. Kelley and Richard Tam (filed as
Exhibit 10.78 to Amendment No. 2 to Registration Statement No. 333-
518-LA and incorporated herein by reference)
10.14. Participation and Intercreditor Agreement, dated April 18, 1996,
between Richard Kelley and Richard Tam (filed as Exhibit 10.53 to
Amendment No. 2 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.15. Stock Purchase Agreement dated as of May 9, 1997 by and between the
Company, PMJ Enterprises, Inc., Patrick J. Shannon, Dr. Richard Roy
Kelley and Richard Tam (filed as Exhibit 10.111 to Registration
Statement No. 333-518-LA and incorporated herein by reference)
10.16. First Amendment to Amended and Restated Convertible Loan Agreement
between the Company and Richard R. Kelley dated July 17, 1997 (filed
as Exhibit 10.123 to Amendment No. 6 to Registration Statement No.
333-518-LA and incorporated herein by reference)
10.17. Intercreditor Agreement by and among Richard Kelley, Richard Tam and
PMJ Enterprises, Inc., dated May 1997 (filed on Exhibit 10.17 to
Form 10-KSB filed April 15, 1998 and incorporated herein by
reference)
10.18. Option Agreement between the Company and Desert Mesa Land Partners,
Ltd., a Nevada limited partnership dated April 23, 1996 (filed as
Exhibit 10.84 to Amendment No. 2 to Registration Statement No. 333-
518-LA and incorporated herein by reference)
10.19. First Amendment dated April 30, 1997 to Option Agreement between the
Company and Desert Mesa Land Partners, Ltd., and High Mesa
Development, Inc., dated April 23, 1996 (filed as Exhibit 10.117 to
Amendment No. 5 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.20. Second Amendment dated September 8, 1997 to Option Agreement between
the Company and Desert Land Partners, Ltd. and High Mesa
Development, Inc. (filed as Exhibit 10.20 to Form 10-KSB filed April
15, 1998 and incorporated herein by reference)
10.21. Third Amendment, dated March 15, 1998 to Option Agreement and
Amendment to Note between the Company and Desert Land Partners, Ltd.
and High Mesa Development, Inc. (filed as Exhibit 10.21 to Form 10-
KSB filed April 15, 1998 and incorporated herein by reference).
10.22. Operating Lease Commitment for $2,100,000 dated April 10, 1996
between the Company and PDS Financial Corporation (filed as Exhibit
10.87 to Amendment No. 2 to Registration Statement No. 333-518-LA
and incorporated herein by reference)
10.23. Equipment Financing Commitment dated March 12, 1996 between the
Company and PDS Financial Corporation (filed as Exhibit 10.88 to
Amendment No. 2 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.24. Operating Lease Commitment for $700,000 dated March 29, 1996 between
the Company and PDS Financial Corporation (filed as Exhibit 10.94 to
Amendment No. 2 to Registration Statement No. 333-518-LA and
incorporated herein by reference)
10.25. Construction Loan Agreement between First Credit Bank and the
Company dated January 27, 1998 (filed as Exhibit 10.25 to Form 10-
KSB filed April 15, 1998 and incorporated herein by reference)
10.26 Master Lease Agreement between IGT and the Company, dated April 8,
1998 (filed as Exhibit 10.26 to Form 10-KSB filed April 15, 1998 and
incorporated herein by reference)
10.27. Lease Agreement between Casino Excitement, Inc. dba Mikohn Lighting
& Sign and the Company dated as of February 9, 1998 (filed as
Exhibit 10.27 to Form 10-KSB filed April 15, 1998 and incorporated
herein by reference)
10.28 Financing Commitment Letter dated March 31, 1998 by Richard Kelley
and Richard Tam (filed as Exhibit 10.1 to Form 10-QSB filed May 15,
1998 and incorporated herein by reference)
10.29 Financing Commitment Letter dated April 27, 1998 by Sam Hon (filed
as Exhibit 10.2 to Form 10-QSB filed May 15, 1998 and incorporated
herein by reference)
10.30 First Amendment to Construction Loan Agreement between First Credit
Bank and the Company dated June 17, 1998
10.31 Amendment dated August 25, 1998 to Hon Financing Commitment Letter
10.32 Loan Agreement dated September 30, 1998 by and between the Company
and Richard Kelley and Richard Tam
10.33 Letter Agreement dated May 14, 1998 by and between the Company and
A.F. Construction Company, Inc.
10.34 Conditional Loan Commitment dated September 30, 1998 between the
Company and CNB Capital, Inc. (To be sent by amendment)
10.35 Fourth Amendment, dated September , 1998 to Option Agreement and
Amendment to Note between the Company and Desert Land Partners, Ltd.
and High Mesa Development, Inc.
10.36 Executive Severance Agreement dated September 25, 1998, by and
between the Company and Jeffrey L. Gilbert
Exhibit 24 - Powers of Attorney
Exhibit 27 - Financial Data Schedule (filed on EDGAR only)
(b) REPORTS ON FORM 8-K.
During the quarter ended June 30, 1998, the following reports on Form 8-K
were filed by the Company:
(1) A Report dated June 23, 1998 regarding the Company's receipt of
approval from the Nevada Gaming Commission to commence gaming operations at its
Mesquite Star Hotel and Casino;
(2) A Report dated June 24, 1998 regarding the Company's private
placement of 224,000 shares of Common Stock and adjustments to Warrants; and
(2) A Report dated June 29, 1998 regarding the Company's appointment of
Brent E. Duncan as its Chief Financial Officer and Treasurer
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 13th of October, 1998.
NEVSTAR GAMING & ENTERTAINMENT
CORPORATION
By:
Michael J. Signorelli
Chairman of the Board, President,
Secretary, and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons, who include a majority of the Board of Directors, on
behalf of the Registrant and in the capacities indicated on October ,
1998.
Signatures Title
James D. Meehan Director
Michael J. Signorelli Director
Richard Tam Director
By:
Michael J. Signorelli, individually,
Chairman of the Board, President, Secretary and
Chief Executive Officer (Principal
Executive Officer) and as attorney-in-fact
for the foregoing Persons
By:
Brent E. Duncan
Chief Financial Officer
and Treasurer (Principal Financial
Officer and Principal Accounting Officer)
FIRST AMENDMENT TO
CONSTRUCTION LOAN AGREEMENT
This First Amendment to Construction Loan Agreement ("First Amendment") is
entered into between First Credit Bank, herein "Lender," and NevStar Gaming &
Entertainment Corporation, herein "Borrower," with reference to the following
facts:
A. Pursuant to the Construction Loan Agreement dated January 27, 1998,
(the "Agreement"), Lender agreed to loan to Borrower the sum of Five Million
Dollars ($5,000,000.00) (the "Construction Loan") for the purposes of financing
the construction of a hotel and casino building and other improvements
incidental thereto on Borrower's property referred to therein.
B. Borrower commenced construction of the improvements and loan funds
have been advanced by Lender to Borrower in accordance with the terms of the
Agreement. Borrower has now applied to Lender to increase the Construction Loan
from the sum of Five Million Dollars ($5,000,000.00) to the sum of Five Million,
Four Hundred Fifty Thousand Dollars ($5,450,000.00).
C. In connection with the Construction Loan, Borrower executed the
Related Documents as defined in the Agreement, including the Note and the
Construction Deed of Trust and Security Agreement with Assignment of Rents.
D. Lender agrees to increase the loan amount from the sum of Five
Million Dollars ($5,000,000.00) to Five Million Four Hundred Fifty Thousand
Dollars ($5,450,000.00) in accordance with the terms of the Agreement, as
amended
hereby, and provided that Borrower executes the Advance Promissory Note attached
hereto as Exhibit "A," the Notice of Advance Secured by Deed of Trust and
Amendment attached hereto as Exhibit "B," obtains the necessary signatures to
the
First Amended Subordination Agreements attached hereto as Exhibits "C-1" and "C-
2," and otherwise performs Borrower's obligations under the Agreement as amended
hereby.
Based upon the above, Borrower and Lender agree to amend the Agreement as
follows:
1. The following definitions contained in Article I of the Agreement are
hereby amended in their entirety to read as follows:
Q. Note. The term "Note" shall mean collectively the following two (2)
Promissory Note:
1. Original Note. The Promissory Note dated January 27, 1998, executed
by Borrower, payable to the order of Lender, in the principal sum of Five
Million
Dollars ($5,000,000.00) bearing interest at the variable interest rate and being
payable as therein provided, together with any and all renewals, extensions,
modifications, substitutions, replacements, and expansions thereof (herein the
"Original Note").
2. Advance Note. That certain Advance Promissory Note of this same date
executed by Borrower, payable to the order of Lender, in the principal sum of
Four Hundred Fifty Thousand Dollars ($450,000.00), a copy of which is attached
hereto as Exhibit "A," bearing interest at the variable interest rate and being
payable as therein provided, together with any and all renewals, extensions,
modifications, substitutions, replacements, and expansions thereof (herein the
"Advance Note").
X. Related Documents. The term "Related Documents" means and includes,
without limitation, all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness, and
specifically includes the Advance Note, the Notice of Advance Secured by Deed of
Trust and Amendment, and the First Amended Subordination Agreements referenced
herein and attached hereto.
Y. Security Agreement. The term "Security Agreement" means and includes,
without limitation, any agreements, promises, covenants, arrangements,
understanding or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security Interest,
and specifically includes the Construction Deed of Trust and Security Agreement
with Assignment of rents dated January 27, 1998, executed by the Borrower, as
Trustor, for the benefit of Lender, as Beneficiary, as amended by the Notice of
Advance Secured by Deed of Trust and Amendment attached hereto.
2. The first sentence of paragraph A. of Article II of the Agreement is hereby
amended to read as follows:
A. Description of Loan. The Loan shall be in an amount not to
exceed the principal sum of Five Million Four Hundred Fifty Thousand
Dollars ($5,450,000.00) and shall bear interest on so much of the
principal sum as shall be advanced pursuant to the terms of this Agreement
and the Related Documents.
3. Lender and Borrower acknowledges that the execution, delivery, and
recording of the documents in accordance with the terms of this First Amendment
shall be facilitated through an escrow established with Fidelity National Title
Agency of Nevada, Inc. pursuant to the escrow instructions attached hereto as
Exhibit "D" and incorporated herein by reference. The execution and delivery to
Escrow Agent by Borrower of the escrow instructions and the other documents
required thereby shall be a contingency to Lender's obligation to disburse the
increased Loan Fund in accordance herewith. Borrower agrees that the increased
amount of the Loan Fund shall be disbursed in accordance with the procedures set
forth in the Agreement. Whether or not the additional advance is funded by
Lender to Borrower, Borrower shall assume and pay upon demand all out of pocket
costs and expenses incurred by Lender in connection with this First Amendment to
Construction Loan Agreement, including, without limitation, the following:
(a) All closing costs, fees and disbursements of the escrow;
(b) All fees and expenses of Lender's legal counsel; and
(c) All title examination fees, title insurance premiums, including
necessary endorsements to Lender's policy of title insurance, appraisal fees,
survey costs, filing and recording fees, and other necessary fees.
4. This First Amendment shall be effective as of the date of recording
of the Notice of Advance Secured by Deed of Trust and Amendment, and, commencing
on the effective date hereof, Lender agrees to advance the additional Loan Fund
in accordance with the terms of the Agreement, as amended hereby, subject to
Borrower's performance of Borrower's obligations under the Agreement as amended
hereby.
5. Except as expressly amended hereby, all remaining terms and
conditions of the Agreement are hereby ratified and confirmed and shall remain
in full force and effect. Borrower's right to extend the term of the Loan as
evidenced by the letter agreement dated January 27, 1998, between Lender and
Borrower shall be applicable to the entire loan amount, including the amount
evidenced by the Advance Note.
Dated this 17th day of June, 1998.
LENDER
First Credit Bank
By: /s/ Farhad Ghassemieh
Authorized Officer
Hawaiin Gardens Branch
11940 East Carson Street
Hawaiin Gardens, CA 90716
BORROWER
NevStar Gaming & Entertainment
Corporation
By: /s/ Michael J. Signorelli
Michael J. Signorelli, Secretary
By: /s/ Jeffrey L. Gilbert
Jeffrey L. Gilbert, President
3175 West Post Road
Las Vegas, Nevada 89118
August 25, 1998
Mr. Sam Hon
5521 Toyon
San Diego, California 92115
Re: NevStar Gaming & Entertainment Corporation -- $250,000 financing
commitment dated April 27, 1998 (the "Commitment")
Dear Mr. Hon:
As you are aware, by letters dated June 24, 1998, July 20, 1998 and
August 10, 1998, NevStar Gaming & Entertainment Corporation ("NevStar") has
requested advances pursuant to the above-referenced Commitment totaling
$212,500. Proportionately larger advances were requested at the same time
from Dr. Kelley and Richard Tam pursuant to their loan commitment.
NevStar has agreed to accept a single advance from Dr. Kelley and
Richard Tam at this time of $400,000. Dr. Kelley and Richard Tam have agreed
that NevStar will be entitled to call for a second advance upon ten (10) days
written notice (instead of the twenty (20) days called for in both their and
your loan commitments). In light of the above, NevStar requests your
agreement that the following shall apply to your loan Commitment:
1. You shall make a $100,000 initial advance on your loan commitment;
2. You agree to make a second advance on your loan commitment upon
ten (10) days written notice from NevStar; and
3. Any subsequent advances (beyond the second advance) on your loan
commitment will require a twenty (20) day written notice from
NevStar.
<PAGE>
If the above is acceptable to you, will you please so indicate by your
signature below.
Very truly yours,
ZEVNIK HORTON GUIBORD McGOVERN PALMER &
FOGNANI, L.L.P.
By: /s/ Richard Moskitis
Richard L. Moskitis
I AGREE TO THE ABOVE MODIFICATIONS TO THE LOAN COMMITMENT.
Dated: August 25, 1998 /s/ Sam Hon
Sam Hon
RLM:bdk
cc: Mr. Jeffrey L. Gilbert (via fax: 702-269-1326)
Mr. James M. Shadlaus (via fax: 702-382-9877)
Kenneth D. Polin, Esq.
C:\MyFiles\98063010KSB\9810kx29.txt
LOAN AGREEMENT
This Loan Agreement (the "1998 Loan Agreement") is dated as of September
30, 1998, by and between NevStar Gaming & Entertainment Corporation, a Nevada
corporation formerly known as Mesquite Gaming Corp. (the "Borrower"), and
Richard Roy Kelley, an individual ("Lender"), and Dr. Richard Tam ("Dr. Tam")
with reference to the following facts:
R E C I T A L S
A. On or about April 18, 1996, Borrower executed an Amended and
Restated Convertible Loan Agreement in favor of Lender providing for the loan
of monies to the Borrower. Said Amended and Restated Convertible Loan
Agreement, as amended, is hereinafter referred to as the "Loan Agreement."
B. Dr. Tam participated in the Loan Agreement with Lender.
C. On March 31, 1998, Lender and Dr. Tam (hereinafter, collectively,
the "Lenders") executed a Financing Commitment agreeing, subject to the terms
and conditions therein, to lend the Borrower up to One Million Dollars
($1,000,000). Said Financing Commitment is hereinafter referred to as the
"March Commitment."
D. On or about June 4, 1998, the Lenders executed an Additional
Financing Commitment under which, subject to the terms and conditions set
forth therein, the Lenders and Dr. Tam agreed to lend up to an additional One
Million Dollars ($1,000,000) to the Borrower. Such Additional Financing
Commitment is hereinafter referred to as the "June Commitment."
E. The March Commitment and the June Commitment provided that
Lender's obligations were conditioned upon the preparation, execution and
perfection of legal documents reasonably satisfactory to the parties and their
counsel, which documents were to contain customary representations, warranties
and conditions acceptable to the Lender.
F. The June Commitment provided that the One Million Dollar
($1,000,000) commitment amount would be reduced by the net sum received by
Borrower from the sale of shares of common stock pursuant to that certain
Placement Agent Agreement entered into between Borrower and Schneider
Securities, Inc. dated May 29, 1998. The net sum so received by Borrower was
Five Hundred Ninety-Six Thousand Dollars Four Hundred Fifty Dollars
($596,450), leaving a balance of Four Hundred Three Thousand Five Hundred
Fifty Dollars ($403,550) (the "June Commitment Balance").
G. Borrower and Lenders desire to cancel any obligation of Lenders to
advance the June Commitment Balance to Borrower, and to defer the payment by
Borrower of Two Hundred Fifteen Thousand Dollars ($215,000) in interest owed
pursuant to the existing Loan Agreement until the date that the Note attached
hereto is due (the "Deferred Interest Amount"), which Deferred Interest Amount
shall bear like interest as advances pursuant to this Loan Agreement.
H. Lenders have incurred outstanding legal fees and costs in
connection with the loan evidenced by the Loan Agreement in the amount of
$20,277.33 through July 31, 1998 (the "Deferred Legal Fee Amount"). Borrower
and Lenders desire to confirm the obligation to pay with interest and to defer
the payment by Borrower of the Deferred Legal Fee Amount until the date that
the Note attached hereto is due.
I. Lenders have received a request from the Borrower to advance the
sum of Four Hundred Thousand Dollars ($400,000) under the March Commitment for
working capital purposes (the "Initial Advance").
J. The purpose of this 1998 Loan Agreement is to document the terms
and conditions of the Initial Advance and said loans and provide for the
implementation of the March Commitment and June Commitment, and shall
supersede the March Commitment and June Commitment in their entirety.
K. The capitalized terms not otherwise defined herein shall have the
terms as defined in the Loan Agreement.
IN WITNESS WHEREOF, the parties agree as follows:
1. Agreement to Loan. Lenders (severally and not jointly each as to
one-half) agree to lend to the Borrower up to a principal sum of One Million
Dollars ($1,000,000) (the "Principal Sum") on the terms and conditions set
forth herein (hereafter referred to as the "Loan") and subject to the payment
terms set forth in the Promissory Note attached hereto as Exhibit "A." The
Initial Advance pursuant to this 1998 Loan Agreement shall be net of an
origination fee of Ten Thousand Dollars ($10,000) and the legal fees set forth
in Section 7 below.
2. Security. The Loan shall be secured by a deed of trust
encumbering the Borrower's hotel/casino property in Mesquite, Nevada in the
form attached hereto as Exhibit "B" (the "Deed of Trust"). Borrower and
Lender understand, acknowledge and agree that the Deed of Trust shall
initially encumber those portions of Borrower's hotel/casino property located
in Mesquite, Nevada commonly known as the Rite-Aid pad and the A&W pad (the
"Outparcels"), the legal descriptions of which are attached hereto as Exhibit
"C." Each of the Outparcels is presently the subject of a separate escrow at
Fidelity National Title Agency of Nevada in Las Vegas, Nevada, to be sold to
two different third parties (the "Outparcel Escrows"). Lenders agree to
promptly deposit in the Outparcel Escrows partial reconveyances of the
Outparcels from the lien of the above-referenced Deed of Trust with
irrevocable instructions to record same upon the close of escrow for the sale
of each Outparcel. In the event that (i) the sales of the Outparcels are not
completed pursuant to the Outparcel Escrows, or (ii) the Outparcels are not
sold to other third parties within ninety (90) days of the date of this
Agreement, Lenders shall have no obligation to give partial releases from the
Deed of Trust for the Outparcels without the Lenders' further written
consent. The Lenders agree that the advances pursuant to this 1998 Loan
Agreement shall be subject to the existing Intercreditor Agreement to which
the Lenders are a party with each other.
3. Advances by Lenders. Lenders will advance to the Borrower for
current and future working capital purposes an amount as needed up to an
aggregate cumulative amount equal to the Principal Sum on twenty (20) days'
prior written notice of the Borrower to Lenders in the amounts and at the
times provided herein but no sooner than the date hereof and no later than
March 26, 1999. The Lender's obligation to make any advances shall be subject
to the conditions precedent set forth below in Section 4. After the Initial
Advance, in light of the fact that NevStar has already made a request for an
additional advance, Two Hundred Thousand Dollars ($200,000) may be scheduled
for disbursement on or after August 31, 1998 upon ten (10) days' prior written
notice, and an additional Four Hundred Thousand Dollars ($400,000) may be
scheduled for disbursement on or after September 30, 1998 upon twenty (20)
days' prior written notice.
4. Conditions to Advance. The obligation of the Lenders to make any
advance hereunder shall be subject to the following express conditions
precedent:
a. The Borrower shall possess all gaming and other licenses
required to fully operate the Mesquite Star Hotel and Casino, and no
proceedings or investigations with respect to the continued maintenance of
such licenses shall be pending or threatened.
b. There shall have been recorded in the official real estate
records of Clark County, Nevada, the Deed of Trust and the Lender shall have
received an ALTA policy of title insurance insuring such in form and substance
reasonably acceptable to Lender.
c. There shall be no uncured default pursuant to the terms of
the Loan Agreement or the 1998 Loan Agreement.
d. With respect to every advance other than the Initial
Advance, the Borrower shall demonstrate to the Lender's satisfaction that the
assets of the Borrower exceed the liabilities of the Borrower. Assets and
liabilities shall be determined in accordance with the Generally Accepted
Accounting Principles consistently applied.
e. With respect to all advances except for the Initial Advance
hereunder, all mechanic's liens shall be removed from the real property and
Lender shall have received an endorsement to its title insurance policy
insuring the Deed of Trust, assuring it that all mechanic's liens have been
removed.
5. Default. An Event of Default shall exist hereunder if (i) there
is a failure to pay any principal, interest or other amount within five (5)
days when due under the terms hereof; (ii) there shall be a failure to perform
or observe any obligation under this 1998 Loan Agreement or the exhibits
hereto, (iii) if there exists a default or event of default under the Note or
Deed of Trust, or (iv) there is an uncured Event of Default under the Loan
Agreement. In the event a default shall have occurred which would constitute
an Event of Default under the terms of section (ii) or (iii) above, which
cannot be cured by the payment of money, an Event of Default shall not be
deemed to have occurred in the event such matter is cured to the reasonable
satisfaction of Lender within fifteen (15) days after Lender gives notice
thereof. In the event such matter cannot be cured within such fifteen (15)
day period and it does not materially affect the security granted to Lender
under the Deed of Trust, then an Event of Default shall not be deemed to have
occurred in the event that after such notice from Lender, Borrower promptly
commences and diligently pursues the cure of the default and completes the
cure of such default to the reasonable satisfaction of Lender within one
hundred twenty (120) days.
6. Warrants. In connection with this 1998 Loan Agreement and the
Initial Advance, Lenders shall receive 32,250 warrants to purchase shares of
the Borrower's common stock at a purchase price of $2.50 per share, and 60,000
warrants to purchase shares of the Borrower's common stock at a purchase price
of $2.00 per share. For each additional One Hundred Thousand Dollar
($100,000) Principal Amount advanced pursuant to this 1998 Loan Agreement, the
Lenders shall receive 15,000 warrants (or pro rata portion thereof based upon
a partial draw of less than One Hundred Thousand Dollars ($100,000) rounded to
the nearest whole warrant) to purchase shares of the Borrower's common stock
at a purchase price of $2.00 per share. All warrants shall be in the form
attached hereto. The parties shall use best efforts to structure the
additional warrants in a manner to minimize taxation to the Lenders. All
shares of common stock of the Borrower issued upon exercise of the warrant
shall be subject to the terms and conditions of any existing lock-up
agreements which have been executed by the party receiving the shares and
shall constitute "Registerable Securities" as defined in Article X of the
Stock Purchase Agreement dated as of May 9, 1997 by and between the Company,
PMJ Enterprises, Inc., Patrick J. Shannon and the Lenders (the "Stock Purchase
Agreement"). The Lenders and the Borrower acknowledge and agree that the
registration of these shares of common stock shall be governed by Article X of
the Stock Purchase Agreement.
7. Lender's Attorneys' Fees. The Borrower agrees to pay and the
Lender is authorized to disburse from such loan, monies to pay fees and costs
incurred by Lender's counsel in preparation of negotiation of this 1998 Loan
Agreement and other matters in connection therewith subject to a cap of Seven
Thousand Five Hundred Dollars ($7,500).
8. Entire Agreement. This 1998 Loan Agreement and exhibits hereto
constitute the entire agreement between the parties with respect to the
advance of the funds specified herein and supersedes all prior oral or written
agreements, understandings, representations, warranties and courses of conduct
and dealing between the parties on the subject matter thereof and expressly
supersedes the March Commitment and the June Commitment.
9. General Provisions. Article 13 of the Loan Agreement, which
contains the General Provisions, is hereby incorporated herein by this
reference as though it was set forth in full herein.
10. Enforcement. In the event that the Lender is required to take any
action to enforce the terms and provision of this 1998 Loan Agreement or the
exhibits hereto or other obligations of the Borrower in connection herewith,
the Borrower agrees to pay all costs and expenses incurred by Lender in doing
so, including, but not limited to, reasonable attorneys' fees incurred by the
Lender.
11. Counterparts. This 1998 Loan Agreement may be executed in one or
more counterparts, all of which when fully executed and delivered by all
parties hereto and taken together shall constitute a single agreement, binding
each of the parties. Unless prohibited by law or by any applicable
governmental authority, any document shall be signed and transmitted by
facsimile with the same validity as if it were an ink-signed document.
12. North Las Vegas Option. As consideration for Borrower waiving One
Hundred Thousand Dollars ($100,000) of the June Commitment amount, Dr. Tam
agrees to cause "Seller" and "High Mesa" (as defined in that certain Option
Agreement dated April 23, 1996 in which Borrower is the "Buyer") to enter into
the Fourth Amendment to Option Agreement and Amendment to Note in the form
attached hereto as Exhibit "D." Richard Roy Kelley shall have no obligations
whatsoever in connection with this Section 12.
13. Deferred Amounts. The Deferred Interest Amount and the Deferred
Legal Fee Amount (the "Deferred Amounts") shall bear interest from the date
hereof at the Base Rate as set forth in the Loan Agreement and Borrower hereby
confirms that the obligation to pay the Deferred Amounts is an obligation
under the Loan Agreement and secured by the security given to secure same.
The Deferred Interest Amount and all accrued interest thereon shall be all due
and payable at the earlier of (i) the date the promissory note evidencing the
principal amount upon which the Deferred Interest accrued is due, whether upon
maturity or upon acceleration thereof; or (ii) the date the Note attached
hereto is due, whether upon maturity or upon acceleration thereof.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the date
first set above.
"Borrower" NEVSTAR GAMING & ENTERTAINMENT CORPORATION, a Nevada
corporation
By:/s/ Michael J. Signorelli
By:
"Lenders"
/s/ Richard R. Kelley
RICHARD ROY KELLEY
/s/ Richard Tam
DR. RICHARD TAM
[Signature Page to Loan Agreement]<PAGE>
EXHIBIT "A"
FORM OF PROMISSORY NOTE
<PAGE>
EXHIBIT "B"
FORM OF DEED OF TRUST
NevStar Gaming & Entertainment Corporation
3175 West Post Road
Cypress Center
Las Vegas, Nevada 89118
(702) 269-1325 FAX: (702) 269-1326
May 14, 1998
A.F. Construction Company, Inc.
Attn: Paul T. Faulkner
3675 West Twain
Las Vegas, Nevada 89103
Re: Payment by Note
Dear Mr. Faulkner:
This letter sets forth an agreement by and between NevStar Gaming &
Entertainment Corporation (formerly known as Mesquite Gaming Corp.)
("NevStar"), and A.F. Construction Company, Inc. ("A.F.") regarding Six
Hundred Thousand Dollars ($600,000) of the total sum currently owed by NevStar
to A. F. pursuant to the Standard Form of Agreement Between Owner and
Contractor between the parties, dated August 30, 1994 (the "Standard Form").
1. The Deferred Amount. The parties agree that the issuance of the
Promissory Note to A.F. attached hereto as Exhibit "A" and incorporated herein
by this reference (the "Promissory Note") shall constitute a payment and
credit of $600,000 against amounts due from NevStar to A.F. pursuant to the
terms of the Standard Form.
2. Warrants. In consideration for accepting the Promissory Note as
payment in lieu of cash, A.F. shall be issued warrants in the form attached
hereto as Exhibit "B" and incorporated herein by this reference to purchase
Fifteen Thousand (15,000) shares of NevStar Common Stock at a per share
exercise price of $2.25, which amount is equal to a discount of approximately
thirty five percent (35%) off of the closing bid price of NevStar's Common
Stock on the NASDAQ Small Cap Market on May 11, 1998. In addition, A.F. shall
be issued additional warrants pursuant to the form of warrant attached in
connection with each one (1) month extension of the Note as follows: for each
One Hundred Thousand Dollar ($100,000) principal amount (or pro rata portion
thereof) outstanding on the business day immediately following the Payment
Date pursuant to Section 3 of the Promissory Note and each Extension Date as
described therein, A.F. shall receive an additional one thousand two hundred
fifty (1,250) warrants, to purchase shares of NevStar Common Stock at a
purchase price of $2.25. By means of example only, if principal of Two
Hundred Thousand Dollars ($200,000) is outstanding on the relevant date, A.F.
shall be entitled to warrants to purchase an additional two thousand five
hundred (2,500) shares of NevStar Common Stock.
3. Entire Agreement. This Agreement, including its exhibits,
constitutes the entire agreement between the parties, and supersedes all prior
oral or written agreements, understandings, representations and warranties,
and courses of conduct and dealing between the parties on the subject matter
hereof. Except as otherwise provided herein, this Agreement may be amended or
modified only by a writing executed by all of the parties.
4. Governing Law. This Agreement will be governed by and construed
under the laws of the State of Nevada without regard to conflicts of laws
principles.
5. Counterparts. This Agreement may be executed in one or more
counterparts, all of which when fully executed and delivered by all parties
hereto and taken together shall constitute a single agreement, binding against
each of the parties. To the maximum extent permitted by law or by any
applicable governmental authority, any document may be signed and transmitted
by facsimile with the same validity as if it were an ink-signed document.
If you are in agreement with the foregoing, please sign and return one
copy of this letter agreement, which thereupon will constitute our agreement
with respect to its subject matter.
Sincerely,
NEVSTAR GAMING & ENTERTAINMENT
CORPORATION, a Nevada corporation
By:/s/ Michael J. Signorelli
Michael J. Signorelli
Chairman and Chief Executive Officer
The undersigned hereby acknowledge and agree to the terms and conditions
set forth above, as of May 14, 1998.
A.F. CONSTRUCTION COMPANY, INC.
By:/s/ Paul T. Faulkner
Paul T. Faulkner, President
[Signature Page to Letter Agreement]
C:\MyFiles\98063010KSB\9810kx33.txt
FOURTH AMENDMENT TO OPTION AGREEMENT
AND AMENDMENT TO NOTE
This FOURTH AMENDMENT TO OPTION AGREEMENT ("Amendment") is entered into
effective as of September __, 1998, by and among DESERT MESA LAND PARTNERS,
LTD.,
a Nevada limited partnership ("Seller"), HIGH MESA DEVELOPMENT, INC., a Nevada
corporation ("High Mesa"), and NEVSTAR GAMING & ENTERTAINMENT CORPORATION, a
Nevada corporation, formally known as NEVSTAR GAMING CORPORATION ("Buyer"), in
connection with that certain Option Agreement between the parties dated April
23,
1996 (the "Agreement"), as previously amended by that certain First Amendment to
Option Agreement between the parties dated April 30, 1997 (the "First
Amendment"), and as further amended by that certain Second Amendment to Option
Agreement between the parties dated September 8, 1997 (the "Second Amendment")
and as further amended by that certain Third Amendment to Option Agreement and
Amendment to Note dated March , 1998 (the "Third Amendment") (the Agreement,
First Amendment, Second Amendment and Third Amendment are collectively referred
to as the "Option").
For good and valuable consideration, the receipt and legal sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Change in Date of Conversion of Note to Cash.
a. The second paragraph of Section 1.4 of the Option entitled
"Initial Option Consideration" is deleted and replaced in its entirety with the
following:
"Notwithstanding anything set forth in this Section 1.4
or anything set forth elsewhere in the Option, Buyer's
obligation to deposit Development Funds shall be
satisfied by Buyer giving to Seller on or before
September 30, 1997, Buyer's Promissory Note in the
amount of $200,000 (in the form attached hereto as
Exhibit "A") which note shall provide that it shall be
convertible into $200,000 in cash on or before December
31, 1998 which funds shall thereupon be deposited into
a federally insured financial institution in an account
designated for the Project on which both Buyer and High
Mesa are joint signatories. Any monies advanced by
Buyer directly to third parties to pay for Development
Funds expenses of the Project which are approved by High
Mesa shall be a dollar for dollar credit against said
$200,000. The Development Funds shall be non-refundable
and shall not be applicable to the Option Purchase
Price, but shall be reimbursable from the LLC to Buyer
in connection with the development and financing of the
Project. If Buyer fails to deposit the Development
funds as set forth in the first sentence of this
paragraph above, this Option shall automatically
terminate and shall be null and void for all purposes.
Upon any such termination, neither party shall have any
further liability to the other party with respect to the
Option. Any portion of the Initial Option Consideration
remaining at Closing shall be deposited in the name of
the LLC. The parties hereto acknowledge and agree that
the preliminary development of the Project will require
funds substantially in excess of the Development Funds
<PAGE>
and that Buyer may elect, in its sole discretion to advance
additional funds pursuant to budget(s) approved by Desert Mesa. Any
such additional advances shall be reimbursed from the LLC to Buyer
in connection with the development and financing of the Project."
b. The due date of the Note dated September 30, 1997 in the
principal amount of $200,000 given by Buyer to Seller is hereby amended to
provide it is due on December 31, 1998 instead of March 15, 1998.
2. Except as amended hereby, all of the other terms and provisions of
the Option shall remain in full force and effect.
3. This Amendment may be executed in one or more counterparts, each of
which taken together shall constitute one and the same instrument. This
Amendment may be executed by facsimile with original signatures to follow by
mail.
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first written above.
"Buyer" NEVSTAR GAMING & ENTERTAINMENT CORPORATION,
a Nevada corporation
By:/s/ Michael J. Signorelli
Michael J. Signorelli, Chief Executive
Officer
"Seller" DESERT MESA LAND PARTNERS, LTD.
a Nevada limited partnership
BY: TSRS, INC., a Nevada corporation
Its: General Partner
By:/s/ Richard Tam
Richard Tam, Chairman
By:/s/ R. Ian Ross
R. Ian Ross, President
"High Mesa" HIGH MESA DEVELOPMENT, INC.
a Nevada corporation
By:/s/ Richard Tam
Richard Tam, Chairman of the Board
[Signature Page to Fourth Amendment to Option Agreement and Amendment to Note]
EXECUTIVE SEVERANCE AGREEMENT
This Executive Severance Agreement ("Agreement") is made effective as of
September 25, 1998, by and between NevStar Gaming & Entertainment Corporation,
a Nevada corporation ("Company"), and Jeffrey L. Gilbert ("Executive"), with
reference to the following facts:
A. Executive is employed by Company in the capacity of President and
Chief Operating Officer and is a Director of the Company. Company and Executive
desire to terminate this employment relationship and enter into this Agreement
to set forth the obligations of each party with respect to said termination.
B. Executive and the Company are parties to that certain Employment
Agreement dated January 2, 1996, as amended (the "Employment Agreement"), that
certain Indemnification Agreement dated January 2, 1996 (the "Indemnification
Agreement") and to certain Stock Option Agreements referred to in Section 4
below.
NOW, THEREFORE, in consideration of the foregoing and the covenants
and agreements contained herein the parties hereto covenant and agree as
follows:
1. Termination of Employment. Executive hereby resigns as President,
Chief Operating Officer and any other officer position and as Director of
Company. In addition, Company and Executive agree that the Employment Agreement
is hereby terminated with no further effect, except as set forth in the
Agreement. Said resignation and termination shall be effective September 25,
1998 ("Severance Date"). Company expressly denies that Company has breached,
defaulted in the performance of, or otherwise violated the Employment Agreeme
nt.
Likewise, Executive expressly denies that Executive has breached, defaulted in
the performance of, or otherwise violated the Employment Agreement. Company and
Executive each acknowledge that Executive's employment with Company is
terminated
by mutual agreement. Accordingly, this Agreement does not constitute an
adjudication or finding on the merits and it is not, and shall not be construed
as an admission by Company, Executive or any other person released herein of any
violation of the Employment Agreement. Moreover, neither this Agreement nor
anything in this Agreement shall be construed to be or shall be admissible in
any
proceeding as evidence of or an admission by Company, Executive or any other
person released. This Agreement may be introduced, however, in any proceeding
on account of any breach of any provision of this Agreement to enforce any
provision of this Agreement.
2. Compensation; Benefits. Executive shall be paid his full salary and
shall be entitled to such Company benefits as were normally received by
Executive
through the Severance Date. Company further agrees to pay to Executive
severance pay in the amount of $100,000 (the "Severance Pay"), payable to
Executive during the six (6) month period commencing on the Severance Date (the
"Severance Period") by payments of $7,692.30 on each of the twelve (12), and a
payment of $7,692.40 on the thirteenth, employee payment dates of the Company
immediately following the Severance Date in accordance with the normal payroll
practices of the Company applicable to Executive in his former position. If the
Company fails to pay any portion of the Severance Pay in accordance with the
provisions of the previous sentence, and fails to cure such failure within five
(5) business days of receipt of a written demand notice from Executive, then the
amount due and owing to Executive shall be subject to interest at a simple rate
of ten percent (10%) per annum. Nothing contained in the preceding sentence,
however, shall be construed to prevent, restrict or limit Executive's right to
exercise any remedy available to Executive on account of such failure. The
Company may withhold from any compensation or other benefits payable under this
Agreement all federal, state, city or other taxes as shall be required pursuant
to any law or governmental regulation or ruling. Additionally, during the
Severance Period, Executive shall receive the same Company benefits as Executive
was entitled to on the Severance Date pursuant to Section 1.7 of the Employment
Agreement. Additionally, Executive shall be entitled to his rights under the
Consolidation Omnibus Budget Reconciliation Act (COBRA) of 1985.
3. Consulting. For and in consideration of the mutual covenants set
forth in this Agreement, Company and Executive agree that during the Severance
Period, Executive shall serve as a consultant to the Company, as reasonably
requested by the Company, for up to twenty (20) hours per month; provided that
Executive shall not be required to perform any services at any time, at any
location or in any manner which would materially interfere with or any
obligation
of Executive to provide employment or consulting to any other person. Company
and Executive acknowledge and agree that Executive shall assist Company in the
transition of projects to which he devoted attention on or prior to the
Severance
Date. All out-of-pocket expenses incurred by Executive as a result of
Executive's consulting to the Company shall be paid for by the Company. Company
and Executive acknowledge and agree that in no event shall the Severance Pay or
the extension of Executive's options set forth in Section 4 below be contingent
on performance of Executive's service as a consultant to the Company.
4. Stock Options. Company and Executive agree that stock options
granted by the Company to Executive as part of the Company's 1997 Stock
Incentive
Plan (the "Plan") pursuant to Stock Option Agreements, dated as of July 1, 1997,
July 1, 1997 and January 13, 1998 regarding 220,589, 29,411 and 15,000 shares of
Common Stock, respectively (collectively, the "Options"), shall remain in full
force and effect, except that notwithstanding any provisions contained therein,
the Options shall become fully vested as of the Severance Date and shall be
exercisable until their respective Expiration Dates (June 30, 2007,
June 30, 2007
and January 12, 2008), as defined therein. In addition, as long as the Options
are outstanding, the Options shall be included in any Form S-8 Registration
Statement filed by the Company with the Securities and Exchange Commission
regarding the Plan.
5. Automobile Expenses. During the Severance Period, Executive shall
be entitled to receive from the Company an $850 monthly automobile allowance,
payable monthly in advance, which shall include all costs attendant to the use
of the automobile, including but not
limited to, liability and property insurance
and cost of maintenance and an additional $150 monthly allowance to cover all
fuel and car wash expenses.
6. Acknowledgment of Payment of All Wages and Benefits Due. The Company
has previously given or, contemporaneously with the execution of this Agreement,
shall give Executive negotiable checks for amounts representing (i) Executive's
compensation through the Severance Date, (ii) all accrued or unused vacation
benefits and (iii) any bonuses payable to Executive under the terms of all
written or oral agreements with the Company, less applicable withholding taxes
and other voluntary deductions previously authorized by Executive. Other than
as expressly set forth in this Agreement, Executive acknowledges and agrees that
he has received
all wages, bonuses, commissions, vacation pay, incentives and all
other compensation of any kind earned during his employment with the Company
through the Severance Date.
7. Life Insurance. Company and Executive agree that, effective as of
the Severance Date, Company shall assign to Executive the "key man" life
insurance policy held by the Company on the life of Executive on the Severance
Date. Company and Executive agree that Company shall have no further obligation
with respect to such life insurance policy, except to pay all premiums on the
policy for coverage through March 25, 1999.
8. Confidentiality. Executive acknowledges and agrees that any and all
information acquired by Executive relating to the business of the Company,
including but not limited to business plans, trade secrets, financial data,
product information,
customer lists, member data, marketing plans and strategies,
is confidential information which is the property of the Company (collectively,
"Confidential Information"). Executive agrees to maintain in strict confidence
all Confidential Information and not to divulge such Confidential Information to
others or use such Confidential Information for the benefit of any person or
entity other than the Company without the prior written consent of the Company.
Likewise, Company agrees to maintain in strict confidence all information
concerning Executive's compensation and other private information concerning
Executive which may appear in Executive's personnel file. Nothing contained in
this Section 8 shall be deemed to prevent either party
from making any disclosure
(i) necessary to report income to appropriate taxing authorities; (ii) in
response to an order of a court of competent jurisdiction or a subpoena issued
under the authority thereof; or (iii) in response to a subpoena or other request
lawfully issued by any federal or state regulatory or licensing authority having
jurisdiction over the Company
(specifically including the Securities and Exchange
Commission, and the Nevada Gaming Commission and State Gaming Control Board) or
in conjunction with any filing required to be made with any such regulatory or
licensing authority.
9. Company Property. Executive acknowledges and agrees that all
reports, data, recommendations, advice, records, documents and other materials
prepared or obtained by Executive or coming into Executive's possession during
Executive's employment hereunder which relate to the conduct by the Company
and/or its affiliates of
their respective businesses shall be and remain the sole
and exclusive property of the
Company and Executive shall, on the Severance Date,
or earlier at the request of the Company, promptly deliver all such materials to
the Company.
10. Indemnification; Insurance. Company and Executive agree that the
Company shall indemnify Executive pursuant to Section 2 of the Employment
Agreement and Section 5 of the Indemnification Agreement for so long as any
applicable statue of limitation remains open and unexpired, and that Executive
shall be covered by the Company's
officer and director liability insurance policy
to the extent then in effect and permitted by such policy.
11. Mutual General Release. In consideration of the terms, provisions,
covenants and agreements contained
in this Agreement, Executive, on the one hand,
and the Company, on the other hand, on behalf of themselves and their respective
predecessors, heirs, successors, assigns, owners, attorneys, affiliates,
divisions, officers, directors, employees, agents, representatives, partners,
servants, executors, administrators, accountants, investigators, insurers, and
shareholders, and each of them, in any and all capacities, do hereby mutually
relieve, release and forever discharge the other and their respective
predecessors, successors, heirs, agents, representatives, attorneys, partners,
officers, directors, employees (including former officers, partners, directors
and employees), administrators, shareholders, assigns and all affiliated parent
or subsidiary or related corporations, or divisions or partnerships, and each of
them, of and from any and all past, present and future claims, rights, debts,
liabilities, demands, obligations, liens, promises, acts, agreements, costs and
expenses (including, but not limited to, attorneys' fees and costs), damages,
actions and causes of action, of whatever kind or nature (including without
limitation, any statutory, civil or administrative claim, or any claim, arising
out of acts or omissions occurring before the execution of this Agreement),
whether now known or unknown, suspected or unsuspected, fixed or contingent,
apparent or concealed, in any way based on, arising out of or related to or
connected with the past
actions, omissions, obligations or duties of either party
hereto with respect to the other party hereto, and each of them, including,
without limitation, any acts, omissions, obligations or duties arising out of or
in connection with Executive's employment with the Company, including but not
limited to any breach of fiduciary duty and/or any violation of any or all
applicable federal and state securities and other applicable laws.
12. Press Release. Company and Executive agree that,
soon after execution of
this Agreement, the Company will issue a press release
in the form of Exhibit "A"
attached hereto, and that all future press releases regarding the subject matter
of the Agreement shall be mutually agreed to by the parties. Company and
Executive acknowledge that each may be required to provide additional disclosure
regarding the subject matter of the Agreement in accordance with federal
securities laws, Nevada gaming laws and other applicable laws.
13. Contractual Authority. Executive understands and agrees that
he does not have, nor shall
he hold himself out as having, any right, power or authority create
any contract or obligation, either express or
implied, on behalf of or in the name of the Company.
14. Mutual Non-Disparagement. Company and Executive agree that neither
party shall disparage, defame, libel, slander or otherwise make derogatory
comments or references regarding the other party, including but not limited to
references to a party's character, business practices, competence, products
and/or services.
15. Material Inducement. Company and Executive acknowledge and agree
that its or his covenants relating to confidential information,
non-disparagement
and the general release described above are material
inducements to each and both
of the parties to enter into this Agreement and pay the Severance Pay to
Executive.
16. Representation By Counsel. Executive acknowledges and agrees that
the law firm of Zevnik, Horton, Guibord, McGovern, Palmer & Fognani, L.L.P. is
counsel to the Company and has not represented Executive in the past and is not
acting as counsel to Executive nor advising Executive with respect to this
Agreement, except to advise Executive to engage independent counsel to represent
him. Company agrees to reimburse Executive for up to $2,500 of legal fees
incurred by him with respect to the Agreement.
17. Notices. All notices, requests and other communications hereunder
shall be given in writing to a party and shall be deemed to have been duly given
at the time of personal delivery or on the third business day following the date
deposited in the U.S. Mail, certified or return receipt requested, postage
prepaid, addressed to the party to receive the same at its respective
address set
forth on the signature page to this Agreement, or at such other address as may
from time to time be designated by a party in accordance with this Section.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings. Without
limiting the generality of the foregoing,
the Agreement supersedes and terminates
any existing employment agreement or arrangement between Executive and the
Company. Each party to this Agreement acknowledges that no representations,
inducements, promises or agreements have been made by any party, or any one
action on behalf of any party, which are not embodied in this Agreement.
19. Attorneys' Fees and Costs. If any legal action, arbitration or other
proceeding is brought for the enforcement or interpretation of this Agreement,
or because of any alleged dispute, breach, default or misrepresentation in
connection with any of the provisions of this Agreement, the successful or
prevailing party shall be entitled to recover from the other party reasonable
attorneys' fees and other costs incurred in that action, arbitration or
proceeding, in addition to any other relief to which such party may be entitled.
20. Waiver. No covenant, term or condition or the breach thereof shall
be deemed waived, unless it is waived in writing and signed by the party against
whom the waiver is claimed. Any waiver of breach of any covenant, term or
condition shall not be deemed to be a waiver of any preceding or succeeding
breach of the same or any other covenant, term or condition. The failure of any
party to insist upon strict performance of any covenant, term or condition
hereunder shall not constitute a waiver of such party's right to demand strict
compliance therewith in the future.
21. Severability. Should any one or more of the provisions of this
Agreement or of any agreement entered into pursuant to this Agreement be
determined to be illegal or unenforceable, then such illegal or unenforceable
provision shall be modified by the proper court or arbitrator to the extent
necessary and possible to make such provision enforceable, and such modified
provision and all other provisions of this Agreement and of each other agreement
entered into
pursuant to this Agreement shall be given effect separately from the
provision or portion thereof determined to be illegal or unenforceable and shall
not be affected thereby.
22. Counterparts. This Agreement may be executed in multiple copies,
each of which shall be deemed an original and all of which shall constitute a
single agreement binding on all parties.
23. Modification. This Agreement may be amended or modified only be a
written instrument duly executed by all parties hereto.
24. Successors and Assigns. This Agreement is for personal services by
Executive and may not be transferred or assigned by Executive without the prior
written consent of Company, except for assignments by the laws of devise and
descent to Executive's heirs, administrators or executives. Subject to the
foregoing, this Agreement shall inure to the benefit of the parties hereto and
their respective successors and assigns.
25. Governing Law. This Agreement shall be governed by and interpreted
and constructed in accordance with the internal laws of the State of Nevada, as
applied to contracts between Nevada residents entered into and to be performed
wholly within Nevada.
[The Remainder of This Page is Intentionally Left Blank]<PAGE>
IN WITNESS WHEREOF, the parties have executed this Executive Severance
Agreement as of the date first written above.
"Company" NEVSTAR GAMING & ENTERTAINMENT
CORPORATION, a Nevada corporation
By:/s/ Michael J. Signorelli
Michael Signorelli, Chairman of the
Board and Chief Executive Officer
Address for notice: 3175 West Post
Road
Cypress Center
Las Vegas, NV 89118
"Executive"
/s/ Jeffrey L. Gilbert
Jeffrey L. Gilbert
Address for notice: 190 Sudbury
Henderson, Nevada 89014
[Signature Page to Executive Severance Agreement]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Financial Data Schedule for the Six Month Period Ended June 30, 1998 is
unaunaudited. It is suggested that it be read in conjunction with the Company's
Form 10-KSB Transition Report for the transition period from January 1, 1998 to
June 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 962
<SECURITIES> 0
<RECEIVABLES> 459
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 22,842
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,480
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
1
<COMMON> 39
<OTHER-SE> 6,942
<TOTAL-LIABILITY-AND-EQUITY> 25,480
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> (2,286)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,286)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
