<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-11532
INLAND CASINO CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 33-0618806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4225 Executive Square, Suite 1650, La Jolla, California 92037
(Address of principal executive offices)
Issuer's telephone number, including area code: (619) 546-9383
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: as of November 12, 1996,
3,854,548 shares of common stock, $.001 par value per share, were outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE> 2
INLAND CASINO CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Balance Sheets -
June 30, 1996 and September 30, 1996 ..................... 1
Statements of Operations -
Three months ended September 30, 1995 and 1996 ........... 2
Statements of Cash Flows -
Three months ended September 30, 1995 and 1996 ........... 3
Notes to Interim Financial Statements .................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION ................................... 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................... 14
</TABLE>
(i)
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INLAND CASINO CORPORATION
BALANCE SHEETS
JUNE 30, 1996 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
June 30, 1996 September 30, 1996
------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,347,985 $ 6,106,029
Accounts receivable 91,154 313,592
Deposits and prepaid expenses 53,130 85,041
----------- -----------
Total current assets 4,492,269 6,504,662
Property and equipment, net 167,213 155,371
Management agreement acquisition costs, net 6,505,327 6,127,406
Deferred taxes and other 607,200 428,800
----------- -----------
Total assets $11,772,009 $13,216,239
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances of future management fees $ 2,385,814 $ 2,467,266
Current portion of long-term debt 279,946 279,946
Accounts payable and accrued expenses 449,289 873,926
Income taxes payable 210,880 555,880
----------- -----------
Total current liabilities 3,325,929 4,177,018
----------- -----------
LONG TERM DEBT:
Note payable, less current portion 620,054 4,120,054
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.001 par, 100,000,000 shares
authorized, 10,632,792 and 12,541,793 shares
outstanding 2,352,554 3,855
Retained earnings 5,473,472 4,915,312
----------- -----------
Total shareholders' equity 7,826,026 4,919,167
----------- -----------
Total liabilities and shareholders' equity $11,772,009 $13,216,239
=========== ===========
</TABLE>
1
<PAGE> 4
INLAND CASINO CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenue $ 2,652,294 $ 3,950,000
Costs and expenses:
General and administrative expenses 1,706,150 1,878,391
Amortization of deferred contract costs 538,327 604,371
------------ ------------
2,244,477 2,482,762
------------ ------------
Operating profit 407,817 1,467,238
Other income and (expense):
Interest income 56,653
Interest expense (1,692) (15,750)
------------ ------------
(1,692) 40,903
------------ ------------
Income before income taxes 406,125 1,508,141
Income tax provision 203,000 715,000
------------ ------------
Net income $ 203,125 $ 793,141
============ ============
Earnings per share $ 0.02 $ 0.07
============ ============
Shares used in the computation of income per common
and common equivalent share 12,601,307 10,680,547
============ ============
</TABLE>
2
<PAGE> 5
INLAND CASINO CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net cash generated by (used in) operating activities:
Net income $ 203,125 $ 793,141
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 545,458 616,213
Deferred taxes 47,000 158,000
Changes in assets and liabilities:
Accounts receivable (11,194) (222,438)
Deposits, prepaid expenses and other assets (296,039) (11,511)
Accounts payable and accrued expenses 987,390 424,638
Income taxes payable 265,228 345,000
----------- -----------
Net cash generated by operating activities 1,740,968 2,103,043
----------- -----------
Cash used in investing activities:
Purchases of furniture and equipment (42,155) --
Management agreement acquisition costs (403,323) (226,450)
----------- -----------
Net cash used in investing activities (445,478) (226,450)
----------- -----------
Cash flows generated by (used in) financing activities:
Increase in advances of
future consulting fees 789,149 81,452
Payment of notes payable (9,734)
Repurchase and cancellation of common stock (1,321) (200,000)
----------- -----------
Net cash provided by (used in) financing activities 778,094 (118,549)
----------- -----------
Increase in cash 2,073,584 1,758,044
Cash, beginning of period 1,423,826 4,347,985
----------- -----------
Cash, end of period $ 3,497,410 $ 6,106,029
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest expense paid $ 1,692 $ --
=========== ===========
Interest income received $ -- $ 57,862
=========== ===========
Income taxes paid $ -- $ 212,000
=========== ===========
Income tax refund received $ 192,316 $ --
=========== ===========
Repurchase of common stock by issuance of
notes payable $ 3,500,000
===========
</TABLE>
3
<PAGE> 6
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. PRESENTATION OF INTERIM FINANCIAL INFORMATION -
Basis of Presentation - The accompanying interim unaudited financial statements
have been prepared by Inland Casino Corporation, a Utah corporation (the
"Company" or "Inland Casino"), in conformity with generally accepted accounting
principles for interim financial information and with the rules and regulations
of the U.S. Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. The interim unaudited financial statements reflect
all normal, recurring adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. The results of operations for the
interim periods are not necessarily indicative of the results of the full fiscal
year. The interim financial statements should be read in conjunction with the
Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996.
Earnings per share - Earnings per common and common equivalent share are
computed using the weighted average number of shares outstanding for the three
month periods ended September 30, 1995 and 1996. Equivalent shares are those
issuable upon the assumed exercise of stock options reflected under the treasury
stock method using the average market price of the Company's shares during the
periods when their effect is dilutive.
2. REORGANIZATION AND MERGER - Effective July 1, 1994, Inland Casino Partners, a
California general partnership ("ICP"), and its partners, Inland Casino
Corporation, a Nevada Corporation ("ICC I"), and Eagle Edge Partners ("EEP"),
combined to form a new Delaware Corporation, Inland Casino Corporation ("ICC
II"). Such transaction is hereinafter referred to as the "Roll-Up Transaction".
On May 22, 1995 the merger of ICC II into and with Twin Creek Exploration Co.,
Inc. ("Twin Creek"), a Utah corporation, became effective (the "Merger"). To
effect the merger, the common stock of Twin Creek was reverse split 1 for 100
and the shareholders of ICC II received 11,930,406 shares, representing
approximately 95% of the shares outstanding after the merger. The surviving
company was renamed Inland Casino Corporation ("Inland Casino"), and the fiscal
year end was changed from September 30 to June 30. The transaction was accounted
for as a recapitalization using the carryover basis of the assets and
liabilities of ICC II. Accordingly, the financial statements reflect the
financial condition, results of operations and cash flows of ICC II, and its
predecessors, for periods prior to the merger date, and combined with Twin Creek
from that date forward.
3. BUSINESS AND BASIS OF ACCOUNTING - The Company provides operational and other
consulting services for gaming operations under consulting agreements with
Native American Indian Tribes. Currently, the Company provides services to The
Barona Group of Capitan Grande Band of Mission Indians (the "Barona Tribe") in
connection with the Barona Tribe's operation of a gaming facility located north
of Lakeside, California, in eastern San Diego County. In addition, the Company
provides services to the Klamath and Modoc Tribes and the Yahooskin Band of
Snake Indians (the "Klamath Tribes") in connection with the planned Kla-Mo-Ya
Casino, to be constructed near Chiloquin, in south-central Oregon. The Company
4
<PAGE> 7
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
reports revenues and expenses using the accrual method of accounting. All of the
Company's fee revenue for the three months ended September 30, 1995 and 1996 was
generated from services provided to the Barona Tribe.
4. AGREEMENTS WITH THE BARONA TRIBE - Prior to April 1, 1996, the Company
managed, operated and maintained certain gaming and food and beverage operations
in California on behalf of the Barona Tribe in accordance with the terms and
conditions of a certain Gaming Management Agreement (the "Operations Agreement")
with the Barona Tribe, under a grant of authority from the Barona General
Council. The Company's revenue from fees under the Operations Agreement was
based upon a percentage of profits or the excess of revenue over certain
expenses generated from the gaming operations as defined in the Operations
Agreement. The National Indian Gaming Commission (the "NIGC") has not approved
the Operations Agreement. In March 1996, the Company entered into a Consulting
Agreement with the Barona Tribe,with an effective date of April 1, 1996,
relating to the operations of the Barona Casino (the "Initial Consulting
Agreement"). In May 1996, after the parties recognized an inadvertent mistake in
the provision relating to consulting fees had been made, the Company and the
Barona Tribe agreed to an Amended and Restated Consulting Agreement (the "Barona
Consulting Agreement" or "Consulting Agreement"). In addition, the Company and
the Barona Tribe entered into a Mutual Release releasing each other from certain
rights, duties and obligations set forth in the Operations Agreement (the
"Release"). The Barona Consulting Agreement and the Release have effective dates
of April 1, 1996.
The Barona Consulting Agreement provides for an initial term of three years,
with an option to extend the agreement for an additional five year period. Under
the terms of the Barona Consulting Agreement, the Barona Tribe has the right to
draw from the gross revenues of the Barona Casino an annual income stream at
least equal to the distributions received by the Barona Tribe for the twelve
month period ended December 31, 1995, and fees paid or payable to the Company
may accordingly be reduced.
In March 1996, the Barona Tribe submitted the Initial Consulting Agreement to
the NIGC and in May 1996 the NIGC determined that the Initial Consulting
Agreement was not a management agreement and, therefore not subject to NIGC
approval, and forwarded such agreement to the Bureau of Indian Affairs (the
"BIA"). The Company intends to submit the Consulting Agreement to the NIGC and
the BIA. Although there can be no assurance that the NIGC will conclude that the
Consulting Agreement is not a management agreement, the Company believes that,
based upon its prior ruling with respect to the Initial Consulting Agreement,
the NIGC will make a similar determination with respect to the Consulting
Agreement. In addition, if the BIA determines that the Initial Consulting
Agreement and/or the Consulting Agreement is subject to its review, there can be
no assurance that such Agreements will be approved by the BIA. Failure to
approve the Initial Consulting Agreement or the Consulting Agreement may have a
material adverse effect on the business and financial condition of the Company.
5. DEFERRED CONTRACT COSTS - Pursuant to oral agreements with the Barona Tribe,
the Company has agreed to fund, or to arrange acceptable financing for, the
construction of facility improvements, furniture and equipment, the
establishment of initial working capital and the losses, if any, of the Barona
Casino's operations. Because the Barona Tribe will not allow its land to be
encumbered and has not assumed any
5
<PAGE> 8
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
financial liability for costs associated with developing the Barona Casino, the
Company assumed liability for these obligations and capitalized those costs
incurred as deferred contract costs, since (i) the Company had the ultimate
responsibility for the costs incurred and (ii) management believes that these
costs were fully recoverable over the life of the Operations Agreement and the
Consulting Agreement, through receipt of fee income from the Barona Casino.
However, given the nature of the asset, if the recoverability is determined to
be not probable, the Company will expense the unamortized portion.
On an ongoing basis, the Company reviews the valuation and recoverability of
these unamortized deferred contract costs. As part of this review, the Company
estimates the discounted present value of the future projected net income
generated by the Barona Casino and the resulting revenue to the Company to
determine whether impairment has occurred.
Through March 31, 1996, amortization of these deferred costs was calculated as
the greater of the amortization using (i) the straight-line method over the
remaining term of the Operations Agreement or (ii) an accelerated method,
whichever is greater. The accelerated amortization was equal to the excess of
fees earned over 30% of Casino operating income. Beginning April 1, 1996,
amortization of the deferred costs is calculated using the straight-line method
over the remaining term of the Consulting Agreement. Under the terms of the
Operations Agreement and the Consulting Agreement, title to the Barona Casino
facilities, furniture and equipment rests solely with the Barona Tribe, unless
the Barona Tribe agrees otherwise.
The Consulting Agreement can be terminated by the Barona Tribe for any material
breach by the Company, as defined in such Agreement. Management is not aware of
any material breach of the Consulting Agreement.
6. COMMON STOCK REPURCHASE: On March 4, 1996, the Company repurchased 1,908,865
shares of its common stock and an option to purchase 894,780 shares of its
common stock from Jack R. Smith, a former executive officer, director, and
principal shareholder, for consideration totaling $1,400,000. The purchase price
consisted of a $500,000 cash payment and issuance of a $900,000, 7% unsecured
promissory note, payable in three equal annual installments of principal and
interest of $342,947. In addition, if the Company's common stock reaches certain
levels during measurement periods prior to March 1998 and 1999, Mr. Smith will
be entitled to receive up to $250,000 for each measurement period.
On September 30, 1996, pursuant to a Stock Purchase and Settlement and Release
Agreement dated September 27, 1996 (the "Stock Purchase Agreement") by and among
Jonathan Ungar, Alan Henry Woods and the Company, the Company purchased
3,424,913 shares of its common stock from Mr. Ungar and 3,353,331 shares of its
common stock from Mr. Woods. The terms of the Stock Purchase Agreement include
(i) a cash payment of $200,000 upon closing, (ii) the issuance of unsecured
promissory notes in the principal amount of $3,500,000, with interest at the
rate of 10%, payments of interest only for the first three years, followed by
three equal annual installments of principal repayment, with interest on the
remaining balance commencing September 30, 1997, (iii) a contingent obligation
(the "Initial Contingent Obligations") to issue a total of $9,856,488 in
unsecured promissory notes ($4,981,276 in principal amount
6
<PAGE> 9
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
to Mr. Ungar and $4,875,212 in principal amount to Mr. Woods) including
$2,000,000 in principal amount of notes each year for four years and $1,856,488
in principal amount of notes to be issued in a fifth year, each note with
interest at 10%, payment of interest only for three years, followed by three
equal annual installments of principal plus interest on the remaining principal
balance, and (iv) another contingent obligation to issue an additional
$3,000,000 principal amount ($1,515,000 to Mr. Ungar and $1,485,000 to Mr.
Woods) in unsecured promissory notes (or cash, if the Company has closed a firm
commitment underwritten public offering of securities of not less than $35
million prior to the contingencies being met) when and if certain conditions are
met, with interest at the then "preferred" or "prime" rate of interest charged
to the Company by the Company's principal bank, with interest only for three
years from date of issuance, followed by two equal annual installments of
principal, plus interest on the remaining principal.
The obligations to issue the Initial Contingent Obligations (i.e., $2,000,000 in
notes for four years and $1,856,488 in notes for a fifth year) are contingent
upon the Company's retained earnings balance being at least $4,000,000 for the
fiscal year ending immediately prior to the date the notes are to be issued.
Dividends paid by the Company and certain other payments, if any, are to be
added back to the retained earnings balance for purposes of this contingency
calculation. The period for determining the Company's obligation to issue each
of the $2,000,000 and $1,856,488 in principal amount of notes is an eight year
period commencing with the fiscal year ending June 30, 1997. If the $4,000,000
retained earnings test is not met in one year, the Company is not obligated to
issue the notes in that year. However, the test is to be made each year for
eight successive years commencing with the fiscal year ending June 30, 1997, but
each year can be used only once during the eight year period, and only five out
of the eight years may be used. The Second Contingent Obligation is subject to
the following conditions: (i) the Barona Tribe enters into a Class III Gaming
Compact (the "Compact") with the State of California which permits the operation
of video gaming machines at the Barona Casino in San Diego County; (ii) at the
time that the Barona Tribe enters into the Compact, the Company has a consulting
agreement or similar contractual arrangement with the Barona tribe: and (iii)
consulting fees paid to the Company by the Barona Tribe relating to the Barona
Casino for any consecutive 12-month period within five years after the Barona
Tribe has entered into the Compact, equals or exceeds one and one-half times
such consulting fees for the year ended June 30, 1996. The Company intends to
record as the additional cost of the repurchase of its common stock, each
contingent obligation as each contingency or condition is met. All payments
pursuant to the Stock Purchase Agreement are further subject to compliance with
certain state law provisions and the Company's Articles of Incorporation
concerning repurchase transactions.
8. COMMITMENTS AND CONTINGENCIES - LITIGATION - Indian Gaming is the subject of
numerous lawsuits in various court jurisdictions at both federal and state
levels. These court cases are attempting to define the permissible gaming
activities on Indian reservations, the states' rights or limitations on control
of gaming, and numerous other issues. The Barona Tribe is not a party to these
cases nor is the Barona Reservation within the jurisdiction of certain courts in
which many of these cases will be decided; therefore, the impact, if any, on the
operations of the Barona Casino cannot be determined at this time.
7
<PAGE> 10
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
The impact of decisions in various cases, however, could have a significant
impact on the operations of Barona Casino and the Company when decided.
Specifically, current cases are addressing the legality of electronic gaming
equipment and certain card games in California (currently used in the Barona
Casino) and the enforcement rights applicable to Federal and State governments.
Various courts have ruled in different cases, or in different hearings on the
same case, both in the states' favor and in the tribes' favor on the same or
similar issues. There are appeals remaining in a number of cases and other cases
may arise. Until there are definitive rulings by the courts, the legality of the
gaming activities will not be known.
On June 30, 1994, the U.S. Attorney of the Southern District of California
announced a verbal understanding with a number of Southern California tribes,
including the Barona Tribe, that would allow the Barona Tribe to continue to
operate without expansion of gaming activities until one or more of the
following occurs:
- A compact with the State of California is negotiated or the Secretary
of the Interior expressly authorizing gaming, such as certain card or
electronic/video gaming, which have not been previously addressed;
- Entry of final judgments and exhaustion of all appellate remedies in
certain cited suits pending before federal courts;
- Enactment of federal legislation that authorizes the operation of the
electronic/video games at issue without a tribal-state compact;
- Amendment of the NIGC's regulations to include the electronic/video
games within the definition of gaming or permissible technologic aids
thereto which are not subject to State compact; or
- Material breach of the understanding by the tribes.
Management is not aware of any violations of the verbal understanding by the
Barona Tribe or any other Indian Tribe which is a party to such understandings.
The Company is also subject to claims and lawsuits which arise in the ordinary
course of business. The Company does not anticipate any material losses with
respect to such existing or pending claims and lawsuits.
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
From its formation through March 31, 1996, the Company provided services for the
Barona Tribe at the Barona Casino under the terms of the Operations Agreement,
including providing assistance to the Barona Tribe in the development and
expansion of the "Big Top" facility at the Barona Casino. Through March 31,
1996, the Company earned fees based upon a percentage of the "net profits"
generated by the Barona Casino. As used in this Report, the term "net profits"
is not intended to mean net profits as defined by generally accepted accounting
principles or by IGRA.. Generally, the Operations Agreement defined "net profit"
as the total amount of moneys remaining from monthly gross receipts after
payment of the operating expenses for such month which amount shall be
calculated on a cash basis. The Company provided certain personnel, at its
expense, to operate the activities at the Barona Casino, and it entered into
agreements such as leases or other contracts for the Barona Casino in which the
Company was the obligor (e.g., leases for gaming equipment, the Big Top lease,
etc.).
Effective April 1, 1996, the Company commenced providing consulting services to
the Barona Tribe pursuant to the Consulting Agreement. The Company and the
Barona Tribe also entered into a Mutual Release, effective April 1, 1996,
releasing each other from their respective duties under the Operations
Agreement.
As part of its obligation to the Barona Tribe under the Operations Agreement,
Inland Casino provided significant financing for the construction and expansion
of the Barona Casino. The financing costs have been recognized as an asset in
the financial statements of the Company, designated as deferred contract costs,
and are being amortized to expense over the combined lives of the Operations and
Consulting Agreements through April 1999. The recovery of these deferred costs
is achieved through the fees earned by Inland Casino pursuant to the agreements
with the Barona Tribe. Construction financing obligations, such as those
described herein, are incurred upon the recommendation of the Company and are
subject to acceptance by the Barona Tribe.
In addition to its obligations under the Consulting Agreement and collateral
contracts for the benefit of the Barona Tribe, the Company's consulting
activities include assisting clients in arranging financing to support casino
construction projects and monitoring of Indian Gaming legislative and litigation
matters.
In June 1996, the Company began providing consulting services for the
Confederated Tribes of Siletz Indians of Oregon (the "Siletz Tribes") at the
Chinook Winds Gaming and Convention Center in Lincoln City, Oregon, and with the
Associated Tribes of Northwest Indians in Oregon. In October 1996, the
consulting agreement with the Siletz Tribe was terminated.
Also in June 1996, the Company entered into a consulting agreement with the
Klamath Tribes to assist with the development, construction and eventual
operation of the Kla-Mo-Ya Casino, to be constructed near Chiloquin, in
south-central Oregon. The opening date of the facility is scheduled for early
summer of 1997, and under the terms of its agreement with the Klamath Tribes the
Company will not receive fees for consulting services until the facility is
opened and operating.
9
<PAGE> 12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1996.
REVENUE. Revenue increased 48.9% from $2,652,294 for the three months ended
September 30, 1995 to $3,950,000 for the three months ended September 30, 1996,
as a result of higher profit margins at the Barona Casino during the same
three-month period. The Company's revenue was solely from fees earned under
agreements with the Barona Tribe; namely, the Operations Agreement during the
three months ended September 30, 1995, and the Consulting Agreement during
the three months ended September 30, 1996.
OPERATING EXPENSES. General and administrative expenses increased 10.1% from
$1,706,150 for the three months ended September 30, 1995 to $1,878,391 for the
three months ended September 30, 1996, resulting primarily from an increase in
compensation expense, reflecting a net increase in the number of full-time
employees from 20 to 24 from September 30, 1995 to September 30, 1996, a
provision for doubtful accounts to cover anticipated losses resulting from
certain consulting engagements, business development costs, including costs
associated with marketing the Company's services to potential new clients,
partially offset by decreases in promotional expenses and professional and other
consulting fees.
Amortization of deferred contract costs increased 12.3% from $538,327 for the
three months ended September 30, 1995 to $604,371 for the three months ended
September 30, 1996, resulting primarily from calculating amortization on a
higher asset value for the three months ended September 30, 1996.
OTHER INCOME AND EXPENSE. For the three months ended September 30, 1995 interest
income was $56,653 compared to zero for the three months ended September 30,
1996. Prior to April 1, 1996, while the Company performed services at the Barona
Casino under the terms of the Operations Agreement with the Barona Tribe, it was
determined by management that as long as the Company had outstanding advances of
future fees due to the Barona Casino, interest earned on excess cash balances
would be paid to the Barona Casino. Commencing April 1, 1996, the effective date
on which the Consulting Agreement between the Company and the Barona Tribe
replaced the Operations Agreement, the Company began to realize interest income
on its cash balances available for investment.
Interest expense increased from $1,692 for the three months ended September 30,
1995 to $15,750 for the three months ended September 30, 1996, primarily as a
result of accrued interest during the three months ended September 30, 1996 on a
note payable issued in March 1996 in connection with the repurchase of 1,908,875
shares of the Company's common stock from a former officer and director of the
Company.
INCOME TAX PROVISION. The income tax provision increased 252.2% from $203,000
for the three months ended September 30, 1995 to $715,000 for the three months
ended September 30, 1996, primarily as a result of an increase in taxable
income.
LIQUIDITY AND CAPITAL RESOURCES.
During the three months ended September 30, 1996, the Company's cash position
increased $1,758,044 from the June 30, 1996 balance of $4,347,985, to $6,106,029
at September 30, 1996. The increase was principally due to net cash generated by
operating activities of $2,103,043 during the period, reduced by cash invested
in deferred contract costs of $226,450, and use of cash flows for financing
activities of
10
<PAGE> 13
$118,549. Cash flows used in financing activities include $200,000 in payments
related to the repurchase of shares of common stock, partially reduced by
an increase of $81,451 in advances of future fees.
Accounts receivable increased $222,438 during the three months ended September
30, 1996, primarily as a result of an increase in client billings. Accounts
payable and accrued expenses increased $424,637 during the three months ended
September 30, 1996, primarily as a result of accrued expenses incurred in
connection with consulting contracts.
Long term debt increased $3,500,000, as a result of the issuance of notes
payable in connection with the repurchase of shares of common stock.
The deferred contract costs, totaling $13,387,403 at September 30, 1996, were
financed principally by cash generated from operations, advances of future fees
from the Barona Casino, working capital and advances and capital contributions
from shareholders. From the inception of the Company through September 30, 1996,
in addition to its general and administrative expenses, the Company's most
significant expenditure has been the funding of the deferred contract costs
related to an expansion of the facilities at the Barona Casino. Net cash
provided by operations from fees earned during this same period was insufficient
by itself to fund the deferred contract costs. In addition to fees earned under
the Operations and Consulting Agreements, the Company also has received advances
against future fees from the Barona Tribe and received capital contributions
from its shareholders. At September 30, 1996, outstanding advances of future
fees from the Barona Casino were $2,467,265. Advances do not bear interest and
are due on demand.
In the future, if the Operations Agreement is successfully challenged by the
NIGC, Inland Casino may be obligated to repay such advances to the Barona Casino
even though the Operations Agreement is cancelled. Although the Company believes
that it will have the resources sufficient to make repayment of the advances,
there can be no assurance that Inland Casino will have the resources to repay
any outstanding advances in the future.
It is the Company's intention to assist the Barona Tribe in funding, or finding
acceptable sources of funding for, future improvements in the Barona Casino.
Depending on the nature and extent of the improvement project, to the extent
practicable, it is the Company's intent to first explore funding such
improvement projects from the Company's working capital and through advances of
future fees, before seeking outside debt or equity financing. However, outside
sources of financing may be required or sought at any time.
Inland Casino has announced plans to expand and improve the existing facilities
at the Barona Casino, which expansion is subject to the approval of the Barona
Tribe and also is subject to obtaining appropriate financing. The expansion will
not increase the number of gaming devices, but is expected to expand off-track
betting and other non-gaming activities, as permitted under the verbal agreement
with the U.S. Attorney for the Southern District of California and the compact
with the State of California concerning off-track betting. This proposed
expansion project is estimated to cost up to $17.5 million and the Company and
the Barona Tribe are exploring financing alternatives for the project.
The Barona Casino and all of the related facilities are capital improvements
upon land which belongs to the Barona Tribe. As such, the Company has no
ownership whatsoever in any of the improvements to such land. All of these
improvements belong to the Barona Tribe.
11
<PAGE> 14
SEASONALITY.
The Barona Casino is located approximately 30 miles east of downtown San Diego,
California where the population is relatively stable throughout the year,
although it peaks to some extent due to tourism during the summer months and to
a lesser extent during the winter months. On the basis of its experience to
date, the Company anticipates that the Barona Casino's business may peak in
summer and, to some extent, in winter, and may decline somewhat in early spring
and late fall. However, at this time, the Company cannot accurately predict the
continued effect of seasonality on its business.
INFLATION.
To date, inflation has not had a material impact on the Company's financial
condition or its results of operations.
SUBSEQUENT EVENTS, ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS, AND
FORWARD-LOOKING STATEMENTS.
Subsequent Events.
Transactions with the Klamath Tribes - In October 1996, the Company loaned to
the Klamath Tribes, subject to the terms of an 8.25% unsecured promissory note,
$1,121,009 in connection with the planned development of the Kla-Mo-Ya Casino.
Unless and until the Klamath Tribes obtain outside sources of financing , the
Company may loan the Klamath Tribes up to an additional approximately $4 million
to fund the construction and opening of the Kla-Mo-Ya Casino, which is scheduled
to open in May 1997. While the Company believes that cash flow from the future
operations of the Kla-Mo-Ya Casino will be adequate to repay the principal and
interest on its promissory note due from the Klamath Tribes, as well as
additional loans, if any, used to finance construction, there is no assurance
that the Kla-Mo-Ya Casino will open as scheduled, or if opened, that cash flows
from operations will be adequate to service the then-outstanding debt due to the
Company.
Under the terms of the Tribal State Compact for Regulation of Class III Gaming
between The Klamath Tribes and the State of Oregon (the "Compact"), the Klamath
Tribes plan to open the Kla-Mo-Ya Casino initially as a temporary facility,
which will permit the operation of 300 video lottery terminals for a
twelve-month period. Under the terms of the Compact, at the end of the twelve-
month period, the Klamath Tribes must either increase the square footage of the
casino facility to provide that the video lottery terminal area comprises no
more than fifteen percent (15%) of the total square footage of the casino
facility, or reduce the video lottery terminal area (and therefore the number of
terminals or machines) to equal fifteen percent (15%) of the square footage of
the temporary facility. If the Klamath Tribes are unable to open the Kla-Mo-Ya
Casino, or experience long delays in its opening, or if cash flow from its
operations is not adequate to pay its obligations, the Company may lose all or a
portion of its investment in loans due from the Klamath Tribes, which could have
a material adverse effect on the financial condition of the Company.
The Company has filed an application with the State of Oregon to provide
consulting services as a vendor for Indian gaming operations in Oregon. The
application is currently pending, and while the Company believes that it will
become an approved vendor in the State of Oregon, there is no assurance that the
Company will receive such approval.
Cancellation of Credit Agreement - On September 20, 1996, the Company commenced
the process of canceling a bank credit agreement. Pursuant to such agreement,
among other things, the Company granted to the bank a security interest in the
Company's assets and an immediately exerciseable warrant to purchase 40,000
shares of the Company's common stock at a price of $5.00 per share.
On October 22,
12
<PAGE> 15
1996, the bank agreed to cancel the credit agreement, terminate its security
interest in the Company's assets, but retained the warrant. During the three
months ended September 30, 1996 and all prior periods, the Company did not
utilize such credit facility.
Additional Factors That May Affect Future Results.
Gaming on Indian land is extensively regulated by federal, state and tribal
governments. The present regulatory environment is extremely uncertain because
of certain pending litigation and legislation. Adverse findings for any of the
Indian tribes in any of the pending actions could have a material adverse effect
on the operations of Inland Casino, as would criminal and civil enforcement
actions taken by federal agencies which could be commenced before the outcome of
such litigation is known.
In addition, the Company's Consulting Agreements with the Barona Tribe and the
Klamath Tribes have not yet been approved by all regulatory authorities. If the
Consulting Agreements (particularly, the Barona Consulting Agreement) are not
approved or are significantly modified from the standpoint of consulting
revenue, such action would have a material adverse effect on the business and
financial condition of the Company.
In any event, any material reduction in fees payable to the Company, whether as
a result of a modification to the agreements between the Company and the Barona
Tribe as result of regulatory compliance requirements or weakness in the
operations of the Barona Casino, could have a material adverse effect on the
business and financial condition of the Company, if the Company could not either
reduce expenses or increase revenues from other sources.
Forward-looking Statements.
Included in the Notes to the Interim Financial Statements, this Item 2.
Management's Discussion and Analysis or Plan of Operation and elsewhere in this
Report are certain forward-looking statements reflecting the Company's current
expectations. Although the Company believes that its expectations are based on
reasonable assumptions, there can be no assurance that the Company's financial
goals or expectations will be realized. Numerous factors may affect the
Company's actual results and may cause results to differ materially from that
expressed in forward-looking statements made by or on behalf of the Company.
Some of these factors include the uncertainty involved in the regulatory
approval process relating to the Consulting Agreement; the regulatory approach
taken with respect to the now terminated Operations Agreement; the outcome of a
variety of pending litigation and legislation at the federal and state levels
regarding Indian gaming; the availability of funding alternatives to fulfill
certain contemplated development projects at the Barona Casino and the Kla-Mo-Ya
Casino; and the general economic factors affecting the gaming industry in
general and Indian gaming in particular in the geographic market within which
the Company competes.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Exhibit No.
3.1 Amended and Restated Articles of Incorporation of the
Company (formerly known as Twin Creek Exploration Co.,
Inc.), previously filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1995, filed with the U.S. Securities and Exchange
Commission (the "Commission") on October 12, 1995 (File No.
0-11532), which is hereby incorporated herein by reference.
3.2 Amended and Restated By-laws of the Company (formerly known
as Twin Creek Exploration Co., Inc.), previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 1996, filed
with the Commission on May 17, 1996 (File No. 0-11532),
which is hereby incorporated herein by reference.
10.1 Stock Purchase and Settlement and Release Agreement by and
among the Company, Jonathan Ungar and Alan Henry Woods,
dated September 27, 1996, previously filed as Exhibit 2.1
to the Company's Current Report on Form 8-K dated October
1, 1996, filed with the Commission on October 1, 1996 (File
No. 0-11532) (the "October 1, 1996 Current Report"), which
is hereby incorporated herein by reference.
10.2 Promissory Note dated September 30, 1996 in favor of
Jonathan Ungar in the principal amount of $1,768,550,
previously filed as Exhibit 2.2 to the October 1, 1996
Current Report, which is hereby incorporated herein by
reference.
10.3 Promissory Note dated September 30, 1996 in favor of Alan
Henry Woods in the principal amount of $1,731,450,
previously filed as Exhibit 2.3 to the October 1, 1996
Current Report, which is hereby incorporated herein by
reference.
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K.
During the three months ended September 30, 1996, no reports on Form 8-K were
filed by the Company with the Commission; however, the Company filed during its
second quarter ending December 31, 1996, a Current Report on Form 8-K dated
October 1, 1996, disclosing the terms of the repurchase of 6,778,244 shares of
its common stock from two principal shareholders on September 30, 1996, pursuant
to that certain Stock Purchase and Settlement and Release Agreement by and among
the Company, Jonathan Ungar and Alan Henry Woods, dated September 27, 1996.
14
<PAGE> 17
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INLAND CASINO CORPORATION,
a Utah Corporation (Registrant)
Date: November 14, 1996 By /s/ Duane M. Eberlein
---------------------
Duane M. Eberlein
Vice President, Chief
Financial Officer and
Secretary
(Principal Financial and
and Accounting Officer)
15
<PAGE> 18
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of the
Company (formerly known as Twin Creek Exploration Co.,
Inc.), previously filed as Exhibit 3.1 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended June
30, 1995, filed with the U.S. Securities and Exchange
Commission (the "Commission") on October 12, 1995 (File No.
0-11532), which is hereby incorporated herein by reference.
3.2 Amended and Restated By-laws of the Company (formerly known
as Twin Creek Exploration Co., Inc.), previously filed as
Exhibit 3.1 to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 1996, filed
with the Commission on May 17, 1996 (File No. 0-11532),
which is hereby incorporated herein by reference.
10.1 Stock Purchase and Settlement and Release Agreement by and
among the Company, Jonathan Ungar and Alan Henry Woods,
dated September 27, 1996, previously filed as Exhibit 2.1
to the Company's Current Report on Form 8-K dated October
1, 1996, filed with the Commission on October 1, 1996 (File
No. 0-11532) (the "October 1, 1996 Current Report"), which
is hereby incorporated herein by reference.
10.2 Promissory Note dated September 30, 1996 in favor of
Jonathan Ungar in the principal amount of $1,768,550,
previously filed as Exhibit 2.2 to the October 1, 1996
Current Report, which is hereby incorporated herein by
reference.
10.3 Promissory Note dated September 30, 1996 in favor of Alan
Henry Woods in the principal amount of $1,731,450,
previously filed as Exhibit 2.3 to the October 1, 1996
Current Report, which is hereby incorporated herein by
reference.
27 Financial Data Schedule
16
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,106,029
<SECURITIES> 0
<RECEIVABLES> 313,592
<ALLOWANCES> 0
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<CURRENT-ASSETS> 6,504,662
<PP&E> 203,037
<DEPRECIATION> 47,666
<TOTAL-ASSETS> 13,216,239
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<BONDS> 4,120,054
0
0
<COMMON> 3,855
<OTHER-SE> 4,915,312
<TOTAL-LIABILITY-AND-EQUITY> 13,216,239
<SALES> 3,950,000
<TOTAL-REVENUES> 3,950,000
<CGS> 0
<TOTAL-COSTS> 2,482,762
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<LOSS-PROVISION> 241,091
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<INCOME-CONTINUING> 793,141
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