UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 0-21071
NEVSTAR GAMING & ENTERTAINMENT CORPORATION
(Exact name of small business issuer as specified 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)
Check whether the issuer (1) filed all reports required 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 filing requirements for the past 90 days. Yes X No
There were 3,937,687 outstanding shares of Common Stock, par value $0.01 per
share, as of May 10, 1999.
Transitional Small Business Disclosure Format: Yes____ NO X
NevStar Gaming & Entertainment Corporation
Form 10-QSB
For the Quarter Ended March 31, 1999
INDEX
PART I. FINANCIAL INFORMATION: PAGE
ITEM 1. Financial Statements:
Balance Sheet at March 31 1999 and
June 30, 1998 3
Statements of Operations for the Three Month
Periods Ended March 31, 1999 and 1998 4
Statements of Operations for the Nine Month
Periods Ended March 31, 1999 and 1998 5
Statements of Cash Flows for the Nine Month
Periods Ended March 31, 1999 and 1998 6
Notes to financial statements 8
ITEM 2. Management's Discussion and Analysis or
Plan of Operation 13
PART II. OTHER INFORMATION:
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 3. Defaults upon Senior Securities 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 5. Other Information 20
ITEM 6. Exhibits and Reports on Form 8-K. 20
SIGNATURES 20
NevStar Gaming & Entertainment Corporation
Condensed Balance Sheets
March 31, 1999 and June 30, 1998
(Dollars in Thousands)
March 31, June 30,
1999 1998
ASSETS (Unaudited) (Development
Current assets: Stage)
Cash and cash equivalents $ 416 $ 962
Receivables 85 459
Inventories 116 -
Prepaid expenses 314 558
Total current assets 931 1,979
Property and equipment(note 3) 22,049 22,842
Other assets 435 659
$23,415 $25,480
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable(note 4) $16,825 $ 1,743
Accounts payable 1,956 1,409
Accrued expenses 316 189
Accrued interest 835 275
Total current liabilities 19,932 3,616
Notes payable, excluding current portion(note 4) 1,423 14,882
Total liabilities 21,355 18,498
Stockholders' Equity:
Series A convertible non-voting preferred
stock, $.01 par value per share. Designated
1,500,000 shares. Issued and outstanding
64,500 at March 31, 1999 and June 30,
1998 1 1
Common stock, $.01 par value per share.
Designated 50,000,000 shares. Issued and
outstanding 3,937,687 and 3,607,491 shares
at March 31, 1999 and June 30, 1998,
respectively and 274,000 shares committed
to be issued at June 30, 1998 39 39
Additional paid-in capital 18,076 17,759
Accumulated deficit (16,056) (10,817)
Total stockholders' equity 2,060 6,982
$23,415 $25,480
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
Condensed Statements of Operations
Three Month Periods Ended March 31, 1999 and 1998,
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED) (Development
Stage)
1999 1998
Revenues:
Casino $2,117 $ -
Food & Beverage 863 -
Rooms 474 -
Other 22 -
3,476 -
Less: casino promotional allowances 346 -
Net revenues 3,130 -
Costs and expenses:
Casino 1,032 -
Food & beverage 670 -
Rooms 268 -
Selling, general and administrative 1,250 -
Rents 276 15
Depreciation and amortization 305 3
3,801 18
Operating loss before corporate expense (671) (18)
Corporate expenses 393 537
Operating loss (1,064) (555)
Other income (expense):
Interest expense (558) (112)
Gain on sale of land - -
(558) (112)
Loss before income taxes (1,622) (667)
Income taxes - -
Net loss $(1,622) $ (667)
Loss per common share $ (0.42) $ (0.19)
Weighted average number
of common shares outstanding 3,937,687 3,459,676
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
Condensed Statements of Operations
Nine Month Periods Ended March 31, 1999 and 1998,
(Dollars in Thousands, Except Per Share Amounts)
(UNAUDITED) (Development
Stage)
1999 1998
Revenues:
Casino $5,495 $ -
Food & Beverage 2,040 -
Rooms 1,123 -
Other 60 -
8,718 -
Less: casino promotional allowances 830 -
Net revenues 7,888 -
Costs and expenses:
Casino 2,657 -
Food & beverage 1,584 -
Rooms 777 -
Selling, general and administrative 3,499 -
Rents 773 45
Depreciation and amortization 917 65
10,207 110
Operating loss before corporate expense (2,319) (110)
Corporate expenses 1,937 1,578
Operating loss (4,256) (1,688)
Other income (expense):
Interest expense (1,521) (630)
Gain on sale of land 538 -
(983) (630)
Loss before income taxes (5,239) (2,318)
Income taxes - -
Net loss $(5,239) $(2,318)
Loss per common share $ (1.34) $ (0.86)
Weighted average number
of common shares outstanding 3,922,978 2,680,493
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
Condensed Statements of Cash Flows
Nine Month Periods Ended March 31, 1999 and 1998
(Dollars in Thousands)
(UNAUDITED) (Development
Stage)
1999 1998
Cash flows from operating activities:
Net loss $(5,239) $ (2,318)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 917 65
Amortization of debt issue costs 122 -
Accretion of discount on notes payable 336 304
Common stock options and
warrants expenses 198 413
Decrease (increase)in receivables, inventories,
prepaid expenses and other assets 604 (414)
Increase (decrease) in accounts payable
and accrued expenses 1,568 (419)
Cash used in operating activities (1,494) (2,369)
Cash flows from investing activities:
Construction costs incurred - (4,719)
Net purchase of furniture and equipment (124) -
Cash used in investing activities (124) (4,719)
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
Condensed Statements of Cash Flows (continued)
Nine Month Periods Ended March 31, 1999 and 1998,
(Dollars in Thousands)
(UNAUDITED) (Development
Stage)
1999 1998
Cash flows from financing activities:
Issuance of notes payable 1,188 23
Construction loan draws, including fees - 2,966
Change in construction costs payable - (521)
Principal repayments of notes payable (4) (1,423)
Payments of capital lease obligations (112) -
Proceeds from issuance of
common stock - 7,739
Cash provided by
financing activities 1,072 8,784
Increase (decrease) in cash
and cash equivalents (546) 1,696
Cash and cash equivalents, beginning 962 55
Cash and cash equivalents, ending $ 416 $1,751
Supplemental schedule of non-cash
investing and financing activities:
Accrued interest paid in common stock $ 119 $ 406
Pre-opening expenses paid in common stock - 75
Accrued interest payable added to principal 215 1,001
Note payable for an option agreement - 200
Value allocated to warrants granted - 57
Default interest on notes waived
by shareholders - 274
Note payable forgiven by shareholder - 450
Value of warrants recorded as
original issue discount - 896
Construction costs incurred and payable - 954
See accompanying notes to financial statements.
NevStar Gaming & Entertainment Corporation
Notes to Financial Statements
March 31, 1999
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements of NevStar Gaming & Entertainment Corporation, a Nevada
corporation, include all adjustments, of a normal recurring nature, which are
necessary for a fair presentation of the results for the interim periods
presented, which are not necessarily indicative of those expected for a full
year. Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission.
Although the Company believes that the disclosures are adequate to make the
information presented not misleading, it is suggested that these condensed
financial statements be read in conjunction with the financial statements and
notes thereto included in the Company's Report on form 10-KSB for the
transition six month period ended June 30, 1998. Certain items included in the
financial statements have been reclassified to conform to the current period
presentation.
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.
(2)Per Share Calculations
Net loss per common share is based on the weighted average number of shares of
common stock outstanding. Common share equivalents attributable to
outstanding options and warrants or convertible preferred stock, computed
under the treasury stock method have not been included in the calculations
because the incremental shares so computed are not considered significant, and
the result would be anti-dilutive.
(3) Property and Equipment, Net
Property and equipment, net consisting primarily of the land, building and
furniture and equipment of the Mesquite Star Hotel and Casino (which opened
for business on July 1, 1998) follows (Dollars in thousands):
March 31, June 30,
1999 1998
(Unaudited) (Development
Stage)
Land $ 4,514 $ 4,710
Buildings 15,152 15,021
Furniture and equipment 3,314 3,111
22,980 22,842
Less: accumulated depreciation
and amortization 931 -
$22,049 $22,842
Depreciation is computed over the useful lives of Buildings and improvements
(generally 15 to 30 years) and Furniture and equipment (generally 5 to 7
years) using the straight-line method.
On September 11, 1998, the Company sold about one-half an acre of land
adjacent to the Mesquite Star Hotel and Casino. A gain on the sale of
approximately $365,000 was recorded during the three month period ended
September 30, 1998.
On November 25, 1998, the Company sold a second parcel of land, also less than
an acre, adjacent to the Mesquite Star Hotel and Casino. A gain on the sale of
approximately $173,000 was recorded during the three month period ended
December 31, 1998.
(4) Notes Payable
A summary of notes payable follows:
March 31, June 30,
1999 1998
(Unaudited) (Development
Stage)
(Dollars in thousands)
Note payable to bank, secured by first
deed of trust on the Mesquite Star
property, bank prime rate plus 2.5%
(10.25% at March 31, 1999), due
July, 27, 1999 with conditional terms
to extend maturity to July 27, 2002 $ 5,450 $ 5,436
Notes payable to shareholders, secured
by deeds of trust on the Mesquite Star
property. Interest is payable monthly,
either at the greater of the Bank of
Hawaii prime interest rate (7.75 percent
at March 31, 1999) plus 3 percent,
or 11 percent. Principal is due
August, 1999 7,500 7,285
Note payable, secured by deed of trust on
the Mesquite Star property. Interest is
payable monthly, either at the greater
of the Bank of Hawaii prime interest rate
(7.75 percent at March 31, 1999) 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 1,099 1,099
12% Note payable to shareholder secured by a
deed of trust on the Mesquite Star property
due no later than August, 1999 (See "Letters
of Commitment", below) 900 -
Note payable to shareholder, unsecured and
non-interest bearing 200 200
12% note payable in connection with construction
of the Mesquite Star Hotel & Casino, due no
later than May 15, 1999 600 600
12% Note payable secured deed of trust
on the Mesquite Star property (See
"Letters of Commitment", below) 250 -
10% to 12% equipment contracts payable,
collateralized by slot machines and
Related equipment due in monthly
payments over 12 to 36 months 533 514
Capital lease obligations collateralized
by property and equipment due in
monthly payments over 36 to 60
months 1,940 2,051
18,472 17,185
Less: unamortized original issue discount 224 560
18,248 16,625
Less: current maturities 16,825 1,743
$ 1,423 $14,882
Letters of 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. The New Loan is for $1,000,000 with interest at 12% and defers
payment of accrued interest on the previous loan agreements until the new loan
is due in August, 1999. The deferred interest will accrue interest at 12% per
annum also, and has been reflected as a reduction in accrued interest payable
and a corresponding increase in notes payable at September 30, 1998. In
addition, the North Las Vegas option expiration date was extended to December
31, 1998 by Dr. Tam under the New Loan agreement. As consideration for the
commitment and the initial advance, which occurred 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 $2.00 per share to the lenders. For
each additional $100,000 advance, the lenders shall receive 15,000 warrants to
purchase shares of the Company's common stock at $2.00 per share. The
remaining commitment fees of approximately $109,000 from the previous two
commitments was charged to expense during the three month period ended
September 30, 1998. An initial advance of $400,000 was made on October 1, 1998
net of approximately $10,000 of commitment fees, $7,500 of the lenders legal
fees and approximately $82,000 of accrued interest. Another advance in the
amount of $300,000 was received by the Company December 3, 1998. An additional
advance of $200,000 was received on January 15,1999. On March 1, 1999, the
Company issued warrants to purchase an aggregate of 75,000 shares of common
stock at $2.00 per share to the lenders.
On April 27, 1998, an unrelated third party executed a financing commitment to
loan the Company up to $250,000 secured by a deed of trust on the Mesquite
Star property, with per annum interest up to 12%. During the nine months ended
March 31, 1999, the Company borrowed $250,000 pursuant to the terms of this
commitment.
At March 31, 1999, the Company was in default on its real estate secured notes
payable, because of an outstanding $853,000 construction lien on its Mesquite
Star Hotel & Casino property. On February 18, 1999, the contractor filed suit
in District Court against the Company seeking a Mechanics Lien Foreclosure
Action in the amount of $853,000.00. The Company is seeking additional
financing to pay the $853,000 balance (of which $600,000 is carried as a note
payable, and $253,000 as an accounts payable in the accompanying December 31,
1998 financial statements) and to remove the lien. In addition, the Company is
several months in arrears on interest payments on its real estate secured
notes payable to shareholders, and is several months in arrears on its
installment contract and capital lease obligation payments. The Company is
seeking additional financing and/or refinancing to carry such existing, or
smaller, monthly payment obligations, and to provide working capital for,
among other things, the continuation of the pursuit of its business plan.
There can be no assurance that the Company will be successful in its financing
efforts.
(5) Legal matters
MESQUITE STAR HOTEL & CASINO
On August 27, 1998 a mechanics lien of $853,000 was filed by the general
contractor of the Company's newly-built Mesquite Star Hotel & Casino. On
February 18, 1999, the contractor filed suit in District Court, Clark County,
Nevada against the Company seeking damages in the amount of approximately
$853,000, plus interest thereon, attorney's fees and costs of suit, and an
order authorizing a Mechanics Lien Foreclosure Action. The Company is seeking
additional financing to pay the $853,000 (of which $600,000 is carried in
notes payable, and approximately $253,000 in accounts payable in the
accompanying December 31, 1998 financial statements).
SERIES A PREFERRED STOCKHOLDER CLAIM
The Company received a Demand and Claim Pursuant to Mass. Gen. Laws
Chapter93A, dated December 18, 1998 (the "Claim Letter"), on behalf of William
P. DeLuca, Jr., a holder of the Company's Series A Convertible Non-Voting
Preferred Stock (the "Series A Preferred Stock") that was purchased in April,
1994 for $100,100. The Claim Letter sought rescission relief in the amount of
$100,100, plus interest thereon from purchase date. Mr. DeLuca reserved his
right to seek triple damages for his alleged loss, legal fees and interest
thereon from the purchase date. The Company believes that the claim is without
merit.
On February 16, 1999, the Company received a derivative demand, dated February
16, 1999, on behalf of Mr. DeLuca, demanding that the Board of Directors of
the Company institute suit in connection with Mr. DeLuca's pending recission
claim against all corporate officers and members of management responsible for
the Company's alleged prior wrongful and actionable conduct with respect to
the Series A Preferred Stock.
(6) 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 upon multiple conditions being met. If funded, the
proceeds would be utilized, among other things, to repay the Company's
existing real estate notes payable, to provide a principal and interest
reserve during the early months of the mortgage loan, and for general
corporate purposes. No loan has been consummated to date. At May 21, 1999, the
lender is actively working on arranging a loan for the Company, but there can
be no assurance that a loan will be consummated on acceptable terms.
The Company's success is substantially dependent upon closing a loan pursuant
to this loan commitment or obtaining alternative debt or equity financing, or
the net proceeds from the exercise of the outstanding Warrants, or otherwise
funding its operations in the second calendar quarter of 1999, to continue to
implement its business plan, including pursuing the NevStar 2000 project.
There can be no assurance that the Company will be able to generate sufficient
funds from these or other sources.
ITEM 2. MANAGEMENTS 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 Interim Report
on Form 10-QSB 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, and the status of Year 2000 readiness.
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, the Mesquite Star in Mesquite, Nevada, pursuant to an Order of
Registration, dated June 23, 1998.
The newly constructed Mesquite Star, which opened for business on July 1,
1998, currently consists of 210 rooms and suites, with a swimming pool, and a
public area of approximately 34,000 square feet, featuring a casino area of
approximately 12,000 square feet containing 410 slot machines, 10 table games
and Keno, a specialty restaurant, a 160 seat coffee shop, gift shot, hotel
registration and other amenities.
THREE MONTH PERIOD ENDED MARCH 31, 1999
During the three month period March 31, 1998, the company was in the
development stage and had not opened the Mesquite Star Hotel and Casino which
was then under construction. The following narrative compares the Company's
March 31, 1999 quarter with its December 31, 1998 quarter.
During the three month period ended March 31, 1999, losses decreased over the
quarter ended December 31, 1998 by approximately $309,000 or 16%. The Company
incurred losses of $1,622,000, during the quarter, which includes operating
results of the Mesquite Star, and corporate expenses. Net revenues increased
by $751,000 or 31% over the quarter ended December 31, 1998. Promotional
allowances, which are subtracted from revenues, increased by approximately
25%, 6% less than the percentage increase in net revenues, as the Company
continued its marketing plan to build identification of the Mesquite Star
Hotel & Casino by utilizing complimentary rooms, food and beverages, special
events and entertainment.
Gaming revenues increased $473,000 or 29% over the quarter ended December 31,
1998. Gaming revenues were up primarily as a result of increased volumes of
play, with slot machines accounting for the majority of the increase. Food &
beverage revenues increased $240,000 or 38% as a result of increased volume.
Room revenues increased by $109,000 or 30% as a result of increased occupancy
and improving average rates. Hotel occupancy averaged 94% for the quarter
ended March 31, 1999, much improved over the quarter ended December 31, 1998.
Casino expenses increased $217,000 or 27%, which was slightly less than the
corresponding percentage increase in casino revenues, during the quarter ended
March 31, 1999. Food and beverage expenses increased $198,000 or 42% primarily
due to increased volume. Room expenses increased $271,000 or 13%, which was
less than half the corresponding percentage increase in room revenues,
primarily as a result of the increased volume. Selling, general and
administrative expenses increased $89,000 or 9% resulting primarily from
special casino marketing activities. Rent expenses arising primarily in
connection with operating equipment leases decreased during the quarter by
approximately $96,000 when compared with the quarter ended December 31,
1998.Certain leases are currently being renegotiated and rescheduled with
lessors. Depreciation and amortization, property and equipment, of $305,000
was consistent with the quarter ended December 31, 1998.
Corporate expenses for the quarter ended March 31, 1999 decreased by
approximately $209,000 primarily as a result of a decrease in professional
fees during the quarter, and to a lesser extent due to a reduction in other
general corporate expenses. Interest expense of $558,000 was comparable with
the quarter ended December 31, 1998.
The quarter ended March 31, 1998 was the third quarter during which the
Company's newly-built Mesquite Star Hotel & Casino was in operation. During
the quarter ended March 31, 1998, the Company was in the development-stage.
NINE MONTH PERIOD ENDED MARCH 31, 1999
During the nine month period ended March 31, 1999, the loss from operations
including the Mesquite Star Hotel & Casino and the Company's corporate
operations was $5,239,000. During the nine month period ended March 31,
1998,the Company was still in the development-stage. Operations of the
Company's newly-built Mesquite Star Hotel & Casino were still stabilizing
during this initial nine months of 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 (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."
MESQUITE STAR HOTEL & CASINO
The Company's plan of operation for the year ending March 31, 2000 includes
continuing the marketing of special events and promotional activities at the
Mesquite Star, which may attract more guests and visitors to the property, and
to continue programs to reduce expenses. Although occupancy and revenues
improved during the quarter ended March 31, 1999 there can be no assurance
that the Company's plan of operation for the Mesquite Star will be successful.
NORTH LAS VEGAS OPTION; NEVSTAR 2000 PROJECT
In September of 1997, the Company issued a $200,000 note payable, which was
due December 31, 1998, and which the parties have recently verbally agreed to
extend, for 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. (Planned site for the NevStar 2000 project). The $200,000 is intended
to be used for preliminary project costs including planning, engineering,
promotion and design. The sum is not refundable, nor applicable to the option
purchase price, but may be reimbursed upon development and financing of the
project.
On February 17, 1999, as directed by an order of the court issued in January,
1999, the North Las Vegas City Council approved a use permit for the $140
million proposed casino and entertainment complex it had denied at a council
meeting in November, 1998. The District Judge ruled in January, 1999 that the
NevStar proposal was submitted and approved by the City's Planning Commission
before a law passed in the 1997 Legislature went into effect restricting
neighborhood casinos. The District Judge labeled the rejection of the permits
arbitrary and capricious.
The NevStar 2000 $140 million project, planned by NevStar Gaming &
Entertainment Corporation, includes a 200-room hotel with gaming, a bowling
alley, movie theaters, a retail shopping village, a fitness center, a food
court and specialty restaurants, convention and meeting rooms , an
amphitheater and other amenities. The Company's option to purchase the planned
site for the project expired on December 31, 1998. The parties have verbally
agreed to extend the option. There is no assurance that the project will be
completed as planned.
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
In the past, many computer software programs were written using two digits
rather than four to define the applicable year. As a result, date-sensitive
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. This is generally referred to as the "Year 2000 issue." If
this situation occurs, the potential exists for computer system failures or
miscalculations by computer programs, which could disrupt operations.
The Company is in many ways involved in a low-technology business. Casino
employees, for example, do not require computers to deal blackjack or spin a
roulette wheel. Likewise, a chef does not require computers to prepare a meal
and a maid does not require a computer to clean and prepare a guest room.
Slot machines are a type of computer, but there is no date embodied in their
basic operation of choosing a random sequence and determining the appropriate
payout.
Nevertheless, the Company does use computers extensively to assist its
employees in providing goods and services to its guests and to assist
management in monitoring the Company's operations. The Company uses computers
in the back-of-house to facilitate purchasing and maintaining inventory
records. In the casino, computers are used to monitor gaming activity and
maintain customer records, such as credit availability.
Computers on occasion fail, irrespective of the Year 2000 issue. For this
reason, where appropriate, the Company maintains paper and magnetic backups
and the Company's employees are trained in the use of manual procedures.
Incidents of this nature occur within the hotel and casino industry each year
and generally such failures are unnoticed by guests.
However, the risk to the Company from the Year 2000 issue could be
substantial. Most of the Company's guest rooms, for example, are easily
accessed only by elevators, and most elevators incorporate some computer
technology. Likewise, the Company's heating, ventilation, life safety and
air-conditioning systems are highly computerized and critical to the Company's
operations. The Company is also exposed to the risk that one or more of its
vendors or suppliers could experience Year 2000 problems that may impact their
ability to provide goods and services. Although this is not considered as
significant a risk with respect to the suppliers of goods due to the
availability of alternative suppliers, the disruption of certain services, in
particular utilities and financial services, and automobile, bus and airline
transportation could, depending upon the extent of the disruption, have a
material adverse impact on the Company's operations.
STRATEGY
The Company has a detailed Year 2000 compliance program and has substantially
completed an inventory of its various systems that may be sensitive to the
Year 2000 issue. Much of the hardware and software purchased is already
compliant or may need only minor modifications. The hotel, slot accounting
and F&B software are not yet compliant. The Company has prioritized the
importance of such systems to its operation and assigned responsibilities to
ensure Year 2000 compliance of all critical systems. Where important to the
Company's business, inquiries are also being made of third parties with whom
the Company does significant business, such as vendors and suppliers, as to
their Year 2000 readiness, and alternatives if a third party encounters a Year
2000 problem are being developed.
The Company believes that a substantial majority of its systems are currently
Year 2000 compliant. It is the Company's goal to have all systems Year 2000
compliant by the third quarter of 1999. The Company is currently developing
a comprehensive contingency plan, although as previously mentioned a number
of its critical casino systems are currently backed up by manual procedures
that have been utilized during times of system malfunctions. The Company will
continue to assess the need for a comprehensive contingency plan as
implementation of its corrective action plan continues.
ESTIMATED COSTS
The total cost to the Company of making its systems Year 2000 compliant is
currently estimated to be in the $10,000-$50,000 range. Remaining testing in
1999 may result in additional costs, but such costs are not expected to be
material. All costs related to software modification, as well as all costs
associated with the Company's administration of its Year 2000 project, are
being expensed as incurred.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its capital requirements by the
sale of securities to private investors, from the proceeds of secured loans
and from its Initial Public Offering in September, 1997. 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 would be utilized,
among other things, to repay all or part of the Company's existing real estate
notes payable, to provide a principal and interest reserve during the early
months of the mortgage loan, and for general corporate purposes. No loan has
been consummated to date. At May 21, 1999, the lender is actively working on
arranging a loan for the Company under this commitment, but there can be no
assurance that a loan will be consummated on acceptable terms.
The Company has an immediate need for capital and is actively pursuing a
variety of debt and equity financing alternatives. There can be no assurance
that the necessary financing can be obtained on acceptable terms. See Item 1
Legal Proceedings and Item 3. Defaults on Senior Securities. The
Company'success is substantially dependent upon closing a loan pursuant to
this loan commitment or obtaining alternative debt or equity financing, the
net proceeds from the exercise of the outstanding Warrants, or otherwise
during the second quarter of 1999, to continue to implement its business plan,
including pursuing the NevStar 2000 project. There can be no assurance that
the Company will be able to generate sufficient funds from these or other
sources.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NEVSTAR 2000
On February 17, 1999, as directed by an order of the court issued in January,
1999, the North Las Vegas City Council approved a use permit for the $140
million proposed casino and entertainment complex it had denied at a council
meeting in November, 1998. The District Judge ruled in January, 1999 that the
NevStar proposal was submitted and approved by the City's Planning Commission
before a law passed in the 1997 Legislature went into effect restricting
neighborhood casinos. The District Judge labeled the rejection of the permits
arbitrary and capricious.
The proposed $140 million NevStar 2000 project, planned by the Company,
includes a 200-room hotel with gaming, bowling, movie theaters, retail
shopping village, fitness center, food court and specialty restaurants,
convention and meeting rooms, an amphitheater and other amenities. The
Company's option to purchase the planned site for the project expired on
December 31, 1998. The parties have verbally agreed to extend the option.
There is no assurance that the project will be completed as planned.
MESQUITE STAR HOTEL & CASINO
On August 27, 1998 a mechanics lien of $853,000 was filed by the general
contractor of the Company's newly-built Mesquite Star Hotel & Casino. On
February 18, 1999, the contractor filed suit in District Court, Clark County,
Nevada against the Company seeking damages in the amount of approximately
$853,000, plus interest thereon, attorney's fees and costs of suit, and an
order authorizing a Mechanics Lien Foreclosure Action. The Company is seeking
additional financing to pay the $853,000 (of which $600,000 is carried in
notes payable, and approximately $253,000 in accounts payable in the
accompanying March 31, 1999 financial statements).
SERIES A PREFERRED STOCKHOLDER CLAIM
The Company received a Demand and Claim Pursuant to Mass. Gen. Laws
Chapter93A, dated December 18, 1998 (the "Claim Letter"), on behalf of William
P. DeLuca, Jr., a holder of the Company's Series A Convertible Non-Voting
Preferred Stock (the "Series A Preferred Stock") that was purchased in April,
1994 for $100,100. The Claim Letter sought rescission relief in the amount of
$100,100, plus interest thereon from purchase date. Mr. DeLuca reserved his
right to seek triple damages for his alleged loss, legal fees and interest
thereon from the purchase date. The Company believes that the claim is without
merit.
On February 16, 1999, the Company received a derivative demand, dated February
16, 1999, on behalf of Mr. DeLuca, demanding that the Board of Directors of
the Company institute suit in connection with Mr. DeLuca's pending recission
claim against all corporate officers and members of management responsible for
the Company's alleged prior wrongful and actionable conduct with respect to
the Series A Preferred Stock.
ITEM 2. CHANGES IN SECURITIES
On April 22, 1999, the Company issued and sold 196,000 shares of its common
stock (the "Shares"), at an offering price of $1 per share, in a private
placement exempt from registration under the securities Act of 1933, as
amended. The Shares were offered, and sold, only to "accredited investors" as
defined in Regulation D. Net proceeds to the Company was $186,200 ($196,000
less expenses of $9,800). No underwriting commissions or discounts were
payable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The recording of a mechanic's lien and filing of a foreclosure action (See
Item 2. Legal Proceedings) by the general contractor for the Company's
Mesquite Star Hotel & Casino (and hence the failure of the Company to keep its
property free and clear of mechanics liens) is a default under the Company
loans which are secured by deeds of trust on the Mesquite Star property,
including the First Credit Bank loan, the Dr. Kelly/Dr. Tam loan, the PMJ
Enterprises, Inc. loan and the Dr. Sam Hon loan (See Note 4 to March 31, 1999
Financial Statements.) As of May 21, 1999, the Company is several months in
arrears on interest payments on such secured notes payable.
As of May 21, 1999, the Company is in default in payment of the Construction
note payable relating to construction of the Mesquite Star Hotel & Casino (See
"Legal Proceedings").
As of May 21, 1999, the Company is also several months in arrears on payments
arising from its equipment and furniture leases and installment contracts
payable (including Mikohn, NEC, IGT, Sigma Game and Ballys). The Company is
two month's behind in payments it's Telerent Leasing Corporation lease, which
has been renegotiated and revised to start as of March 1, 1999, and is current
on its PDS Financial Corporation Lease.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Not
Applicable.
ITEM 5. OTHER INFORMATION
Dr. Richard Tam resigned from the Company's Board of Directors effective
February 10, 1999.
ITEM 6.
(a) Exhibits:
None
(b) Reports on Form 8-K
(1) January 6, 1999 Form 8-K announcing appointment of Max L. Page as
a director.
(2) February 8, 1999 Form 8-K announcing appointment of James E.
Haglund as a director.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 21st day of May, 1999.
NEVSTAR GAMING & ENTERTAINMENT CORPORATION
By: /s/ MICHAEL J. SIGNORELLI
Michael J. Signorelli
Chairman of the Board and
Chief Executive Officer
By: /s/ BRENT E. DUNCAN
Brent E. Duncan
Chief Financial Officer and
Treasurer (Principal Financial
Officer and Principal Accounting Officer)
<TABLE> <S> <C>
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<LEGEND>
The accompanying financial data schedule for the nine month period ended
March 31, 1999 is unaudited. It is suggested that it be read in conjunction
with the Company's report on Form 10-KSB for the period ended
June 30, 1998 and the Company's March 31, 1999 Form 10-QSB.
</LEGEND>
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