<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A2
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO 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 February 12,
1997, 3,854,548 shares of common stock, $.001 par value per share, were
outstanding.
Transitional Small Business Disclosure Format (check one) Yes No X
-- ---
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INLAND CASINO CORPORATION
BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,347,985 $ 3,492,340
Notes receivable 1,121,009
Accounts receivable 91,154 481,974
Deposits and prepaid expenses 53,130 129,634
----------- -----------
Total current assets 4,492,269 5,224,957
PROPERTY AND EQUIPMENT, NET 167,213 183,196
DEFERRED CONTRACT COSTS, NET 6,505,327 6,030,720
RESTRICTED CASH AND OTHER INVESTMENTS 2,397,993
DEFERRED TAXES 462,126 294,126
DEPOSITS AND OTHER ASSETS 145,074 103,324
----------- -----------
Total assets $11,772,009 $14,234,316
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Advances of future consulting fees $ 2,385,814 $ 2,980,739
Current portion of long-term debt 279,946 279,946
Accounts payable and accrued expenses 449,289 1,080,769
Income taxes payable 210,880 297,680
----------- -----------
Total current liabilities 3,325,929 4,639,134
----------- -----------
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, 12,541,793 and 3,854,548 shares
outstanding at June 30, 1996 and December 31,
1996, respectively 2,352,554 3,855
Retained earnings 5,473,472 5,471,273
----------- -----------
Total shareholders' equity 7,826,026 5,475,128
----------- -----------
Total liabilities and shareholders' equity $11,772,009 $14,234,316
=========== ===========
</TABLE>
1
<PAGE> 3
INLAND CASINO CORPORATION
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue $ 1,688,922 $ 3,808,317
Costs and expenses:
General and administrative expenses 1,874,338 2,188,231
Amortization of deferred contract costs 564,180 635,720
------------ ------------
2,438,518 2,823,951
------------ ------------
Operating profit (loss) (749,596) 984,366
Other income and (expense):
Interest income 76,843
Interest expense (1,229) (103,250)
------------ ------------
(1,229) (26,407)
------------ ------------
Income (loss) before income taxes (750,825) 957,959
Income tax provision (credit) (335,000) 402,000
------------ ------------
Net income (loss) $ (415,825) $ 555,959
============ ============
Earnings (loss) per share $ (0.03) $ 0.11
============ ============
Shares used in the computation of income per
common and common equivalent share 12,541,657 5,134,858
============ ============
</TABLE>
2
<PAGE> 4
INLAND CASINO CORPORATION
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Revenue $ 4,341,216 $ 7,758,317
Costs and expenses:
General and administrative expenses 3,580,487 4,066,623
Amortization of deferred contract costs 1,102,507 1,240,091
------------ ------------
4,682,994 5,306,714
------------ ------------
Operating profit (loss) (341,778) 2,451,603
Other income and (expense):
Interest income 133,497
Interest expense (2,922) (119,000)
------------ ------------
(2,922) 14,497
------------ ------------
Income (loss) before income taxes (344,700) 2,466,100
Income tax provision (credit) (132,000) 1,117,000
------------ ------------
Net income (loss) $ (212,700) $ 1,349,100
============ ============
Earnings (loss) per share $ (0.02) $ 0.16
============ ============
Shares used in the computation of income per
common and common equivalent share 12,541,657 8,540,310
============ ============
</TABLE>
3
<PAGE> 5
INLAND CASINO CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net cash generated by (used in) operating activities:
Net income (loss) $ (212,700) $ 1,349,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation 1,118,861 1,265,295
Deferred taxes 126,000 168,000
Changes in assets and liabilities:
Notes receivable (1,121,009)
Accounts receivable (37,000) (390,820)
Prepaid expenses, deposits and other assets (333,344) (34,754)
Accounts payable and accrued expenses 115,007 631,480
Income taxes payable (380,986) 86,800
----------- -----------
Net cash generated by operating activities 395,838 1,954,092
----------- -----------
Cash used in investing activities:
Purchases of furniture and equipment (73,528) (41,185)
Deferred contract costs (891,856) (765,484)
Acquisition of revenue bonds and restricted cash (2,397,993)
----------- -----------
Net cash used in investing activities (965,384) (3,204,662)
----------- -----------
Cash flows generated by (used in) financing activities:
Increase in advances of future
consulting fees 622,875 594,925
Payment of notes payable (19,713)
Repurchase and cancellation of common stock (1,320) (200,000)
----------- -----------
Net cash provided by financing activities 601,842 394,925
----------- -----------
Increase (decrease) in cash 32,296 (855,645)
Cash, beginning of period 1,423,826 4,347,985
----------- -----------
Cash, end of period $ 1,456,122 $ 3,492,340
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Interest expense paid $ 2,922 $ -
=========== ===========
Interest income received $ - $ 57,862
=========== ===========
Income taxes paid $ 16,152 $ 212,000
=========== ===========
Income tax refund received $ 192,316 $ -
=========== ===========
Repurchase of common stock by issuance of
notes payable $ - $ 3,500,000
=========== ===========
</TABLE>
4
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INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS
DECEMBER 31, 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
and six month periods ended December 31, 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
reports revenues and expenses using the accrual method of accounting. All of the
Company's fee revenue for the three and six months ended December 31, 1995 and
1996 was generated
5
<PAGE> 7
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
from services provided to the Barona Tribe, with the exception of $65,817 in
fees earned for consulting work performed for a tribe in New Mexico during the
three months ended December 31, 1996.
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. 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").
In January 1997, the Company entered into a settlement agreement with the NIGC
regarding the Company's relationship with the Barona Tribe. Under the terms of
the settlement agreement, the NIGC held that the relationship between the Barona
Tribe and the Company had benefited the Barona Tribe, and that the Company had
not violated any law. The Company agreed to reimburse the NIGC for
administrative, investigative and legal expenses in the aggregate amount of
$250,000. In addition, the Company agreed to contribute $2 million to the Barona
Tribe for general improvement on the reservation, payable in five equal annual
installments, commencing in January 1997. The $250,000 reimbursement to NIGC was
accrued as an expense as of December 31, 1996, and the Company will account for
the $2 million in payments as deferred contract costs, which will be amortized
over the remaining life of the Consulting Agreement with the Barona Tribe.
In January 1997, the Company submitted the Consulting Agreement to the NIGC.
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,
and based on its findings in the settlement agreement, the NIGC will make a
similar determination with respect to the Consulting Agreement. If the BIA
determines that the Initial Consulting Agreement and/or
6
<PAGE> 8
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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. CONSULTING AGREEMENT WITH THE KLAMATH TRIBES. In June 1996, the Company
entered into a consulting agreement (the "Klamath Agreement") with the Klamath
Tribes. The Klamath Tribes plan to build and operate the Kla-Mo-Ya Casino, to be
constructed near Chiloquin, in south-central Oregon. The opening date of the
facility is scheduled for mid-summer of 1997.
Under the terms of the Company's consulting agreement with the Klamath Tribes,
the Company will consult with and advise the Tribes, provide technical
assistance and training, and provide services as may be directed by the Tribes
in such areas as organization and administration, financing, planning and
development, gaming activities, internal controls, accounting systems and
procedures, engineering and maintenance, housekeeping, human resources,
marketing and advertising, purchasing, surveillance, security and food and
beverage operations.
The Kla-Mo-Ya Casino project is to be constructed on a 42-acre site which has
been acquired by the Klamath Tribes, and which is in the process of being
converted to fee simple property and transferred to the U. S. Government to be
held in trust for the benefit of the Tribes. In connection with the acquisition
of the 42-acre parcel, the Company loaned $1,121,009 to the Klamath Tribes
pursuant to the terms of an 8.25% unsecured promissory note. The loan was repaid
in January 1997. The Klamath Tribes plan to construct a temporary gaming
facility on the site, at an estimated cost of approximately $9.5 million.
Funding for the land purchase and construction of the facility has been obtained
by the sale and issuance of $4,735,000 in revenue bonds issued by the Tribes. In
connection with such bond financing, the Company expended $879,933 to purchase
revenue bonds with a face amount of $900,000. As a condition of the bond
financing, the Company agreed to purchase and hold at least $500,000 face amount
of the such bonds for a five year period. In January 1997, the Company sold
$200,000 face amount of such bonds for $197,415. Preopening costs and expenses
of approximately $1.5 million are being financed by loans made pursuant to a
bank credit agreement with the Klamath Tribes. The Company has pledged to such
bank a certificate of deposit for $1,518,000 as collateral for such loans. In
addition, the Klamath Tribes plan to obtain lease financing for approximately
$3.4 million in gaming and other equipment, signage, furniture and fixtures.
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 twenty-four-month
period. Under the terms of the Compact, at the end of the twenty-four-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. There is no assurance that financing can be obtained by the Klamath
Tribes to complete either the construction of a permanent facility or the
conversion of the temporary facility into a permanent 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
the revenue bonds it purchased and its certificate of deposit pledged as
7
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INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
collateral for bank loans to the Klamath Tribes, which could have a material
adverse effect on the financial condition of the Company.
As of December 31, 1996, the Company incurred costs and expenses and made
initial payments to certain contractors totalling approximately $428,000 on
behalf of the Klamath Tribes. In January 1997, the Company received
reimbursement for these payments from the Klamath Tribes. The Company has signed
contracts for the construction of the Kla-Mo-Ya Casino totalling approximately
$1,250,000 as of December 31, 1996. The Company is currently in the process of
assigning those contracts to the Klamath Tribes. While the Company believes that
all liabilities under the construction contracts will be assumed directly by the
Klamath Tribes, payments, if any, that the Company is required to make which are
not reimbursed by the Klamath Tribes, could result in losses to the Company,
which could have a material adverse effect on the Company's financial condition.
The term of the Klamath Agreement is 5 years, commencing with the date of
opening of the Kla-Mo-Ya Casino. At any time after the first full year of the
Agreement, the Tribes may terminate the Agreement by giving 30 days' notice to
the Company, during which time the Agreement will remain in effect, and by
paying the Company an amount equal to 12 times the average consulting fees paid
over the past 12 months. The Klamath Tribes will not be required to make these
early termination payments essentially if, upon review and investigations, the
Company does not meet the criteria necessary to qualify as a vendor to Indian
gaming, as determined by the State of Oregon, the Klamath Tribes or the NIGC.
Either party may terminate the Agreement in the event the other party (i)
commits or knowingly allows to be committed any act of theft or embezzlement; or
(ii) commits a material breach of the Agreement, defined as a failure of either
party to perform any duty or obligation required under the Agreement. In
addition, the Tribes may terminate the Agreement if the Company commits a
material breach of any of the Company's representations or fails to disclose
pertinent information that adversely affects its ability to carry out its
responsibilities under the Agreement. After notice and time to cure, remedies
for breach include the Company's meeting and conferring in good faith with the
Tribes' Executive Committee and binding arbitration before the American
Arbitration Association in the State of Oregon.
For services rendered pursuant to the Klamath Agreement, the Company will
receive a base consulting fee of $25,000 per month, commencing from the opening
of the Kla-Mo-Ya Casino if the Casino earns an operating profit of at least
$50,000 per month, and will receive additional consulting fees if certain
operating levels are reached. From June 1996 through to the planned opening of
the casino, the Company will be reimbursed for its out-of-pocket costs and
expenses related to the Kla-Mo-Ya Casino.
Since the Compact permits the Tribe to offer Class III games at its casino, as
that term is defined in the Indian Gaming Regulatory Act and which would include
many of the games allowed in the State of Oregon, including blackjack and video
lottery terminals, the Klamath Agreement must be reviewed by the National Indian
Gaming Commission (the "NIGC") The Klamath Agreement was submitted by the Tribe
to the NIGC, and in January 1997 the NIGC determined that such agreement was not
a management agreement and, therefore not subject to NIGC approval, and
forwarded such agreement to the BIA. If the BIA determines that the Klamath
Agreement is subject to its review, there can be no assurance that such
agreement will be approved by the BIA. Failure to approve Klamath Agreement may
have a material adverse effect on the business and financial condition of the
Company.
8
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INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
The State of Oregon requires that vendors providing goods and services to Indian
gaming operations apply and receive approval by the Gaming Division of the
Oregon State Police. The Company has completed and submitted its application,
but there is no assurance that the Company will receive such approval. The
Klamath Tribes will operate the Kla-Mo-Ya Casino under the provisions of the
Compact with the State of Oregon.
6. 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 liability for any of these obligations, the
Company has capitalized those costs incurred as deferred contract costs, since
(i) the Company had the ultimate responsibility for such costs incurred in
connection with developing the Barona Casino and (ii) management believes that
these costs are 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.
7. 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 of the Company, 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, a former director
of the Company, 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
9
<PAGE> 11
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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 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 in 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 the date of issuance, followed by two
equal annual installments of principal, plus interest on the remaining principal
balances.
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.
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)
10
<PAGE> 12
INLAND CASINO CORPORATION
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
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
rise. Until there are definitive rulings by the courts, the legality of the
gaming activities in California 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 that expressly authorizes 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 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.
11
<PAGE> 13
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: May 27, 1997 By: /S/ Duane M. Eberlein
--------------------------
Duane M. Eberlein
Vice President, Chief Financial
Officer and Secretary
(Principal Financial and
and Accounting Officer)
12
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<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
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0
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