<PAGE> 1
U.S. 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 September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number: 0-11532
VENTURE CATALYST INCORPORATED
(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.)
16868 Via Del Campo Court, Suite 200, San Diego, California 92127
(Address of principal executive offices)
Issuer's telephone number: (858) 385-1000
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 3, 2000,
7,422,490 shares of common stock, $.001 par value per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No_X_
<PAGE> 2
VENTURE CATALYST INCORPORATED
FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
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Page
Number
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Consolidated Balance Sheets -
September 30, 2000 and June 30, 2000 ........................... 3
Consolidated Statements of Operations -
Three months ended September 30, 2000 and 1999 ................. 4
Consolidated Statements of Cash Flows -
Three months ended September 30, 2000 and 1999 ................. 5
Notes to Interim Consolidated Financial Statements ............. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION ........................................ 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS IN FORM 8K ............................. 23
SIGNATURES ............................................................... 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
VENTURE CATALYST INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000 JUNE 30,
(UNAUDITED) 2000
----------- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 4,071,727 $ 4,766,743
Due from Barona Casino -- expansion project ........................ 9,685,296 9,685,296
Accounts receivable, net ........................................... 722,185 753,012
Prepaid expenses and other current assets .......................... 1,710,847 504,712
------------ ------------
Total current assets ....................................... 16,190,055 15,709,763
NONCURRENT ASSETS:
Restricted cash .................................................... 1,655,460 1,655,460
Property, plant and equipment, net ................................. 1,165,664 1,092,669
Deferred contract costs, net ....................................... 2,346,775 2,514,403
Available-for-sale securities, net ................................. 1,172,245 3,176,189
Goodwill and other intangibles, net ................................ 5,667,214 5,279,401
Deferred tax asset ................................................. 1,770,731 947,558
Non-current receivables (net of allowance of $208,613) ............. 397,505 167,983
Convertible notes, net ............................................. 308,521 590,842
Held-to-maturity investments ....................................... 395,812 395,812
Deposits and other assets .......................................... 385,973 322,890
------------ ------------
Total noncurrent assets .................................... 15,265,900 16,143,207
------------ ------------
Total assets ............................................... $ 31,455,955 $ 31,852,970
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses .............................. $ 1,159,820 $ 1,165,007
Current portion of long-term debt .................................. 2,233,333 977,150
Deferred revenues .................................................. 178,369 301,708
Advances of future consulting fees -- Barona Casino ................ 303,377 2,879,271
Deferred tax liability ............................................. 221,084 221,084
------------ ------------
Total current liabilities .................................. 4,095,983 5,544,220
LONG-TERM DEBT, less current portion ................................. 6,500,000 8,333,333
------------ ------------
Total liabilities .......................................... 10,595,983 13,877,553
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares
authorized and 7,422,490 shares outstanding .................... 7,423 7,248
Additional paid in capital ......................................... 15,897,504 13,387,560
Accumulated unrealized holding gains (losses),
net of deferred taxes........................................... 23,025 (191,383)
Deferred compensation .............................................. (866,493) (1,674,387)
Retained earnings .................................................. 5,798,513 6,446,379
------------ ------------
Total shareholders' equity ................................. 20,859,972 17,975,417
------------ ------------
Total liabilities and shareholders' equity ................. $ 31,455,955 $ 31,852,970
============ ============
</TABLE>
3
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VENTURE CATALYST INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Client services .............................................. $ 6,555,244 $ 4,037,996
OPERATING EXPENSES:
Cost of revenues ............................................. 2,079,406 1,274,398
General and administrative expenses .......................... 2,365,265 1,501,374
Amortization of intangible assets and stock based
compensation............................................... 344,555 272,604
----------- -----------
Operating expenses ........................................... 4,789,226 3,048,376
----------- -----------
Operating income ............................................. 1,766,018 989,620
OTHER INCOME (EXPENSE):
Interest income .............................................. 112,941 142,802
Interest expense ............................................. (178,765) (195,834)
Other gains (losses) ......................................... (1,880,574) -
----------- -----------
Other income (expense) ....................................... (1,946,398) (53,032)
----------- -----------
(Loss) income before income taxes .............................. (180,380) 936,588
----------- -----------
Income tax provision ........................................... 467,486 421,700
----------- -----------
(Loss) income from continuing operations ....................... (647,866) 514,888
Discontinued operations, net of taxes .......................... - 4,898
----------- -----------
NET (LOSS) INCOME .............................................. $ (647,866) $ 519,786
=========== ===========
OTHER COMPREHENSIVE (LOSS) INCOME:
Unrealized gain on securities, net of tax .................... 23,025 -
----------- -----------
COMPREHENSIVE (LOSS) INCOME .................................... $ (624,841) $ 519,786
=========== ===========
Basic earnings per share:
(Loss) income from continuing operations ..................... $ (.09) $ .11
Income on discontinued operations, net of taxes .............. $ - $ -
----------- -----------
Net (loss) income per share-basic ............................ $ (.09) $ .11
=========== ===========
Diluted earnings per share:
(Loss) income from continuing operations ..................... $ (.09) $ .11
Income on discontinued operations, net of taxes .............. $ - $ -
----------- -----------
Net (loss) income per share-diluted .......................... $ (.09) $ .11
=========== ===========
Weighted average common shares outstanding:
Basic ........................................................ 7,384,447 4,753,786
=========== ===========
Diluted ...................................................... 7,384,447 4,828,724
=========== ===========
</TABLE>
4
<PAGE> 5
VENTURE CATALYST INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
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Increase (decrease) in cash:
Net cash provided by (used in) operating activities:
Net (loss) income .................................... $ (647,866) $ 519,787
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization ........................ 539,189 356,370
Provision for bad debts .............................. 379,962 10,000
Write-off of assets classified as other assets ....... 10,101 -
Loss on disposal of assets, net ...................... 6,985 -
Loss on disposal of intangible asset ................. 47,175 -
Deferred taxes ....................................... - (18,764)
Amortization of stock based compensation ............. (83,659) 6,000
Due from Barona Casino - expansion project ........... - (1,110,000)
Equity and convertible notes received for services ... (268,892) -
Loss on impairment of investments .................... 2,826,414 -
Changes in operating assets and liabilities .......... (2,307,951) (787,444)
----------- -----------
Net cash provided by (used in) operating
activities.................................... 501,458 (1,024,051)
----------- -----------
Cash flows (used in) investing activities:
Purchase of other intangible assets .................. - (77,191)
Investment in and interest earned on
convertible notes.................................. (203,172) -
Purchase of available-for-sale securities ............ - (100,000)
Purchase of furniture and equipment .................. (186,630) (45,463)
Issuance of loans .................................... (249,033) -
Payment of loans .................................... 19,511 4,735
----------- -----------
Net cash (used in) investing activities ........... (619,324) (217,919)
----------- -----------
Cash flows (used in) financing activities:
Payment of notes payable ............................. (577,150) -
----------- -----------
Net cash (used in) financing activities ........... (577,150) -
----------- -----------
Net (decrease) in cash ............................ (695,016) (1,241,970)
Cash at beginning of period ............................ 4,766,743 9,285,928
----------- -----------
Cash at end of period .................................. $ 4,071,727 $ 8,043,958
=========== ===========
Supplemental disclosures of cash flow information:
Interest expense paid ................................ $ 373,220 $ 712,686
=========== ===========
Income taxes paid .................................... $ - $ 377,000
=========== ===========
</TABLE>
5
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. THE COMPANY.
Venture Catalyst Incorporated ("VCAT") provides professional services to support
and facilitate its clients' businesses. VCAT acts as a critical resource partner
and has its central mission in growing client top line and bottom line revenues
at an increasing rate. VCAT offers gaming consulting, web development, public
and governmental relations, Internet marketing, integrated communications,
strategic planning, technology solutions, and professional and technical
expertise. VCAT has offices in San Diego, Orange County and West Los Angeles.
2. DISCONTINUED OPERATIONS.
In March 1998, VCAT established a wholly-owned subsidiary, Worldwide Media
Holdings, N.V., a Curacao, Netherland Antilles corporation ("WMH"). WMH was
formed to provide comprehensive marketing, advertising, technical and
distribution services for Internet related gaming businesses. In February 2000,
the Board of Directors of VCAT adopted a plan to discontinue the Internet gaming
consulting business, and is in the process of liquidating WMH. Operations ceased
as of March 31, 2000. There will be no material gains or losses related to the
disposal of the business, as all remaining assets are cash and receivables
carried at their net realizable value.
3. PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL INFORMATION.
The accompanying interim unaudited consolidated financial statements have been
prepared by Venture Catalyst Incorporated and its subsidiaries, Dayplan.com,
Inc. ("Dayplan") and WMH, 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 consolidated financial
statements reflect all normal, recurring adjustments and disclosures which are,
in the opinion of management, necessary for a fair presentation. The interim
unaudited consolidated financial statements should be read in conjunction with
VCAT's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2000.
Current and future financial statements may not be directly comparable to VCAT's
historical financial statements. The results of operations for the interim
period are not necessarily indicative of the results to be expected for the full
year.
4. BARONA CONSULTING AGREEMENT.
VCAT has provided services to the Barona Band of Mission Indians and its
affiliates (the "Barona Tribe") since 1991. Consulting services are provided in
accordance with the terms and conditions of an Amended and Restated Consulting
Agreement (the "Amended and Restated Consulting Agreement"). During February
1998, Modification #1 to the Amended and Restated Consulting Agreement (the
"Modification") extended the term by an additional 60 months. Unless otherwise
stated, the Amended and Restated Consulting Agreement, as amended by the
Modification, shall be referred to as the "Barona Consulting Agreement." The
Barona Consulting Agreement expires in March 2004.
6
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
In March 1996, the Barona Tribe submitted the Initial Consulting Agreement (a
predecessor agreement to the Amended and Restated Consulting Agreement) to the
National Indian Gaming Commission (the "NIGC"). 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 July 1997, the BIA reviewed the Initial
Consulting Agreement and determined that no further action by it with respect to
such agreement was required. The NIGC conducted an investigation of the past
relationship between the Barona Tribe and VCAT that resulted in a January 1997
settlement agreement.
In January 1997, VCAT submitted the Amended and Restated Consulting Agreement to
the NIGC. In April 1997, VCAT received a letter from the NIGC declining to
conclude the Amended and Restated Consulting Agreement was not a management
contract. The letter stated that additional review would be necessary to make
such a determination. In March 1999, the NIGC started a preliminary review of
the relationship between the Barona Tribe and VCAT, which has included a review
of the Barona Consulting Agreement. In September 1999, VCAT submitted the
Modification to the NIGC. This review is currently pending.
VCAT believes that the Barona Consulting Agreement is not a management contract,
based on (a) the May 1996 and July 1997 determinations of the NIGC and BIA,
respectively, with respect to the Initial Consulting Agreement, (b) the NIGC's
findings in the January 1997 settlement agreement and (c) the nature of the
relationship between the Barona Tribe and VCAT. However, there is no assurance
that the NIGC will determine that the Barona Consulting Agreement is not a
management contract, and failure to do so could have a material adverse effect
on VCAT's business and financial condition. If the NIGC concludes that the
Barona Consulting Agreement is not a management agreement, the NIGC will forward
such Agreement to the BIA for its review. If the BIA determines that its
approval is required, there can be no assurance that the BIA will approve the
Barona Consulting Agreement, and failure to approve such Agreement may have a
material adverse effect on VCAT's business and financial condition.
5. TRIBAL-STATE COMPACTS.
In September 1999, the Governor of the State of California entered into new
Tribal-State Compacts with over 50 Indian tribes, including the Barona Tribe
(the "Barona Compact"). In May 2000, the Barona Compact was approved by the U.S.
Secretary of the Interior and the approval was published in the Federal
Register. The Barona Compact replaces the prior Tribal-State Compact with the
Barona Tribe. VCAT believes the Barona Compact ended a significant amount of
uncertainty and concern about the future of gaming activities at the Barona
Casino.
6. DUE FROM BARONA CASINO - EXPANSION PROJECT.
The Barona Tribe is in the early development stages of an approximately
$225,000,000 expansion project. VCAT is assisting the Barona Casino in obtaining
outside financing for the project. VCAT plans to share in funding the expansion
costs incurred with the Barona Tribe prior to the time that the Barona Tribe
obtains all such outside financing. VCAT expects to advance up to $10,000,000 as
an unsecured, non-interest-bearing advance to the Barona Casino, of which
$9,685,000 was advanced as of September 30, 2000. These advances are accounted
for as a receivable from the Barona Casino to VCAT. In January 2000, the Barona
Tribe obtained approximately $19,000,000 in outside financing from the issuance
of tax-exempt bonds, primarily for the golf course development. In May 2000, the
Barona Tribe obtained $30,000,000 in outside financing from Sodak Gaming, Inc.
for gaming machines, systems, furniture and technologies. In October 2000, the
Barona Tribe received a 120-day bridge loan from Bank of America and Wells Fargo
in the amount of $30,000,000 to finance the expansion and the related
obligations, prior to them obtaining
7
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
the remaining outside financing of approximately $175,000,000. The Barona Tribe
used $2,000,000 of the bridge loan to repay VCAT for advances made in connection
with the expansion project. Payment of the remaining receivable of $7,685,000 is
expected to occur when the Barona Tribe obtains the remaining financing of
approximately $175,000,000, which is expected to be no later than the first
quarter of calendar 2001, unless VCAT is in a cash position that would allow the
Barona Casino to retain the remaining advanced funds for use in its operations
during the expansion. If the advances were not repaid when the Barona Tribe
obtains all outside financing they would be payable upon terms agreed to between
VCAT and the Barona Tribe at that time.
7. ACQUISITIONS.
In August 1998, VCAT acquired all of the outstanding capital stock of
Cyberworks, Inc. ("Cyberworks") in exchange for 750,000 shares of our common
stock and $500,000 in cash, in a transaction valued, exclusive of acquisition
costs, at $3,560,000. In January 2000, VCAT acquired all outstanding shares of
capital stock of webinc, Inc. ("webinc") in exchange for 6,884 shares of stock
and $20,000 in cash, in a transaction valued, exclusive of acquisition costs, at
$74,000. In March 2000, VCAT acquired all of the outstanding shares of capital
stock of CTInteractive, Inc. ("CTI") in exchange for 230,474 shares of common
stock and $300,000 in cash, in a transaction valued, exclusive of acquisition
costs, at $2,282,000.
In August 2000, VCAT sold the Cyberworks Internet domain names for $1,000,000
and agreed to cease using the business name. In September 2000, the operations
of Cyberworks, webinc and CTI were merged into VCAT, as part of its strategic
plan.
In July 2000, VCAT acquired all of the outstanding shares of capital stock of
DayPlan, a software company offering a complete web-based scheduling platform,
in exchange for 175,000 shares of common stock, in a transaction valued,
exclusive of acquisition costs, at $700,000. DayPlan will operate as a
wholly-owned subsidiary of VCAT. The acquisition was accounted for as a purchase
and the accounts of DayPlan have been included in the accompanying consolidated
financial statements since July 2000. The excess of the total acquisition cost
over the fair value of net assets acquired ("goodwill") was $696,000 and is
being amortized on a straight-line basis over 3 years.
Goodwill and other intangible assets net of amortization, as of September 30,
2000, was $5,667,000 and is being amortized over periods ranging from 2 to 10
years. During the three months ended September 30, 2000 and 1999, VCAT recorded
amortization expense of $261,000 and $99,000, respectively.
On an ongoing basis, VCAT reviews the valuation and recoverability of the
unamortized goodwill and other intangible assets and expenses any portion of the
unamortized amount determined necessary for fair statement.
8. CASH AND CASH EQUIVALENTS
For purposes of the balance sheet and the statement of cash flows, cash
equivalents include time deposits and all highly liquid debt instruments with
original maturities of three months or less. VCAT maintains its cash in bank
deposit and checking accounts that, at times, may exceed Federally insured
limits. To date VCAT has not experienced any losses in such accounts. VCAT cash
equivalents consist primarily of commercial paper, certificates of deposits,
banker's acceptances and U.S. treasury securities with maturities ranging from
one to three months.
8
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
9. BUSINESS CONCENTRATION.
A significant portion of VCAT's revenue is earned from its main client, the
Barona Tribe. For the three months ended September 30, 2000 and 1999 the
revenues from the Barona Tribe were $5,316,000, or 81% of the total revenues,
and $3,184,000, or 79% of the total revenues, respectively.
10. HELD-TO-MATURITY INVESTMENTS AND RESTRICTED CASH.
From June 1996 to May 1997, VCAT provided consulting services to the Klamath and
Modoc Tribes and the Yahooskin Band of Snake Indians (collectively, the "Klamath
Tribes"). The Klamath Tribes constructed the Kla-Mo-Ya Casino near Chiloquin, in
south central Oregon, a gaming facility funded by revenue bonds issued by the
Klamath Tribes. In connection with such bond financing, VCAT has a net
investment of $396,000 in revenue bonds with a principal face amount of
$400,000. The bonds are classified as held-to-maturity investments. As a
condition of the bond financing, VCAT agreed to hold the bonds for a five-year
period. In addition, pre-opening costs and expenses of approximately $1,500,000
were financed by loans made pursuant to a third-party bank credit agreement with
the Klamath Tribes. VCAT pledged a certificate of deposit for $1,518,000 as
collateral for such loans. The certificate of deposit is classified as
restricted cash at September 30, 2000. In October 2000, the Klamath Tribes
refinanced all of their outstanding debt, which released the certificate of
deposit as collateral. Also, as part of the refinancing, the $400,000 in bonds
were defeased.
Additionally, VCAT issued an irrevocable letter of credit for $133,000 to
satisfy the terms of our corporate office lease agreement. Such letter of credit
will automatically renew on an annual basis until October 31, 2002 unless
canceled by the lessor.
11. AVAILABLE-FOR-SALE SECURITIES.
At September 30, 2000, available-for-sale securities consist of equity
securities carried at fair value and based on quoted market prices.
Additionally, VCAT holds equity securities of companies for which no established
trading market existed at September 30, 2000. These securities are stated at
cost less any deemed impairment. On an ongoing basis, VCAT reviews the valuation
and recoverability of the investments and expenses any portion of the securities
determined necessary for fair statement.
Available-for-sale securities with quoted market prices on September 30, 2000
consist of investments in:
- CraftClick.com Inc.
- clickNsettle.com, Inc.
- Ultrexx Corporation
- Predict It Inc.
- WorldNet Resource Group, Inc.
- TheBigHub.com, Inc.
Collectively, these securities had a carrying value of $298,000 at September 30,
2000. During the three months ended September 30, 2000, there was a $1,119,000
loss recorded to fully reduce the carrying value of our investment in
CraftClick.com, Inc.("CTCK"). In October 2000, CTCK announced the resignation of
their chairman, who simultaneously withdrew his two-year financing and operating
commitment to CTCK. CTCK has expressed concerns as to its ability to operate the
business and remain in existence without this commitment in place. Additionally,
there was a $1,400,000 loss recorded to fully reduce the carrying
9
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
value of our investment in Predict It, Inc. ("PRIT"). In November 2000, PRIT
announced the termination of negotiations regarding its proposed merger with
Hollywood Stock Exchange, and that the two companies have failed to secure the
necessary financing to complete the proposed merger. PRIT further stated if
additional funds cannot be raised or a sale does not occur, PRIT will be
required to consider alternative courses of action, including, without
limitation, winding down the operations of PRIT or filing a voluntary petition
to seek protection under the bankruptcy laws. Available-for-sale securities with
no established market prices at September 30, 2000 consist of investments in:
- Senscom, Inc.
- Idealab
- companyfinance.com, Inc.
- Bullet Point News Inc.
- Watchnet, Inc.
- eFresh Incorporated
- Seatadvisor.com, Inc.
- Invigo, Inc.
- KINeSYS Pharmaceutical, Inc.
These investments had a carrying value of $874,000 at September 30, 2000. During
the quarter ended September 30, 2000, there was a $76,000 loss recorded to fully
reduce the carrying value of our investment in Invigo, Inc., as they were unable
to secure additional financing and effective October 30, 2000 they ceased
operations. During fiscal 2000 there was a $120,000 loss recorded to fully
reduce the carrying value of our investment in KINeSYS Pharmaceutical based on
their inability to pay their cash obligations and the extended period of time in
which they have not traded on a public exchange. An unrealized holding gain of
$40,000, net of deferred income taxes of $17,000, has been reflected in the
equity section of the consolidated balance sheet based on the change in market
value or carrying value of the available-for-sale securities from dates of
acquisition to September 30, 2000.
Additionally, VCAT holds securities, in the form of options, in the following
companies:
- CraftClick.com Inc.
- Entertainment Boulevard, Inc.
- companyfinance.com, Inc.
These securities were given to us as inducements to enter service agreements or
for membership on an advisory board. Such securities have no established cost
basis on our books and were determined to have minimal value, due to the
significant option price premium over market price at the time of grant, and the
very limited operating history for these companies. VCAT will continue to
monitor the operations of the above companies and the valuation of these
securities, and will establish a fair value and record an unrealized gain, if
deemed appropriate.
12. CONVERTIBLE NOTES.
As of September 30, 2000, VCAT had a net investment of $309,000 in Asquare
Communications, Inc., Watchnet, Inc., Rapidcare.com, Inc., Fastestlink, Inc.,
CraftClick.com, Inc. and simplegov.com, Inc. in the form of convertible notes.
The notes were received for cash investments VCAT made in the companies or as
payment for services. The notes are convertible into equity at any time or
payable at maturity (as may be
10
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
accelerated), pursuant to the terms and conditions of the notes. The notes earn
interest at a rate of 8% to 10%, and have maturity dates ranging from October
2000 to March 2002. During the quarter ended September 30, 2000, there was a
$307,000 bad-debt reserve recorded and a $150,000 realized loss recorded for the
notes due from Rapidcare.com, Inc., based on their inability to pay their
obligations or raise additional funds to continue their operations.
Additionally, there was a $80,000 loss recorded for the note due from
CraftClick.com, Inc.
Each of the companies are at the early development stage and there can be no
assurance that they will be able to obtain the financing or develop the
operations necessary to be successful or repay the notes. If more or all of the
companies cannot obtain the necessary financing to continue to develop their
businesses, there could be additional material adverse effects on VCAT's
financial performance, as VCAT will continue to record losses in connection with
the impairment of value of these assets.
13. SEGMENT REPORTING.
During fiscal 2000, in connection with our overall plan to leverage our service
capabilities and expand our client base, VCAT changed the way it managed its
business and consolidated the operations and organization into service groups
that were combined into one reportable segment. All service groups were
consolidated into the client services business segment, and are now being
reported under "Client Services". In September 2000, the Company merged three of
its wholly-owned subsidiaries, Cyberworks, CTI and webinc, into VCAT. The
operations of VCAT's other businesses, VegasatHome.com and DayPlan.com, are not
significant at this time. Accordingly, VCAT did not consider segment reporting
to be relevant at this time and has discontinued such reporting.
14. NET INCOME PER SHARE.
Below is the reconciliation of the components of the calculation of basic and
diluted net income per share for the time periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
-------------------
2000 1999
---- ----
<S> <C> <C>
Net (loss) income available to common
shareholders ................................. $ (647,866) $ 519,786
=========== ===========
Weighted average shares outstanding -- basic . 7,384,447 4,753,786
Effect of stock options ...................... - 74,938
----------- -----------
Weighted average shares outstanding -- diluted 7,384,447 4,828,724
=========== ===========
</TABLE>
At September 30, 2000, options to purchase 7,553,159 shares of VCAT's common
stock, at prices ranging from $3.75 to $12.50 per share, were not included in
the computation of diluted EPS because they were anti-dilutive for that purpose.
The options, which expire on various future dates through August 2010, were
still outstanding at September 30, 2000.
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VENTURE CATALYST INCORPORATED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
15. STOCK OPTIONS.
The following table summarizes stock option activity under the 1994 Plan, the
1995 Plan and the 1996 Plan (collectively the "Plans") for the three months
ended September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- ---------
<S> <C> <C>
Outstanding, beginning of year 8,230,659 $1.00-$12.50
Granted .................... 185,000 $3.31-$4.00
Exercised .................. - -
Cancelled .................. (862,500) $2.75-$10.41
---------
Outstanding, ending balance .. 7,553,159 $1.00-$12.50
=========
</TABLE>
16. SUBSEQUENT EVENTS.
In October 2000, VCAT announced that it will enter into a joint venture with the
Barona Tribe that will focus on gaming technology introduction, implementation
and related services to other California tribal gaming clients. The terms of the
venture are still being documented.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
VCAT provides professional services to support and facilitate its clients'
businesses. We act as a critical resource partner and have our central mission
in growing client top line and bottom line revenues at an increasing rate. We
offer gaming consulting, web development, public and governmental relations,
Internet marketing, integrated communications, strategic planning, technology
solutions, and professional and technical expertise. We have offices in San
Diego, Orange County and West Los Angeles, and can be found on the Web at
www.vcat.com.
In connection with our overall plan to leverage our service capabilities and
expand our client base, we changed the way we manage our business and
consolidated our operations and organization into service groups that were
combined into one business segment. All services have been consolidated into the
client services business segment, and are reported under "Client Services".
Additionally, during the third quarter of fiscal 2000 we decided to discontinue
our Internet gaming consulting business and liquidate our wholly-owned
subsidiary WMH. The operations of that business are reported as "Discontinued
Operations".
Our revenues and earnings may fluctuate from quarter to quarter based on the
number, size and scope of projects in which we are engaged, the contractual
terms and degree of completion of such projects, any delays incurred in
connection with a project, employee utilization rates, the adequacy of
provisions for losses, the use of estimates of resources required to complete
ongoing projects, the performance of the companies that we have ownership
positions in, general economic conditions and other factors. In addition,
revenues from our largest client, the Barona Tribe, may constitute a significant
portion of our total revenues in any particular quarter, and the revenues we
earn from the Barona Tribe may fluctuate significantly from quarter to quarter.
CLIENT SERVICES
We provide to clients, in a wide array of industries, various consulting and
professional services, including gaming consulting, web development, public and
governmental relations, Internet marketing, strategic planning, technology
solutions, and professional and technical expertise. Our objective is to make
our clients money by working with them during every stage of their development
and financial growth. In connection with the implementation of our strategy, we
have in the past, and in the future may, make investments or take all or a
portion of our fees in securities of our clients. However, we do not expect this
to be a significant part of our strategy going forward. We continually review
our services to provide the greatest value to our clients to help them achieve
success.
We have provided many of these services to the Barona Tribe since 1991. We
currently provide consulting services to the Barona Tribe in connection with the
Barona Tribe's operation of the Barona Casino and development of the Barona
Valley Ranch, which includes a championship golf course and a proposed resort
hotel. Our services are provided under the terms of the Consulting Agreement
that expires in March 2004. The consulting fees paid to us are based upon a net
profit formula that includes the Barona Casino's income and expenses.
Accordingly, although gross revenues of the Barona Casino may increase, our
consulting revenue may not correspondingly increase because expenses at the
Barona Casino also may increase.
From February 1992 through March 1996 we provided casino management services at
the Barona Casino pursuant to a management agreement with the Barona Tribe.
During that same period, all of the approximately $13,000,000 to purchase or
construct the fixed assets at the Barona Casino, such as buildings, equipment
and capital improvements, were contributed by us. Due in part to our investment
in the Barona Casino, the value of the Barona Casino has increased, which is
expected to enhance the fees that we may earn over the life of our relationship
with the Barona Tribe. We treat these investments as intangible assets, which
are recorded as "deferred contract costs" and are being amortized over the
remaining life of the
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<PAGE> 14
Consulting Agreement. However, if the recoverability of these assets is
determined not to be probable, we will expense the unamortized portion.
By 1996 the Barona Casino became financially self-sufficient and our
relationship with the Barona Tribe evolved from manager of the Barona Casino to
consultant to the Barona Tribe, which is managing the Barona Casino. Since our
transition from manager to consultant, there have been only two categories of
investments by us in the Barona Casino. The first category relates to
commitments made to the Barona Tribe, while we were acting as manager, pursuant
to a management agreement, of approximately $550,000. The second category
relates to a NIGC settlement with VCAT and the Barona Tribe. Commencing in
November 1996, we agreed to contribute $2,000,000 to construct a new road and
entrance to the Barona Casino. As of September 30, 2000, we have paid $1,600,000
of the $2,000,000 commitment.
At this time, we have no plans to contribute funds other than those committed to
the Barona Casino or the Barona Tribe. However, we will continue to assist the
Barona Casino, from time to time, in obtaining third party outside financing.
See the discussion below under the caption "Liquidity and Capital Resources"
relating to our advance of funds to the Barona Casino in connection with the
current expansion project.
In September 1999, the Governor of the State of California entered into new
Tribal-State Compacts with over 50 Federally recognized Indian tribes, including
the Barona Tribe. These compacts permit Federally recognized Indian tribes to
engage in broader forms of Class III gaming, including slot machines and
electronic video games, house-banked card games, percentage games and any games
the California Constitution authorizes the California lottery to offer. In May
2000, the Barona Compact was approved by the U.S. Secretary of the Interior and
the approval was published in the Federal Register. The Barona Compact replaces
the prior Tribal-State Compact with the Barona Tribe. We believe the Barona
Compact ended a significant amount of uncertainty and concern about the future
of gaming activities at the Barona Casino.
In October 2000, we announced that we will enter into a joint venture with the
Barona Tribe that will focus on gaming technology introduction, implementation
and related services to other California tribal gaming clients. The terms of the
venture are still being documented.
In August 1998, we acquired Cyberworks, a web-site development and Internet
marketing company, to expand our Internet services. The operations of Cyberworks
have been consolidated into VCAT, and the Cyberworks name has been discontinued
as part of our strategic plan. VCAT sold the Cyberworks Internet domain names in
August 2000 for $1,000,000 and agreed to cease using the business name. Our
Internet solutions division offers full service web-site development, strategic
consulting for interactive and online business development, Internet marketing
and custom Internet applications.
In July 1999, we expanded our services to include broader consulting services to
emerging and Internet businesses. We provide our spectrum of services to public
and private companies. In connection with this expansion we acquired certain
assets of Typhoon Capital Consulting, LLC, an investor relations and business
consulting firm. In September 2000 we decided to discontinue offering investor
relations services.
In January 2000, as part of our diversification strategy, we acquired all of the
outstanding shares of capital stock of webinc, a recently-organized corporation
whose business plan focused on consulting, incubation and venture
capital-related services to start-up and early stage companies focusing on
Internet infrastructure and technology. The operations of webinc have been
consolidated into VCAT.
In March 2000, we acquired CTI, a full-service technology management firm. The
operations of CTI have been consolidated into VCAT, as part of our strategic
plan. Our technology solutions services include business application
development, network management, web-site hosting, and hardware sales and
service.
We have made, and will continue to make, significant investments in personnel
and resources to allow
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Client Services to grow and to better position us to leverage our financial
resources and expertise. We plan to grow our services business internally and
possibly through acquisitions. Additionally, we may continue to build our
portfolio of clients, which would involve acquiring additional ownership
positions in exchange for both cash and services, to the extent management deems
appropriate to carry out our strategic plans. We are continually evaluating and
negotiating potential acquisitions and investments, none of which may come to
fruition or may not be material to our business as a whole. There can be no
assurance as to the completion or success of any acquisition or investment.
VEGAS AT HOME
In July 1999, as an adjunct to our Internet gaming consulting business, we
launched the "Vegas At Home" portal web-site (www.vegasathome.com) to provide
both the gaming industry and its patrons with an online central location
containing a variety of gaming related products, merchandise, information and
links to most significant traditional casinos. We are in the process of seeking
a partner for an updated Vegas At Home portal site and have shut down the
existing site.
DAYPLAN.COM
In July 2000, we acquired DayPlan, a software company offering a complete
web-based scheduling platform. DayPlan contains features, such as a group
calendar function, which allows users to coordinate activities with an affinity
group or organization by allowing multiple users to post to the same calendar.
This group calendar can be made available only to a specific affinity group, or
can be made public to reach the entire web audience. We intend to offer DayPlan
as a service to our clients and to build the user base. We also are exploring
enhancements and features for broader application, which may include a strategic
partner to develop or market DayPlan.
DISCONTINUED OPERATIONS
In March 1998, we established WMH, a Netherland Antilles corporation, to
leverage our gaming business expertise. WMH offered comprehensive marketing,
advertising, technical and distribution services for Internet related gaming
businesses. In February 2000, our Board of Directors adopted a plan to
discontinue the Internet gaming consulting business and we are in the process of
liquidating WMH. Internet gaming consulting has not produced a material portion
of our revenues and was not profitable. We believe the resources committed to
such business will be more effectively used in our other businesses.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH THE THREE MONTHS ENDED
SEPTEMBER 30, 1999.
REVENUE. Consolidated revenues from continuing operations increased 62% to
$6,555,000 for the three months ended September 30, 2000 from $4,038,000 for the
three months ended September 30, 1999.
Revenues for services provided to the Barona Tribe increased 67% to $5,316,000
from $3,184,000 earned during the same quarter last year. The increase is a
result of significantly higher revenues at the Barona Casino, primarily due to
the increase in the number of gaming machines, partially offset by increased
expenses at the Barona Casino, attributable to the increased operations and the
ongoing expansion project.
Revenues for services provided to clients other than the Barona Tribe increased
45% to $1,239,000 from $854,000 earned during the same quarter last year. The
increase was primarily due to (a) an increase in the scope of services offered
and (b) an increase in services performed to additional and existing clients.
COST OF REVENUES. Cost of revenues for continuing operations increased 63% to
$2,079,000 for the three months ended September 30, 2000 from $1,274,000 during
the same period last year. The increase was
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<PAGE> 16
primarily attributable to increases in: (a) compensation and benefits, resulting
from an increase in the number of employees in connection with the expanded
services we offer, increased payroll costs for existing employees, a one-time
charge recorded in connection with the decision to stop offering investor
relations services, and a one-time expense accrual recorded for unused vacation;
(b) political contributions; and (c) client relations expenses, primarily
attributable to the Barona Casino gaming floor expansion and the golf course
development. These increases were partially offset by a decrease in professional
service costs incurred in connection with client service work.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES. General operating and
administrative expenses for continuing operations increased 58% to $2,365,000
for the three months ended September 30, 2000 from $1,501,000 during the same
period last year. The increase was primarily attributable to increases in: (a)
bad-debt expense, which included a reserve established for the Rapidcare.com
notes (see Note 12); and (b) compensation and benefits, resulting from the
increase in the number of employees, increased payroll costs for existing
employees, and a one-time expense accrual recorded for unused vacation. These
increases were partially offset by a decrease in corporate legal expenses.
AMORTIZATION OF INTANGIBLE ASSETS AND STOCK BASED COMPENSATION. Amortization of
intangible assets and stock based compensation for continuing operations
increased 26% to $345,000 for the three months ended September 30, 2000 from
$273,000 for the three months ended September 30, 1999, as a result of an
increase in amortization of goodwill in connection with the purchase of webinc,
CTI and DayPlan, partially offset by a decrease in amortization of stock based
compensation.
OTHER INCOME AND EXPENSE. For the three months ended September 30, 2000,
interest income was $113,000 compared to $143,000 for the three months ended
September 30, 1999. This decrease was due to lower balances in our investments
and cash equivalents during the quarter.
Interest expense decreased to $179,000 for the three months ended September 30,
2000 from $196,000 for the three months ended September 30, 1999, as a result of
a decrease in the balance of notes payable to two shareholders, including a
former director of the Company, in connection with the 1996 repurchase of shares
of our common stock held by them.
Other gains and losses during the quarter resulted in a net loss of $1,881,000,
and included: (a) a $1,400,000 loss recorded to fully reduce the carrying value
of our investment in Predict It; (b) a $1,199,000 loss recorded to fully reduce
the carrying value of our investment in CraftClick.com; (c) a gain of $1,000,000
for the sale of the certain intellectual properties, which included the
Cyberworks domain names ; (d) a $150,000 loss recorded to fully reduce the
carrying value of our investment in Rapidcare.com; (e) a $76,000 loss recorded
to fully reduce the carrying value of our investment in Invigo, Inc.; and (f) a
write-down of $60,000 for certain assets purchased from Typhoon, in connection
with the decision to stop offering investor relations services to clients (See
Notes 11 and 12).
INCOME TAX PROVISION. For the three months ended September 30, 2000, we recorded
an income tax provision for continuing operations of $467,000, an increase from
the $422,000 income tax provision recorded for the three months ended September
30, 1999. The tax provision is a result of net income for tax purposes,
primarily resulting from the increase in expenses that are not deductible for
tax purposes, including goodwill amortization and political contributions, and
the establishment of a valuation allowance for the deferred tax asset associated
with anticipated capital losses from our investment activities.
DISCONTINUED OPERATIONS. Operating results of the Internet gaming consulting
business through September 30, 2000 have been included in net results from
discontinued operations for the periods reported.
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LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity at September 30, 2000 consisted of
unrestricted cash and cash equivalents of $4,072,000. We believe that this will
be sufficient to meet our operating and capital requirements for the foreseeable
future.
Our cash position decreased by $695,000 from the June 30, 2000 balance of
$4,767,000. This decrease was a result of cash flows provided by operating
activities of $501,000, offset by cash flows used in investing activities of
$619,000 and cash flows used in financing activities of $577,000 during the
period.
Cash flows provided by operating activities included: (a) losses recorded from
investments of $2,826,000; (b) an income tax provision of $467,000 that, due to
stock option activity and the related tax benefits, has no associated payable;
(c) depreciation on property and equipment and amortization of intangible assets
and goodwill of $539,000; and (d) establishment of bad debt reserves of
$380,000, primarily for notes received for services.
Cash flows used in operating activities included: (a) timing differences between
revenues earned and recognized and payments of $2,576,000; and (b) $269,000 in
securities received for services in lieu of cash.
Cash flows used in investing activities included: (a) investments in fixed
assets of $187,000; (b) the issuance of $249,000 in short-term loans; and (c)
investments in convertible notes of $203,000.
Cash flows used in financing activities include a $577,000 payment on long-term
debt related to the stock purchase agreement discussed below.
Additionally, during the quarter ended September 30, 2000, we have established a
receivable of $1,251,000 for prior year income tax payments that will be
refunded to us in connection with stock option activity during calendar year
2000 that has created taxable losses. These taxable losses can be carried back
two years, and carried forward for up to 20 years, to offset past and future
income tax liabilities. These taxable losses are expected to have a material
favorable impact on the future cash flows of VCAT.
With respect to the current project to expand the Barona Casino, VCAT, the
Barona Tribe and the Barona Casino will share in funding the expansion costs
incurred prior to obtaining all outside financing. We expect to advance up to
$10,000,000 as an unsecured, non-interest-bearing advance to the Barona Casino
of which $9,685,000 was advanced as of September 30, 2000. These advances are
accounted for as a receivable from the Barona Casino to VCAT. In January 2000,
the Barona Tribe obtained $18,900,000 in outside financing from the issuance of
tax-exempt bonds, primarily for the golf course development (discussed below).
In May 2000, the Barona Tribe obtained approximately $30,000,000 in outside
financing from Sodak Gaming, Inc. for gaming machines, systems, furniture and
technologies. In October 2000, the Barona Tribe received a 120-day bridge loan
from Bank of America and Wells Fargo (the "Agents") in an aggregated principal
amount of up to $30,000,000 (the "Bridge Loan") to finance the expansion and the
related obligations, prior to them obtaining the permanent financing of
approximately $175,000,000. The Barona Tribe used $2,000,000 of the bridge loan
to repay VCAT for advances made in connection with the expansion project.
Payment of the remaining receivable of $7,685,000 is expected to occur when the
Barona Tribe obtains remaining financing of approximately $175,000,000, which is
expected to be no later than the first quarter of calendar 2001, unless we are
in a cash position that would allow the Barona Casino to retain the remaining
advanced funds for use in its operations during the expansion. If the advances
are not repaid when the Barona Tribe obtains all outside financing they would be
payable upon terms agreed to between VCAT and the Barona Tribe at that time.
In January 2000, the Barona Tribe completed a placement of tax-exempt limited
general obligation bonds in the principal amount of $18,900,000 (the "Tax-Exempt
Bond Financing"). The principal use of the bond proceeds is to build a public
golf course and related facilities. This project is a part of the $225,000,000
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Barona Casino expansion project. In connection with the Tax-Exempt Bond
Financing, we entered into a Consulting Fee Subordination Agreement pursuant to
which no consulting fee earned under the Barona Consulting Agreement shall be
paid to us so long as we have received notice from the trustee for the benefit
of the bondholders of an event of default for which there is a payment default
under the indenture and such default shall be continuing or we shall have been
notified that any levied Government Service Tax remains unpaid in whole or in
part.
In October 2000, the Barona Casino closed the Bridge Loan pending completion of
the permanent $175,000,000 loan financing lead by the Agents. In connection with
the Bridge Loan, we entered into an Intercreditor and Subordination Agreement.
This agreement permits consulting fees or other amounts owed to us to be paid up
to the amounts permitted under the debt coverage ratios set forth in the Bridge
Loan. It also permits up to $5,000,000 of our advances to be repaid prior to the
maturity of the Bridge Loan. No payments may be made if there is a default under
the terms of the Bridge Loan that has not been cured or waived.
In 1992, there was a one-time advance of future fees under the Consulting
Agreement with the Barona Tribe of approximately $2,500,000. At the beginning of
the management relationship in 1992 with the Barona Tribe, the Barona Tribe was
not in a financial position to make required investments in the Barona Casino.
We invested approximately $2,500,000 into the Casino that was accounted for as
revenue to the Barona Casino and expensed by us due to the uncertainty of
recovery. The amount was not accounted for as a deferred contract cost (similar
to those investments discussed above). As the Barona Casino became profitable
between 1992 and 1994, $2,500,000 of the initial profits of the Barona Casino
were distributed to VCAT and were recorded on our books as an obligation called
"advances of future consulting fees." The Barona Casino established a
corresponding receivable. Sometime prior to when the consulting relationship
ends in 2004 VCAT and the Barona Tribe will discuss how to handle this balance.
Depending on the outcome, if the obligation is forgiven by the Barona Tribe, we
may have an additional source of liquidity in the sense that a debt may not need
to be repaid; however, if the balance reverts back to the Barona Casino or the
Barona Tribe we may have a debt to repay. There is no indication how this issue
will ultimately be resolved. All other transactions between the two parties are
being treated independently. The remaining difference of the September 30, 2000
balance in advances of future consulting fees of $2,197,000 is due primarily to
timing differences between consulting revenues earned and recognized and the
actual payments to VCAT.
In September 1996, we entered into a Stock Purchase and Settlement and Release
Agreement with two shareholders, including a former director (the "Stock
Purchase Agreement"). The terms of the Stock Purchase Agreement included (a) an
aggregate cash payment of $200,000 to such shareholders upon closing, (b) the
issuance of two unsecured promissory notes in the aggregate principal amount of
$3,500,000, with interest at the rate of 10% per annum, 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, (c) a contingent obligation (the "Initial Contingent Obligations") to
issue an aggregate principal amount of $9,856,488 in unsecured promissory notes
to such shareholders 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 (d) another contingent obligation (the
"Second Contingent Obligation") to issue an additional aggregate principal
amount of $3,000,000 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).
The Initial Contingent Obligations are contingent upon VCAT's retained earnings
balance, with certain adjustments, being at least $4,000,000 for the fiscal year
ending immediately prior to the date the notes are to be issued. The test is to
be made each year for eight successive years that commenced with the fiscal year
ended June 30, 1997. The Initial Contingent Obligation has been met for the
first four test periods;
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accordingly, $2,000,000 in obligations were recorded at each of June 30, 1997,
1998, 1999 and 2000, and have been treated as additional consideration for the
common stock repurchased under the Stock Purchase Agreement. The Second
Contingent Obligation is subject to the following conditions: (a) the Barona
Tribe enters into a Class III Gaming Compact with the State of California which
permits the operation of video gaming machines at the Barona Casino in San Diego
County; (b) at the time that the Barona Tribe enters into a compact, VCAT has a
consulting agreement or similar contractual arrangement with the Barona Tribe;
and (c) consulting fees paid to VCAT 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, equal or exceed one and one-half times the
consulting fees for the fiscal year ended June 30, 1996. Two of the foregoing
criteria were satisfied during fiscal 2000. The contingent obligations will be
recorded as the additional cost of the repurchase of our common stock, 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 our Articles of Incorporation concerning repurchase transactions.
In April 2000, VCAT and the two note holders announced that $3,069,000 of
current and future corporate indebtedness would be exchanged for equity prior to
its maturity. Under terms agreed to, a total of 579,105 shares of our restricted
stock and warrants to acquire an additional 144,775 shares of our common stock
at $5.89 per share were issued to retire the debt. The transaction resulted in a
non-cash extraordinary loss of $324,000, attributable to the deemed value of the
warrants.
Our remaining debt related to this stock repurchase was $8,333,000 as of
September 30, 2000. In addition, if all contingent obligations are met, a
maximum of $4,856,000 of aggregate additional consideration may still have to be
repaid under the Stock Purchase Agreement. Our management believes that future
revenues generated from operations and unrestricted cash will be sufficient to
service and repay the aggregate amount of this debt.
Restricted cash and other investments of $1,655,000 include; (a) an irrevocable
letter of credit for $133,000 to satisfy the terms of the corporate lease
agreement that will automatically renew on an annual basis until October 31,
2002, unless canceled by the lessor; and (b) funds in the amount of $1,518,000
which have been pledged as security for amounts borrowed by third parties in
connection with the construction of the Kla-Mo-Ya Casino, a gaming facility near
Chiloquin, in south central Oregon. From June 1996 to May 1997, we provided
consulting services to the Klamath and Modoc Tribes and the Yahooskin Band of
Snake Indians (collectively, the "Klamath Tribes"). Pre-opening costs and
expenses of approximately $1,500,000 were financed by loans made pursuant to a
third-party bank credit agreement with the Klamath Tribes. We pledged a
certificate of deposit for $1,518,000 as collateral for such loans. In October
2000, the Klamath Tribes refinanced all of their outstanding debt, which
released the collateral hold on our certificate of deposit.
VCAT has invested in securities and convertible notes of several companies and
may continue to invest in the securities of other companies, in connection with
our strategy. The aggregate amount invested will depend on our available cash
and our ability to identify potential investment candidates. As of September 30,
2000, we have acquired an aggregated gross total of approximately $1,916,000 in
securities and convertible notes from other companies in exchange for cash.
As of October 31, 2000, our unrestricted cash and cash equivalents balance was
approximately $10,200,000.
FORWARD-LOOKING STATEMENTS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-QSB, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, and the Notes to the Consolidated Financial
Statements, contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 reflecting our current
expectations. Although we believe that our expectations are based on reasonable
assumptions, there can be no assurance that our financial goals or expectations
will be realized. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of VCAT, or industry results, to be materially
different from future results,
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performance or achievements expressed or implied by such forward-looking
statements. Numerous factors may affect our actual results and may cause results
to differ materially from those expressed in forward-looking statements made by
or on behalf of VCAT. We assume no obligation to update or revise any such
forward-looking statements or the factors listed below to reflect events or
circumstances that may arise after this Report is filed, and that may have an
effect on our overall performance.
- DEPENDENCY ON REVENUES FROM THE BARONA TRIBE
We derive the majority of our revenue from services provided to the Barona
Tribe. While we are continuing to take steps to diversify our business
activities and resulting revenues, including our current plan to acquire and
provide services for additional businesses and other Indian Tribes, those
activities are not yet producing revenues as significant as those being
earned from the Barona Tribe. Accordingly, any material reduction in fees
payable to us by the Barona Tribe could have a material adverse affect on
our business and financial condition. In connection with the Barona Casino's
$225,000,000 expansion project, the Barona Casino has incurred, and expects
to continue to incur, significantly higher expenses. As a result, the
consulting revenues paid to us during the expansion project may decrease.
- THE BARONA CONSULTING AGREEMENT
Appropriate regulatory authorities have not yet approved the Barona
Consulting Agreement. If the Consulting Agreement is not approved or is
significantly modified from the standpoint of consulting revenue, such
action would have a material adverse effect on our business and financial
condition.
- LIMITED RECOURSE AGAINST TRIBES AND TRIBAL ASSETS
We have made, and may make, advances or loans (including guarantees of
indebtedness) to tribes for the construction, development, equipment and
operation of casinos for which we may act as a consultant or manager. These
amounts are not conventional indebtedness loans subject to customary
mortgages or security. If these casinos do not generate sufficient cash flow
to repay such indebtedness, our loans may not be repaid. Our principal
recourse for collection of indebtedness from a tribe or money damages for
breach or wrongful termination of a contract is from revenues, if any, from
casino operations. We have agreed to, and in the future may agree to,
subordinate the repayment of a tribe's indebtedness and payment of other
fees due to us from a tribe to other obligations of the tribe, such as
indebtedness to a commercial lender. Accordingly, in the event of a default
by a tribe, a tribe's indebtedness to us may not be repaid, if at all, until
any senior creditors have been repaid in full.
As of September 30, 2000 we had advanced $9,685,000 to the Barona Casino in
connection with the ongoing expansion project. We have committed to advance
up to $10,000,000 to the Barona Casino, if needed, until all outside
financing is obtained. These advances are scheduled to be repaid when all of
the $225,000,000 financing is completed. In addition, as noted above, the
consulting fees earned by VCAT are now subject to Subordination Agreements
relating to the Tax-Exempt Bond Financing and the bridge loan. We also have
$1,918,000 in the form of cash pledged as a guarantee and bonds issued by
the Klamath Tribes. The $1,518,000 in cash pledged has been released, and
the $400,000 in bonds have been defeased in connection with a refinancing by
the Klamath Tribes. If a default occurs, it would have a material adverse
effect on the business and financial condition of the Company.
- VOLATILITY OF AVAILABLE-FOR-SALE SECURITIES
Our assets are, and will be, partially comprised of securities of other
publicly and non-publicly traded companies, and include positions in equity
securities that have experienced significant volatility in their stock
prices. It is possible that the number of, and our investment in, these
assets will increase in the future. The market price and valuations of the
securities that we hold in other companies may fluctuate
20
<PAGE> 21
due to reported results of those companies, market conditions and other
conditions over which we have no control. We do not currently attempt to
reduce or eliminate our market exposure on these securities. An adverse
change in the price of securities we hold would result in a material
decrease in the fair value of our available-for-sale securities, which could
have a material adverse impact on our business and financial condition.
Certain of these companies have encountered financial difficulties that has,
and in the future could, result in a write-down of the carrying value of
such assets. Any write-down could have a material adverse affect on our
operating results and financial condition.
- SOME OF OUR SERVICES ACTIVITIES HAVE A LIMITED OPERATING HISTORY
Certain of our services for emerging businesses have been offered for less
than a year. Because of our short operating history in these activities, we
are unable to provide you with significant data upon which you can evaluate
our prospects. We cannot be certain that our expanded business strategy or
the business strategies of our clients will be successful. Because we
provide services to and have interests in early stage companies and emerging
businesses and have only recently expanded our business strategy, we are
exposed to not only the business risks of our clients but also to the risks
of our own business activities.
- RISKS OF BEING DEEMED AN INVESTMENT COMPANY
We may incur significant costs to avoid investment company status and may
suffer other adverse consequences if we are deemed to be an investment
company under the United States Investment Company Act of 1940, as amended
(the "1940 Act"). A company may be deemed to be an investment company if it
owns investment securities with a value exceeding 40% of its total assets,
subject to certain exclusions. Investment companies are subject to
registration under, and compliance with, the 1940 Act unless a particular
exclusion or SEC safe harbor applies. If we were deemed to be an investment
company, we would become subject to the requirements of the 1940 Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for non-compliance. In addition, certain of our contracts might be
voidable. Such repercussions from being deemed an investment company could
have a material adverse affect on the Company's operating results and
financial condition.
Specifically, if we are deemed to be, and are required to register as, an
investment company, we will be forced to comply with substantive
requirements under the 1940 Act, including:
- limitations on our ability to borrow;
- limitations on our capital structure;
- restrictions on acquisitions of interests in portfolio and/or
affiliated companies;
- prohibitions on transactions with affiliates;
- restrictions on specific investments; and
- compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations.
If we were forced to comply with the rules and regulations of the 1940 Act,
our operations would significantly change, and we would be prevented from
successfully executing our business strategy.
In addition, to avoid regulation under the 1940 Act and related SEC rules,
we may need to sell assets which we would otherwise want to retain and may
be unable to sell assets which we would otherwise want to sell. In addition,
we may be forced to acquire additional, or retain existing,
income-generating or loss-generating assets which we would not otherwise
have acquired or retained and may need to forego opportunities to acquire
interests in attractive companies that would benefit our business. If we
were forced to sell, buy or retain assets in this manner, we would be
prevented from successfully executing our business strategy.
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<PAGE> 22
Although investment securities currently comprise less than 40% of our
assets, fluctuations in the value of these securities or of our other assets
may cause this limit to be exceeded. This would require us to attempt to
reduce our investment securities as a percentage of our total assets. This
can be attempted in a number of ways, including the disposition of
investment securities and the acquisition of non-investment security assets.
If we sell investment securities, we may sell them sooner than we otherwise
would. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. Some
investments may not be sold due to contractual or legal restrictions or the
inability to locate a suitable buyer. Moreover, we may incur tax liabilities
when we sell assets. We may also be unable to purchase additional investment
securities that may be important to our operating strategy. If we decide to
acquire non-investment security assets, we may not be able to identify and
acquire suitable assets and businesses.
- VOLATILITY OF OUR STOCK PRICE
The trading price of our common stock has been, and will likely continue to
be, subject to wide fluctuations because of regulatory developments,
performance of our public clients in which we own equity securities,
quarterly variations in our operating results, announcements of new services
or business activities by the Company or its competitors, general market
fluctuations, and other events and factors. These factors, coupled with the
small public float, have in the past, and could in the future, result in
wide fluctuations in the market-trading price.
- YEAR 2000 READINESS DISCLOSURE
We have not experienced any material problems with network infrastructure,
software, hardware and computer systems relating to the inability to
recognize appropriate dates related to the year 2000. We are also not aware
of any material Year 2000 problems with customers, suppliers or vendors,
including our most significant customer's business, the Barona Casino.
Accordingly, as of September 30, 2000 we have not incurred any material
costs relating to the Year 2000 issue, and we do not anticipate incurring
future material expenses or experiencing any material operational
disruptions as a result of any Year 2000 issues.
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<PAGE> 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The Exhibits listed below are hereby filed with the U.S.
Securities and Exchange Commission (the "Commission") as part of this Quarterly
Report on Form 10-QSB.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.1 Loan Agreement dated September 1, 2000, by and between
Venture Catalyst Incorporated and L. Donald Speer, II
and Kelly Elizabeth Speer.
10.2 Severance Agreement and General Release dated September
29, 2000, by and between Sanjay Sabnani and Venture
Catalyst Incorporated.
10.3 Intercreditor and Subordination Agreement dated October
10, 2000, by and between Venture Catalyst Incorporated,
Wells Fargo Bank, National Association, the Barona Band
of Mission Indians, and the Barona Tribal Gaming
Authority.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. During the Company's first quarter ended September 30,
2000, the Company filed no Current Reports on Form 8-K with the Commission.
23
<PAGE> 24
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.
VENTURE CATALYST INCORPORATED,
a Utah Corporation
Date: November 14, 2000 By: /S/ L. DONALD SPEER, II
------------------------------------------
L. Donald Speer, II
Chairman of the Board and Chief Executive
Officer
(Authorized Signatory, Principal Executive
Officer)
Date: November 14, 2000 By: /S/ KEVIN MCINTOSH
------------------------------------------
Kevin McIntosh
Vice President, Chief Financial Officer,
and Treasurer
(Authorized Signatory, Principal Financial
Officer)
24
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--- -----------
<S> <C>
10.1 Loan Agreement dated September 1, 2000, by and between
Venture Catalyst Incorporated and L. Donald Speer, II
and Kelly Elizabeth Speer.
10.2 Severance Agreement and General Release dated September
29, 2000, by and between Sanjay Sabnani and Venture
Catalyst Incorporated.
10.3 Intercreditor and Subordination Agreement dated October
10, 2000, by and between Venture Catalyst Incorporated,
Wells Fargo Bank, National Association, the Barona Band
of Mission Indians, and the Barona Tribal Gaming
Authority.
27 Financial Data Schedule.
</TABLE>
25
