(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, 2006

 

o                                 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

 

For the Transition Period From                      To                     

 

Commission file number 000-50572

 

SOUTHWEST CASINO CORPORATION

(Exact name of small business issuer as specified in its charter)

 

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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

YES o   NO x

State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 19,688,656 as of September 30, 2006.

Transitional Small Business Disclosure Format (check one): YES o   NO x

 

SOUTHWEST CASINO CORPORATION

FORM 10-QSB
September 30, 2006

TABLE OF CONTENTS

Description

PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements	1
	Consolidated Balance Sheet (Unaudited) September 30, 2006	2
	Consolidated Statements of Operations (Unaudited) for the Three and Nine Months ended September 30, 2006 and 2005	3
	Consolidated Statements of Cash Flows (Unaudited) for the Nine Months ended September 30, 2006 and 2005	4
	Notes to Unaudited Consolidated Financial Statements	5
ITEM 2.	Management’s Discussion and Analysis or Plan of Operation	14
ITEM 3.	Controls and Procedures	23
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	24
ITEM 6.	Exhibits	24
SIGNATURE PAGE		25

 

In this Form 10-QSB, references to “Southwest,” “the company,” “we,” “our” or “us,” unless the context otherwise requires, refer to Southwest Casino Corporation and its consolidated subsidiaries.

i

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

FINANCIAL STATEMENTS	1
Consolidated Balance Sheet (Unaudited), September 30, 2006	2
Consolidated Statements of Operations (Unaudited) for the Three and Nine Months ended September 30, 2006 and 2005	3
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months ended September 30, 2006 and 2005	4
Notes to Unaudited Consolidated Financial Statements	5

 

1

SOUTHWEST CASINO CORPORATION
Consolidated Balance Sheets (Unaudited)
September 30, 2006

ASSETS
		2006
CURRENT ASSETS
Cash and Cash Equivalents		$	1,755,381
Accounts Receivable		60,157
Management Fees Receivable		575,039
Inventories		183,363
Prepaid Expenses		573,657
Total Current Assets		$	3,147,597
PROPERTY AND EQUIPMENT
Leasehold Improvements		15,734,877
Furniture and Equipment		6,060,901
Accumulated Depreciation		(10,573,462		)
Net Property and Equipment		$	11,222,316
OTHER ASSETS
Intangible Assets		$	438,646
Deposits		62,305
Investment in Unconsolidated Subsidiary		4,640,895
Deferred Tax Asset		—
Total Other Assets		$	5,141,846
TOTAL ASSETS		$	19,511,759
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable		$	404,066
Accrued Expenses		1,021,202
Accrued Liabilities - Related Parties		122,467
Notes Payable		446,292
Current Portion of Long-Term Liabilities		2,207,737
Accrued Interest Payable		9,635
Total Current Liabilities		$	4,211,399
LONG-TERM LIABILITIES
Long-Term Liabilities Net of Current Portion		$	7,706,615
STOCKHOLDERS’ EQUITY
Preferred Stock, $.001 Par Value; 30,000,000 Shares Authorized		$	—
Common Stock, $.001 Par Value 50,000,000 Shares Authorized, 19,688,656 Shares Issued and Outstanding		19,689
Additional Paid-in Capital		17,198,898
Accumulated Deficit		(9,624,842		)
Total Stockholders’ Equity		7,593,745
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	19,511,759

 

See Notes to Unaudited Consolidated Financial Statements

2

SOUTHWEST CASINO CORPORATION
Consolidated Statements of Operations (Unaudited)

		For the three months ended September 30, 2006			For the three months ended September 30, 2005			For the nine months ended September 30, 2006			For the nine months ended September 30, 2005
REVENUES
Casino		$	4,216,390		$	4,138,250		$	11,587,076		$	11,536,240
Food & Beverage/Hotel		194,496			148,277			452,552			349,806
Management and Consulting		1,468,192			1,427,880			4,562,005			3,640,785
Entertainment		11,304			11,807			17,429			18,492
Other		39,062			75,198			129,295			152,856
		5,929,444			5,801,412			16,748,357			15,698,179
EXPENSES
Casino		$	3,022,993		$	2,934,007		$	8,751,517		$	8,684,013
Food & Beverage/Hotel		385,210			402,570			1,091,744			1,107,546
Corporate Expense		741,101			552,419			2,053,397			1,950,283
Project Development Costs		47,642			138,194			225,125			653,739
Entertainment		53,069			82,263			102,649			134,862
Depreciation and Amortization		542,728			584,417			1,627,833			1,775,433
		4,792,743			4,693,870			13,852,265			14,305,876
INCOME FROM OPERATIONS		$	1,136,701		$	1,107,542		$	2,896,092		$	1,392,303
OTHER INCOME (EXPENSE)
Interest Income		$	762		$	1,412		$	1,934		$	5,473
Interest Expense		(307,699		)	(228,389		)	(892,222		)	(751,067		)
Loss on Disposition of Property and Equipment		(11,126		)	(41,465		)	(11,126		)	(42,480		)
		(318,063		)	(268,442		)	(901,414		)	(788,074		)
Income(loss) before income taxes, equity in earnings of unconsolidated subsidiaries and minority interest in in loss of consolidated subsidiary		818,638			839,100			1,994,678			604,229
Income taxes		(214,988		)	—			(615,342		)	—
Minority interest in loss of consolidated subsidiary		—			62,096			—			189,980
Loss of Unconsolidated Subsidiaries, Net of Tax Benefit		(43,667		)	—			(144,132		)	—
NET INCOME (LOSS)		$	559,983		$	901,196		$	1,235,204		$	794,209
Income (loss) per share - basic		$	0.03		$	0.05		$	0.06		$	0.04
Income (loss) per share - diluted		$	0.03		$	0.04		$	0.06		$	0.04
Weighted average common shares outstanding - basic		19,688,656			19,400,884			19,671,249			19,471,448
Weighted average common shares outstanding - diluted		20,664,715			21,898,384			20,690,557			22,186,531

 

See Notes to Unaudited Consolidated Financial Statements

3

SOUTHWEST CASINO CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2006 and 2005

		2006			2005
Cash Flows from Operating Activities:
Net Income (Loss)		$	1,235,204		$	794,209
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Minority Interest in Loss of Consolidated Subsidiary		—			(189,980		)
Depreciation and Amortization		1,627,833			1,775,433
Amortization of Loan Costs		123,730			—
Loss on Disposition of Property and Equipment		11,126			43,374
Common Stock Issued for Non-Cash Compensation		134,082			15,875
Loss of Unconsolidated Subsidiaries		185,974			—
Write-off of Land Option					249,778
Change in Current Assets and Liabilities, (Increase) Decrease in Restricted Cash		2,656			48,881
(Increase) Decrease in Receivables		(66,402		)	(222,757		)
(Increase) Decrease in Inventories		(35,080		)	4,689
(Increase) Decrease in Prepaid Expenses		25,714			(16,646		)
(Increase) Decrease in Deferred Tax Asset		573,000			—
Increase (Decrease) in Accounts Payable		(276,721		)	(916,743		)
Increase (Decrease) in Accrued Expenses		(55,036		)	(81,723		)
Increase (Decrease) in Accrued Interest Payable		(7,917		)	(33,463		)
Net Cash Provided By Operating Activities		$	3,478,163		$	1,470,927
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment		(328,534		)	(610,937		)
(Increase) Decrease in Deposits		14,000			(1,126		)
Payment of Capitalized License		—			(189,179		)
Investment in Unconsolidated subsidiary		(528,502		)	—
Net Cash Used In Investing Activities		$	(843,036	)	$	(801,242	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net Advances on Short-Term Notes Payable		$	—		$	(346,949	)
Principal Payments on Long-Term Borrowings		(1,976,891		)	(571,090		)
Proceeds from Investors in Consolidated - Minority Interest		—			1,140,325
Proceeds from Issuance of Common Stock and Exercise of Warrants		12,000			49,000
Settlement of Convertible Subordinated Debentures		—			(25,000		)
Payments for Liabilities Owed to Related Parties		(110,000		)	—
Net Cash Provided (Used) by Financing Activities		$	(2,074,891	)	$	246,286
Net Increase in Cash and Cash Equivalents		560,236			915,971
CASH AND CASH EQUIVALENTS
Beginning of Period		1,195,145			750,556
End of Period		$	1,755,381		$	1,666,527
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest Paid		$	773,683		$	679,305
Income Taxes Paid		$	22,506		$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Warrants Issued in Exchange for Services		$	—		$	15,875
Capital Assets Acquired with Acounts Payable		$	68,081		$	101,225

 

See Notes to Unaudited Consolidated Financial Statements

4

SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

NOTE 1 — BASIS OF PRESENTATION

The unaudited consolidated financial statements of Southwest Casino Corporation, a Nevada corporation (the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. For further information, please refer to the annual audited consolidated financial statements of the Company, and the related notes included within the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, filed with the SEC on March 31, 2006.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included, consisting only of normal recurring adjustments. The results for the current interim period are not necessarily indicative of the results to be expected for the full year.

Certain minor reclassifications to amounts previously reported have been made to conform to the current period presentation. These reclassifications had no effect on net income.

NOTE 2 —NEW MANAGEMENT CONTRACT

On March 24, 2006, Southwest entered into a Gaming Management Agreement with the Otoe-Missouria Tribe of Indians. Under the terms of the Gaming Management Agreement, Southwest will have exclusive management responsibility for the Tribe’s Seven Clans Paradise Casino near Ponca City, Oklahoma. Southwest will receive management fees equal to 20 percent of the net revenue from gaming and non-gaming activity at the facility. The management agreement runs for 5 years beginning on the first day that Southwest begins management of the facility.

This agreement must be approved by the National Indian Gaming Commission (“NIGC”) before it becomes effective. Currently, the NIGC is performing a background investigation of the Company, its executive officers, directors, and shareholders as part of its contract approval process. In addition, the NIGC has reviewed the agreement and provided comments on it to Southwest and the Tribe on two occasions. The Tribe has not responded to the second set of comments. At this time, the Company cannot predict how long the background investigation may take to complete, the total costs related to the background investigation and approval process to be paid by the Company, if or when the Tribe will respond to the NIGC comments, and if or when NIGC approval of the agreement may be received.

NOTE 3 — STOCK OPTIONS AND AWARDS

Stock option plans:

On July 15, 2004, Southwest Casino and Hotel Corp. shareholders approved the Southwest Casino and Hotel Corp. 2004 Stock Incentive Plan that had been adopted by the company’s Board of Directors effective June 1, 2004. Under the terms of the reorganization completed July 22, 2004, Southwest Casino Corporation assumed the rights and obligations of Southwest Casino and Hotel Corp. under this plan. The plan permits Southwest Casino Corporation to issue incentive awards to all employees of Southwest Casino Corporation or any of its subsidiaries and any non-employee directors, consultants or independent contractors of the Company or any of its subsidiaries. Incentive awards under the plan include “incentive options” under Section 422 of the Internal Revenue Code of 1986, “non-statutory stock options” that do not qualify for “incentive option” treatment, stock appreciation rights, restricted stock awards, performance units and stock bonuses. A maximum of 1,500,000 shares of Southwest Casino Corporation common stock are reserved for issuance under the plan. As of September 30, 2006, 925,000 options were issued and are outstanding.

In addition to the assumption of the 2004 Stock Incentive Plan, Southwest Casino Corporation assumed outstanding non-plan options to acquire shares of Southwest Casino and Hotel Corp. common stock as part of its reorganization. The Company assumed obligations in the form of stock options to issue 1,575,000 shares of its common stock at a weighted average price of $.62 per share.

5

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

Valuation and Expense Information under SFAS 123(R)

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options and employee stock purchases based on estimated fair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied certain provisions of SAB 107 in its adoption of SFAS 123(R).

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statement of operations. SFAS 123(R) supersedes the Company’s previous accounting under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). As permitted by SFAS 123, the Company measured compensation cost for options granted before January 1, 2006, in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, before January 1, 2006 no accounting recognition was given to stock options granted at fair market value until they were exercised. Upon exercise, net proceeds, including tax benefits realized, were credited to equity.

The Company adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). The effect of the change was to decrease net earnings for the three and nine months ended September 30, 2006 by $40,294 and $125,705 and basic and diluted earnings per share by $0.002 and $0.006, respectively, as compared to what results for the period would have been had the intrinsic method been used. There was no share-based compensation expense related to employee stock options and employee stock purchases recognized in the financial statements during the three and nine months ended September 30, 2005.

Options are granted to employees and directors at prices equal to the market value of the stock on the dates the options are granted. The options granted have terms of 5 to 10 years from the grant date and granted options typically vest quarterly over a one to three year period. The fair value of each option is amortized into compensation expense over the period the option vests. We have estimated fair value of all stock options as of the date of grant applying the Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. No options were granted during the three months ended September 30, 2006. The key assumptions used in determining the fair value of options during the nine months ended September 30, 2006 were:

 

Historical information was the primary basis for the selection of the expected volatility, expected dividend yield, and the expected lives of the options. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be zero in the three and nine months ended September 30, 2006 based primarily on historical experience. If pre-vesting forfeitures occur in the future, the Company will record the benefit related to those forfeitures as the forfeitures occur. In the Company’s pro forma information required under SFAS 123(R) for the periods before March 31, 2006, the Company also accounted for forfeitures as they occurred.

6

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

Status of options during the nine months ended September 30, 2006

		Options Outstanding		Weighted Average Exercise Price			Weighted Average Contractual Term		Aggregate Intrinsic Value
Balance at December 31, 2005		1,775,000		$	0.65
Granted (1)		725,000		$	0.66
Forfeited/cancelled/expired		0
Exercised		0
Balance at September 30, 2006		2,500,000		$	0.65
Options outstanding at September 30, 2006		2,500,000		$	0.65		6.3 years		$	0
Options exercisable at September 30, 2006		1,912,917		$	0.65		5.4 years		$	0

(1) - See Note 13

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on Southwest Casino Corporation closing stock price of $0.52 per share on September 30, 2006, that the option holders would have received had all option holders exercised their options as of that date. As of September 30, 2006, the Company’s unrecognized share-based compensation related to stock options was approximately $343,000. This cost is expected to be expensed over a weighted average period of two and one-half years.

Consolidated pro forma information required under SFAS 123(R)

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123(R) during the three and nine months ended September 30, 2005. For the purpose of this pro forma disclosure, the value of the options is estimated using Black-Scholes option-pricing model and amortized to expense over the options vesting periods.

		Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net Income as Reported		$	901,196		$	794,209
Deduct: Total stock-based compensation expenses determined under fair value based method for all awards, net of related tax effect		14,258			82,694
Pro forma net income		$	886,938		$	711,515
Income per share:
Basic — as reported		$	0.05		$	0.04
Basic — pro forma		$	0.05		$	0.04
Fully-diluted — as reported		$	0.04		$	0.04
Fully-diluted — pro forma		$	0.04		$	0.03

 

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3 (“FSP 123(R)”), Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards. FSP 123(R)-3 permits the Company to elect from alternative transition methods for calculating the pool of tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123(R). No tax benefit has been recorded on the share based compensation expense for the nine month period ended September 30, 2006.

NOTE 4 — PROMOTIONAL ALLOWANCES

Revenue does not include the retail amount of rooms, food, and beverages provided gratuitously to customers, which was approximately $895,000 and $934,000 for the nine months ended September 30, 2006 and 2005, respectively and was approximately $315,000 and $385,000 for the three months ended September 30, 2006 and 2005, respectively.

7

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

NOTE 5 — INTANGIBLE ASSETS AND CASINO MANAGEMENT AGREEMENT

Intangible Assets, net of amortization consisted of the following at September 30:

 

Future amortization of management contract rights and loan costs are as follows:

 

The Company entered into an agreement with the Cheyenne and Arapaho Tribes of Oklahoma (CATO) for management of its casinos located in Oklahoma that was to expire on May 19, 2004. In exchange for extending the contract through May 19, 2007, the Company has transferred title to a tract of land to CATO. The exchange took place in 2003 and the cost of the land is being amortized over the term of the management contract.

Loan costs in the amount of $254,001 were incurred in connection with a term loan of $2,500,000 from Crown Bank. The loan costs are being amortized over the term of the loan.

NOTE 6— NORTH METRO HARNESS INITIATIVE, LLC (“North Metro”)

The Company evaluates whether North Metro should be treated as a variable interest entity (“VIE”) subject to consolidation during the applicable reporting periods under Financial Accounting Standards Board Interpretation 46(R) — Consolidation of Variable Interest Entities (as amended). The Company determined that North Metro should be treated as a VIE and that North Metro should be consolidated within the Company’s financial statements for the nine months ended September 30, 2005 for the following reason: The Company held 50% of North Metro’s voting rights but as of September 30, 2005, the Company had provided approximately 67% of North Metro’s financial support. Because the Company would absorb financial losses of North Metro that were disproportionate to its 50 percent decision making power, the Company determined that North Metro was a VIE subject to consolidation for the period ended September 30, 2005

Due to contributions of capital made by MTR-Harness, Inc. (“MTR”) as of October 20, 2005, in accordance with the North Metro Member Control Agreement dated June 8, 2004, the Company no longer provides financial support in excess of its 50 percent decision making power. As of September 30, 2006, the Company has provided approximately 39 percent of the financial support, but still retains its 50 percent decision making power. Therefore, since October 20, 2005, the Company has accounted for its investment in North Metro on the equity method.

For the three and nine months ended September 30, 2006, the Company has recorded a loss from this unconsolidated subsidiary, net of tax benefit of $39,618 and $140,083, respectively, as follows:

 

8

SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

For the three and nine months ended September 30, 2005, the Company consolidated the results of operations of North Metro, resulting in recording development expenses of $124,193 and $379,960 net of minority interest in the loss from consolidated subsidiary of $62,096 and $189,980.

NOTE 7- LINE OF CREDIT

On October 20, 2005, the Company entered into an agreement to borrow up to $450,000 under a revolving line of credit due April 30, 2007. The interest rate is Prime +1%, and not less than 7.5%. Currently the interest rate is 9.25%. At September 30, 2006, $3,708 was available to borrow. The loan is guaranteed to the extent of $300,000 by three principal officers of the Company. The line of credit is included in notes payable on the accompanying balance sheet.

NOTE 8 — EARNINGS (LOSS) PER SHARE

For all periods, basic earnings (loss) per share is calculated by dividing earnings (loss) by the weighted-average number of common shares outstanding. Diluted earnings per share for the three and nine months ended September 30, 2006 and 2005, reflect the effect of all potentially dilutive common shares outstanding by dividing net earnings by the weighted-average of all common and potentially dilutive shares outstanding.

The following is a reconciliation of basic and diluted earnings per share:

 

 

 

 

9

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

NOTE 9 — INCOME TAXES

Management evaluated its probable ability to utilize deferred tax assets arising from net operating loss carry forwards, deferred tax assets and other ordinary items and determined that a valuation allowance was appropriate during the three and nine months ended September 30, 2005 based upon prior years net losses. As a result of this evaluation, the Company did not recognize a tax benefit during the nine months ended September 30, 2005. At December 31, 2003, the Company established a deferred tax asset relating to net operating losses. Management evaluated all evidence and determined that a portion of the deferred tax assets relating to net operating losses would be utilized in 2006 based upon forecasted income for the Company in 2006. During the three and nine months ended September 30, 2006, the Company has recorded a tax provision. In addition, during the three months ended September 30, 2006, the Company reduced a portion of the valuation allowance to offset net income for the three months ended September 30, 2006, as net income exceeded management’s forecasted income for 2006. Management evaluated the valuation allowance against the deferred tax assets at September 30, 2006 and did not reverse the valuation allowance due to the uncertainty of continuing the management relationship with the Cheyenne and Arapaho Tribes. As of September 30, 2006, the Company’s deferred tax asset is zero.

NOTE 10 — RELATED PARTY TRANSACTIONS

At its meeting on April 26, 2006, the independent members of the Company’s Board of Directors approved one-time payments to James Druck, CEO, Thomas Fox, President and CFO, and Jeffrey Halpern, Vice President of Government Affairs, as partial repayments of the Company’s outstanding liabilities for their unpaid salaries, the majority of which is from years before 1998. The Board approved payments of $50,000 to Mr. Druck and Mr. Halpern and $10,000 to Mr. Fox. The Company made these payments to Mr. Halpern on April 28, 2006 and Mr. Druck and Mr. Fox on May 15, 2006. As of September 30, 2006, the remaining balance outstanding is $122,467.

During the nine months ended September 30, 2006 and 2005, the Company paid Berc & Fox Limited $15,150 and $15,398 for tax and accounting services, respectively. North Metro paid Berc & Fox Limited $975 during the nine months ended September 30, 2006 for tax services. Thomas Fox is a shareholder and officer in Berc & Fox Limited.

NOTE 11 — PROJECT DEVELOPMENT COSTS

The Company continues to pursue additional gaming opportunities and as a result continues to incur project development expenses. For the three and nine months ended September 30, 2006, development expenses were $47,642 and $225,125. For the three and nine months ended September 30, 2005, development expenses were $138,194 and $653,739. Included in the nine months ended September 30, 2005 amount is a $249,778 write-off of an option to acquire the Gold Rush real estate that the Company allowed to expire unexercised on February 28, 2005. In addition, the Company included development expenses incurred by North Metro Harness Initiative, LLC, in the Company’s consolidated financial statements for the three and nine months ended September 30, 2005. See Note 6.

NOTE 12 — SEGMENT INFORMATION

Segment information related to the three months ended September 30, 2006 follows:

		Casino			Casino			Project			Reconciling
		Operations			Management			Development			Items (2)			Total
Revenues		$	4,461,252		$	1,468,192		$	—		$	—		$	5,929,444
Segmented profit (loss) before income taxes		359,352			506,928			(101,486		)	53,844			818,638
Segmented assets		13,489,529			1,357,680			4,664,550			—			19,511,759

 

10

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

Segment information related to the three months ended September 30, 2005 follows:

		Casino			Casino			Project			Reconciling
		Operations			Management			Development			Items (1)			Total
Revenues		$	4,373,532		$	1,427,880		$	—		$	—		$	5,801,412
Segmented profit (loss) before income taxes		248,812			714,481			(124,194		)	62,097			901,196
Segmented assets		15,223,110			2,614,456			2,706,678			—			20,544,244

 

Segment information related to the nine months ended September 30, 2006 follows:

		Casino			Casino			Project			Reconciling
		Operations			Management			Development			Items (2)			Total
Revenues		$	12,186,352		$	4,562,005		$	—		$	—		$	16,748,357
Segmented profit (loss) before income taxes		386,257			1,833,546			(411,099		)	185,974			1,994,678
Segmented assets		13,489,529			1,357,680			4,664,550			—			19,511,759

 

Segment information related to the nine months ended September 30, 2005 follows:

		Casino			Casino			Project			Reconciling
		Operations			Management			Development			Items (1)			Total
Revenues		$	12,057,394		$	3,640,785		$	—		$	—		$	15,698,179
Segmented profit (loss) before income taxes		15,144			969,046			(379,961		)	189,980			794,209
Segmented assets		15,223,110			2,614,456			2,706,678			—			20,544,244

(1)                                   Reconciling item is loss in subsidiary allocated to minority interest.

(2)                                   Reconciling item is the loss of unconsolidated subsidiary before income taxes.

NOTE 13 — BOARD OF DIRECTORS

On January 10, 2006, as part of the Company’s compensation for independent members of its Board of Directors, Southwest granted non-qualified options to purchase 150,000 shares of its common stock at a price of $0.65 per share to each of the four independent members of its Board of Directors. These options vest in 12 equal installments on the last day of each fiscal quarter of the company over the next three years and remain exercisable for 10 years. If a director’s service on the Southwest Board terminates due to mandatory retirement, the options will continue to vest and remain exercisable for the full 10 years. If a director’s service terminates due to death or disability, the options will remain exercisable, to the extent vested at the time service terminated, for 12 months. If a director’s service terminates for any other reason, the options will remain exercisable, to the extent vested at the time service terminated, for 90 days. If a change in control of Southwest occurs, as defined in the Company’s 2004 Stock Incentive Plan, the options will immediately vest in full and remain exercisable for the entire 10-year term.

On January 10, 2006, the Board of Directors established an Audit Committee and elected David Abramson, Jim Holmes, and Gregg Schatzman to serve on the Committee. The Board of Directors elected David Abramson as Chair of its Audit Committee. Mr. Abramson received options to purchase 75,000 shares of common stock, on the same terms as described in the preceding paragraph, in consideration of his service as Audit Committee Chair.

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

NOTE 14 - COMMITMENTS AND CONTINGENCIES

Management Agreement:

As discussed in Note 5, the Company has an agreement with the Cheyenne and Arapaho Tribes of Oklahoma (CATO) for management of CATO’s casinos located in Concho and Clinton, Oklahoma that expires on May 19, 2007. The management fees received from this contract are significant to the Company’s cash flow from operations. The Company is currently working to extend the Company’s management relationship with CATO. We have been invited, along with other management companies, to present our proposal to manage the casinos beyond May 19, 2007 at a Tribal Council meeting on November 18, 2006. If the Company is unsuccessful in extending this relationship it will have a material adverse impact on the Company’s cash flow from operations.

North Metro Harness Initiative, LLC (“North Metro”) commitments:

The Company owns a 50 percent membership interest in North Metro. North Metro has entered into an agreement for the development of the land, buildings and related property to operate a racetrack and card room. Fees related to the agreement total 3% of the project cost, which is defined as the total development cost less the cost to purchase the land. The agreement began on May 1, 2003, and continues until the completion of the project, unless earlier terminated. North Metro currently pays fees of $6,000 per month, plus applicable out of pocket expenses. Upon the start of construction, two thirds of the total expected fee (less previous monthly payments) is due. If the agreement is terminated before completion of the project, any unpaid fees are determined based on the completed status of the project at the time of termination, as defined in the agreement.

North Metro has also entered into agreements to monitor legislation and perform lobbying activities related to its racetrack and card room development. These agreements are generally on a month-to-month basis, and may be terminated by either party to the agreement. North Metro pays the monthly commitments of approximately $18,000 per month during the Minnesota legislative session and approximately $8,000 outside of the Minnesota legislative session.

Legal Proceeding

North Metro:

In January 2005, the Minnesota Racing Commission voted to grant class A and B licenses to own and operate a harness racetrack and card room to North Metro Harness Initiative, LLC, in which the Company owns a 50% membership interest. These licenses permit North Metro to develop and run a harness racetrack and a 50-table card room in the City of Columbus in Anoka County, Minnesota. North Metro intervened in litigation brought by an anti-gambling citizens group against the Minnesota Racing Commission in an attempt to invalidate those licenses. In June 2005, the District Court issued a summary judgment order dismissing plaintiff’s claims and in favor of the Minnesota Racing Commission and North Metro. On June 6, 2006 the Minnesota Court of Appeals affirmed the decision of the District Court to dismiss the case. The plaintiffs did not file a timely request for review with the Minnesota Supreme Court, concluding this lawsuit in July 2006.

Other:

The Company is involved in various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, any losses that may occur from these matters are adequately covered by insurance or are provided for in our financial statements, and the ultimate outcome of these other matters will not have a material effect on our financial position or results of operations.

NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (Interpretation No. 48). Interpretation No. 48 clarifies the accounting for uncertain tax positions in accordance with SFAS 109, “Accounting for Income Taxes.” Pursuant to Interpretation

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SOUTHWEST CASINO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2006

No. 48, the Company will be required to recognize in its financial statements the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit, based solely on the technical merits of the position as of the reporting date. Only tax positions that meet the “more-likely-than-not” threshold at that date may be recognized. The term “more-likely-than-not” means a likelihood of more than 50 percent. Interpretation No. 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods and transition. The cumulative effect of initially applying Interpretation No. 48 will be recognized as a change in accounting principle as of the date of adoption. We have begun to evaluate the impact of applying this interpretation as of January 1, 2007, the effective date of the interpretation for the Company. We do not expect Interpretation No. 48 to have a material impact on our financial position, results of operation or cash flows.

NOTE 16 — SUBSEQUENT EVENTS

The Company entered into an amendment of its term loan with Crown Bank in October 2006. The agreement has been amended to allow the Company to repay the remaining principal in seven equal payments through April 30, 2007 as opposed to the original agreement under which the Company would have been required to repay the remaining principal in five equal principal payments through March 1, 2007. Monthly principal payments will be $148,810 as compared to the original payments of $208,333.

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Item 2. Management’s Discussion and Analysis or Plan of Operation

The following is a discussion and analysis of the financial position and operating results of Southwest Casino Corporation (referred to in this discussion, together with its consolidated subsidiaries where appropriate, as “Southwest Casino”, “Southwest”, the “Company”, “we”, “our” and “us”) for the three and nine months ended September 30, 2006 and 2005.

Summary of Consolidated Operating Results:

For the quarter ended September 30, 2006, Southwest had net income of $559,983 on revenue of $5,929,444 compared to net income of $901,196 on revenue of $5,801,412 for the same period in 2005. This amounts to basic and fully diluted earnings of $0.03 per outstanding share during the third quarter of 2006, as compared to earnings of $0.05 per outstanding share ($0.04 per share on a fully-diluted basis) during the third quarter of 2005.

For the nine months ended September 30, 2006, Southwest had net income of $1,235,204 on revenue of $16,748,357 compared to net income of $794,209 on revenue of $15,698,179 for the same period during 2005. This amounts to basic and fully diluted earnings of $0.06 per outstanding share in the first nine months of 2006, as compared to basic and fully diluted earnings of $0.04 per outstanding share during the first nine months of 2005.

Net income and earnings per share for the third quarter of 2006 were lower than the third quarter of 2005, primarily due to a charge for income taxes of approximately $215,000 in 2006 as compared to $0 in the same period in the prior year. Additionally, interest expense was higher in the third quarter of 2006 than 2005 by approximately $80,000.

For the nine months ended September 30, 2006, we attribute our improvement in operating results primarily to the increased management fees generated at the casinos we manage for the Cheyenne and Arapaho Tribes of Oklahoma and the absence in 2006 of an approximately $250,000 expense related to the expiration during the first quarter of 2005 of an option to acquire the real property that houses our Gold Rush and Gold Digger’s casinos in Cripple Creek, Colorado.

Overview:

Our principal business is the management, operation and development of gaming facilities in emerging and established gaming jurisdictions. Currently, we operate three casinos in Cripple Creek, Colorado — Gold Rush Hotel and Casino, Gold Digger’s and Uncle Sam’s. We also manage two Native American gaming operations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma, Lucky Star - Concho and Lucky Star - Clinton. Lucky Star - Concho is located on U.S. Highway 81, just north of the Oklahoma community of El Reno. Lucky Star - Clinton is located 60 miles west of Lucky Star - Concho in the community of Clinton, Oklahoma on Old Route 66 near Interstate I-40.

We continually evaluate other management, consulting, development and acquisition opportunities related to gaming that have the potential to generate new revenue streams for us. New opportunities for which we have an agreement or have received the appropriate licenses include:

·                  In January 2005, the Minnesota Racing Commission voted to grant class A and B licenses to own and operate a harness racetrack and card room to North Metro Harness Initiative, LLC, (“North Metro”) in which we own a 50% membership interest. These licenses permit North Metro to develop and run a harness racetrack and a 50-table card room in the City of Columbus, Anoka County, Minnesota. Lawsuits against the Minnesota Racing Commission (“MRC”) challenging the validity of those licenses concluded in favor of MRC and North Metro during July 2006. We are now actively engaged in pre-construction activities and arranging construction financing for the project.

·                  On March 24, 2006 we entered into a Gaming Management Agreement with the Otoe-Missouria Tribe of Indians in north central Oklahoma. Under this agreement, we will manage the Tribe’s Seven Clans Paradise Casino near Ponca City, Oklahoma. Southwest will receive management fees equal to 20 percent of the net revenue from gaming and non-gaming activity at the facility. The Management Agreement has a five-year term beginning on the date Southwest assumes management of the facility. We have submitted the agreement to the National Indian Gaming Commission (“NIGC”) for approval. The agreement is not effective, and we cannot provide any services or receive any compensation under the agreement until we receive that approval. At this time we can not predict how long the NIGC will take to complete its ongoing

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background investigation of Southwest, the total costs related to the NIGC’s background investigation and approval process that Southwest will be required to pay, if or when the Tribe will respond to outstanding comments on the management agreement from the NIGC, and if or when the NIGC will approve the management agreement.

Operating segments:

Our executive officers review operating results, assess performance and make decisions related to the allocation of resources on a property-by-property basis. We, therefore, believe that each property is an operating segment. In order to provide more detail in a more understandable manner than would be possible on a consolidated basis, and to facilitate discussion of operating revenue, we have grouped our properties as follows:

 

Casino Management:

Southwest Casino and Hotel Corp. manages two casinos for the Cheyenne and Arapaho Tribes of Oklahoma under the Third Amended and Restated Gaming Management Agreement dated June 16, 1995. This Agreement has been extended twice and currently expires on May 19, 2007. Southwest is working to extend this relationship beyond May 19, 2007, but is uncertain whether we will continue to manage these casinos after that date. We have been invited, along with other management companies, to present our proposal to manage the casinos beyond May 19, 2007 at a Tribal Council meeting on November 18, 2006. If this relationship is not extended, the Company will lose this revenue source in May 2007, which would have a material adverse effect on our operating results.

Lucky Star - Concho

We earned management fees of $896,449 and $1,000,181 from Lucky Star - Concho during the three months ended September 30, 2006 and 2005, respectively, a decrease of 10.4%. We earned management fees of $2,809,052 and $2,355,217 from Lucky Star - Concho during the nine months ended September 30, 2006 and 2005, respectively, an increase of 19.3%. The dramatic increase in management fees for the nine months ended September 30, 2006 as compared to the same period in the prior year is the direct result of the Tribes signing a gaming compact with the state of Oklahoma in April 2005 and the subsequent addition and effective management of the new gaming opportunities permitted under that compact. The compact allows Lucky Star — Concho to offer its patrons card games including poker, as well as certain Class III electronic games permitted under the compact, all of which have resulted in a significant increase in revenue. The decrease in management fees in the third quarter of 2006 compared to the same period in the prior year is due to greater competition from other tribal gaming operations closer to Oklahoma City and from Remington Park, a racetrack in Oklahoma City that began offering electronic gaming near the end of 2005, and increases in fuel costs that reduce patrons’ discretionary spending. We anticipate that the fourth quarter revenues will also be adversely affected by increased competition.

Lucky Star - Clinton

We earned management fees of $571,743 and $427,699 from Lucky Star - Clinton during the three months ended September 30, 2006 and 2005, respectively, an increase of 33.7%. We earned management fees of $1,752,953 and $1,285,568 from Lucky Star - Clinton during the nine months ended September 30, 2006 and 2005, respectively, an increase of 36.4%. The increase in management fees is the result of an improved mix of games on the floor, including the introduction of slim line cabinets that allowed us to put more gaming machines in the same amount of space, and the successful renegotiation of machine vendor fees on a number of our more popular electronic games. Even though Lucky Star — Clinton is at capacity in terms of how many gaming machines and customers the facility can accommodate, especially on weekends, we continue to anticipate increases in revenues during the fourth quarter of 2006 compared to the comparable period in the prior year.

In addition, in early November 2006, we received a Class ‘B’ license under which Lucky Star - Clinton will also offer Class III games permitted under the gaming compact with

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the State of Oklahoma. We anticipate that providing these additional gaming opportunities will further improve operating results at this facility.

Other Matters

On March 4, 2006, the Tribes rescinded their prior approval of an amendment to the Gaming Management Agreement under which we were to assist them in developing an additional gaming facility at Canton Lakes, Oklahoma. This amendment had been submitted to the NIGC for approval in September 2003, but that approval had not been received.

In conjunction with seeking a continued gaming management relationship with the Tribes beyond May 2007, we are also discussing with the Tribes the possibilities of expanding both the Concho and Clinton facilities.

Casino operations:

Gold Rush/Gold Digger’s Casino Results

		Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Percentage Increase (Decrease)		Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005			Percentage Increase (Decrease)
Casino revenues		$	3,957,770		$	3,872,556		2.2	%	$	10,856,649		$	10,799,025		0.5	%
Total revenues		4,166,323			4,089,986			1.9	%	11,412,467			11,290,598			1.1	%
EBITDA		1,127,107			1,154,387			(2.4	%)	2,651,195			2,696,442			(1.7	%)
Operating margin		27.1		%	28.2		%			23.2		%	23.9		%

 

Three Months Ended September 30, 2006 v September 30, 2005:

Gold Rush/Gold Digger’s (“GRGD”) recorded a 2.2% increase in casino revenues for the quarter although the Cripple Creek market increased by less than 1.0%. GRGD attributes this increase in gaming revenues to increased marketing efforts. Due to increased marketing costs, EBITDA fell slightly (2.4%) compared to prior year. We continue to see high gas prices reduce the number of visits our patrons are able to make as most live about an hour’s drive from Cripple Creek. We also have increased competition as a nearby competitor expanded their facility by about 80 machines year-over-year, which has had an adverse impact on us. We expect this condition to stabilize in 2007.

Nine Months Ended September 30, 2006 v September 30, 2005:

Gold Rush/Gold Digger’s recorded a 0.5% increase in casino revenues for the nine months ended September 30, 2006 compared to prior year. The market increased by less than 2.0% for the same time period. GRGD revenue has been adversely impacted by a casino expansion at a nearby competitor that increased their slot capacity by more than 80 machines. We expect this situation to stabilize in 2007. For the period, EBITDA is about flat compared to prior year. We expect operating results in the fourth quarter of 2006 to be improved over the comparable period in the prior year, unless we encounter adverse weather conditions on weekends in the fourth quarter of 2006.

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Uncle Sam’s Casino Results:

		Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Percentage Increase (Decrease)		Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005			Percentage Increase (Decrease)
Casino revenues		$	258,620		$	265,694		(2.7	%)	$	730,427		$	737,215		(0.9	%)
Total revenues		279,601			266,543			4.9	%	752,043			739,669			1.7	%
EBITDA		(89,389		)	(131,831		)	32.2	%	(329,946		)	(454,002		)	27.3	%
Operating margin		(32.0		%)	(49.5		%)			(43.9		%)	(61.4		%)

 

Three Months Ended September 30, 2006 v September 30, 2005:

Uncle Sam’s enjoyed a 4.9% increase in total revenues for the third quarter compared to prior year. Late in the second quarter, Uncle Sam’s opened the Altitude Night Club & Bar, which helped increase traffic and revenues during the quarter, particularly on weekends. The higher revenues along with reduced expenses helped improve EBITDA by more than $40,000.

Nine Months Ended September 30, 2006 v September 30, 2005:

Uncle Sam’s increased total revenues by 1.7% relative to prior year in large part due to the new Altitude Night Club & Bar that opened late in the second quarter of 2006. These higher revenues along with reduced expenses allowed Uncle Sam’s to improve EBITDA by nearly $125,000. Uncle Sam’s also did not have the burden of the poker room in 2006, which reduced expenses this year and, in turn, helped improve EBITDA.

Project Development costs for the three and nine months ended September 30, 2006 were $47,642 and $225,125 as compared to $138,194 and $653,739 for the three and nine months ended September 30, 2005. Project development costs for the nine months ended September 30, 2005 included a $249,778 write off of an option to acquire the Gold Rush/Gold Digger’s real estate, which expired unexercised on February 28, 2005. In addition, for the three and nine months ended September 30, 2005, the Company consolidated the results of operations of North Metro, recording development expenses of $124,192 and $379,960 net of minority interest in the loss from consolidated subsidiary of $62,096 and $189,980. North Metro is no longer consolidated in our financial statements. See Note 6 to our consolidated financial statements.

In the first nine months of 2006, we continued to pursue other gaming opportunities. The pursuit of these new initiatives resulted in signing a five-year management contract with the Otoe-Missouria Tribe of Oklahoma. We have submitted the agreement to the National Indian Gaming Commission for approval. We cannot begin to perform work under this contract until it is approved. Currently, the NIGC is performing a background investigation of the Company, its executive officers, directors and shareholders as part of its contract approval process. In addition, the NIGC has reviewed the agreement and provided comments on it to Southwest and the Tribe on two occasions. The Tribe has not responded to the second set of comments. At this time, the Company cannot predict how long the background investigation may take to complete, the total costs related to the background investigation and approval process to be paid by the Company, if or when the Tribe will respond to the NIGC comments, and if or when NIGC approval of the agreement may be received.

In February 2006, we formed a new subsidiary to pursue opportunities in the charitable gaming market, Southwest Charitable Enterprises, LLC. For the three and nine months ended September 30, 2006, this entity has incurred approximately $37,285 and $88,523 in expenses, which are included in project development costs.

Corporate expenses were $741,101 and $552,419 during the three months ended September 30, 2006 and 2005, respectively an increase of $188,682. Corporate expenses were $2,053,397 and $1,950,283 during the nine months

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ended September 30, 2006 and 2005, respectively, an increase of $103,114. The increase in corporate expenses during the three months ended September 30, 2006 over the comparable period in 2005 is primarily due to increased salary expense of approximately $52,000, increased board fees of approximately $46,000, increased fees with the National Indian Gaming Association of $31,000 and increased travel related expenses of $30,000. The increase in corporate expenses for the nine months ended September 30, 2006 over the comparable period in the prior year is primarily due to increased board fees and salaries of approximately $195,000 offset by reduced legal fees of approximately $98,000 due in part to the settlement of a contract dispute that had required us to pay significant legal expenses during the prior year period.

Interest Expense was $307,699 and $228,389 for the three months ended September 30, 2006 and 2005, respectively and $892,222 and $751,067 for the nine months ended September 30, 2006 and 2005, respectively. Interest expense increased 34.7% and 18.8% during the three and nine months ended September 30, 2006 when compared to the same period in 2005 as a result of interest incurred in connection with the $2,500,000 loan we secured in order to meet our obligations to fund capital contributions to North Metro Harness Initiative, LLC.

Minority interest in loss of consolidated subsidiary and loss of unconsolidated subsidiary, net of tax benefit represents our partner’s share of the losses during the three and nine months ended September 30, 2005 and our share of the losses during the three and nine months ended September 30, 2006. During the three and nine months ended September 30, 2005 the results of North Metro were consolidated with our financial statements; however on October 20, 2005 North Metro became an unconsolidated subsidiary. See Note 6 to our consolidated financial statements for our evaluation of the financial reporting for our 50% interest in North Metro.

Effective tax rate for the three and nine months ended September 30, 2006 was 26.3% and 30.8%. At December 31, 2003, the Company established a deferred tax asset relating to net operating losses. Management evaluated all evidence and determined that a portion of the deferred tax assets relating to net operating losses would be utilized in 2006 based upon forecasted income for the Company in 2006. During the three and nine months ended September 30, 2006, the Company has recorded a tax provision. As of September 30, 2006 the remaining deferred tax asset was utilized. In addition, during the three months ended September 30, 2006, the Company reduced a portion of the valuation allowance to offset net income for the nine months ended September 30, 2006, as net income exceeded management’s forecasted income. Management evaluated the valuation allowance against the deferred tax assets at September 30, 2006 and did not reverse the valuation allowance due to the uncertainty of continuing the management relationship with the Cheyenne and Arapaho Tribes past May 2007. As of September 30, 2006, the Company’s deferred tax asset is zero.

We did not record a tax benefit for the losses during the three and nine months ended September 30, 2005, primarily due to the valuation allowance for deferred tax assets and lack of certainty that net operating loss carryforwards available to offset future income would not be limited under Section 382 of the Internal Revenue Code of 1986.

Liquidity and Capital Resources:

We generate cash flow from our Oklahoma management activities and casino operations in Colorado. We use the cash flows generated to pay off debt in accordance with our agreements, fund reinvestment in existing properties for both refurbishment and replacement of assets, and to pursue additional growth opportunities. To balance our cash requirements we supplement the cash flows generated by our operations with funds provided by financing activities.

Our cash flows from operations will be sufficient to meet our normal operating and debt repayment requirements during the next twelve months. If we are unsuccessful in continuing our management relationship with the Cheyenne and Arapaho Tribes past May 2007, we will likely have to raise additional capital through debt or equity financing for periods after the next 12 months. North Metro will need additional debt financing to fund the development of the racetrack and card room in Minnesota.

We continue to review additional opportunities to acquire or invest in companies, properties and other investments that meet our strategic and return on investment criteria. If we complete a material acquisition or investment, our operating results and financial condition could change significantly in future periods. In addition, any new opportunity would in all likelihood require new equity or debt financing.

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Net cash provided by operating activities during the nine months ended September 30, 2006 was $3,478,163 compared to $1,470,927 during the same period in the prior year, an increase of $2,007,236. The increase between periods is primarily due to an increase in management fees of $921,220, decreased payments of accounts payable and accrued liabilities of $692,255 and a decrease in project development costs of $165,336, net of the write-off of an option to purchase the real estate at Gold Rush, which expired unexercised in February 2005, of $249,778.

Net cash used in investing activities for the first nine months of 2006 was $843,036 compared to net cash used in investing activities of $801,242 during the first nine months of 2005, an increase of $41,794. The increase in use of cash between the periods was due primarily to an increase in our investment in North Metro of approximately $339,000 (North Metro was consolidated in the prior year and is unconsolidated in the current year, see Note 6 to our consolidated financial statements) offset by a decrease in purchases of property and equipment of approximately $282,000.

Net cash used in financing activities for the nine months ended September 30, 2006 was $2,074,891 compared to net cash provided by financing activities for the nine months ended September 30, 2005 of $246,286. During the nine months ended September 30, 2006 we made payments of $1,976,891 on long-term borrowings. During the nine months ended September 30, 2005 we made payments on long-term borrowings and notes payable of $918,039, which were offset by funding of $1,140,325 from our minority partner in NMHI. At that time, North Metro was a consolidated subsidiary of Southwest and those contributions were reported as cash provided by financing activities. The increase in payments on long-term obligations during 2006 is primarily related to our $2.5 million term note entered into in October 2005. For the nine months ended September 30, 2006, we made principal payments of $1.25 million relating to the term note. During 2006, we also paid $110,000 to three officers related to unpaid compensation from prior periods.

Line of Credit. On October 20, 2005, we established a $450,000 line of credit with Crown Bank of Minneapolis, Minnesota that replaced a $450,000 line of credit with Associated Bank of Minneapolis. The line of credit is due April 30, 2007 with a variable interest rate at one percent above prime but not less than 7.5% (9.25% at September 30, 2006). As of September 30, 2006, the outstanding balance was $446,292. Our three principal officers have guaranteed up to $300,000 of this line of credit.

Term Note. On October 20, 2005, the Company entered into a term loan to borrow $2.5 million. The loan is due April 30, 2007 with a variable interest rate at one percent above prime but not less than 7.5% (9.25% at September 30, 2006). The repayment period will extend to May 31, 2008, if the Company achieves certain business goals. Twelve shareholders of the Company, including our three principal officers and a member of our board of directors, guarantee the loan. The term note provided for interest only until April 1, 2006 at which time we began making principal payments of $208,333 per month plus interest.

The Company entered into an amendment of its term loan with Crown Bank in October 2006. The agreement has been amended to allow the Company repay the remaining principal in seven equal payments through April 30, 2007 as opposed to the original agreement under which the Company would have been required to repay the remaining principal in five equal principal payments through March 1, 2007. Monthly principal payments will be $148,810 as compared to the original payments of $208,333.

Equipment Loan. On December 23, 2005, the Company negotiated a loan of $460,324 to pay off outstanding payables in connection with the installation of a player tracking system at our three casinos in Cripple Creek, Colorado. The loan is for a term of 48 months with interest equal to the prime rate, which is 8.25% as of September 30, 2006. The outstanding balance as of September 30, 2006 was $383,603.

Effects of Current Economic and Political Conditions:

Competitive Pressures:

Many casino operators are either entering or expanding in our markets — Colorado and Oklahoma — thereby increasing competition. As companies have completed new or expanded projects, supply has sometimes grown at a

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faster pace than demand, and competition has increased significantly. Furthermore, several operators, including Southwest, have plans for additional developments or expansions in our markets.

Although, the short-term effect on Southwest of these competitive developments generally has been negative, we are not able to determine the long-term impact, whether favorable or unfavorable, that development and expansion trends and events will have on current or future markets. We believe that the geographic diversity of our operations, our service training, our rewards and customer loyalty programs, and our continuing efforts to improve our facilities will insure continued customer loyalty and will enable us to face the competitive challenges present within our industry.

Political Uncertainties:

The casino entertainment industry is subject to political and regulatory uncertainty. From time to time, individual jurisdictions have considered legislation or referendums that could adversely impact our operations. The likelihood or outcome of similar legislation and referendums in the future is difficult to predict.

The casino entertainment industry represents a significant source of tax revenues to the various jurisdictions in which casinos operate. From time to time, various state and federal legislators and officials have proposed changes in tax laws, or in the administration of tax laws, that would affect the industry. It is not possible to determine with certainty the scope or likelihood of possible future changes in tax laws or in the administration of tax laws. If adopted, changes in tax law could have a material adverse effect on our financial results.

Significant Accounting Policies and Estimates:

We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Certain of our accounting policies, including, but not limited to, the estimated lives assigned to our assets, the determination of bad debt, asset impairment, and income taxes, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. We cannot assure you that our actual results will not differ from our estimates. For a discussion of our significant accounting policies and estimates, please refer to Management’s Discussion and Analysis or Plan of Operation and Notes to Consolidated Financial Statements presented in the 2005 Financial Statements included in our Annual Report on Form 10-KSB.

Share-Based Compensation Expense:

On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires us to measure and recognize compensation expense for all share-based payment awards made to employees and directors, including employee and director stock options and employee and director stock purchases, based on estimated fair values. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). We apply certain provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS 123(R) requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that we ultimately expect to vest is recognized as expense over the requisite service periods in our consolidated statement of operations. SFAS 123(R) supersedes our previous accounting under the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). As permitted by SFAS 123, we measured compensation cost for options granted before January 1, 2006, in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees and related interpretations. Accordingly, no accounting recognition was given to stock options granted at fair market value until they were exercised. Upon exercise, net proceeds, including tax benefits realized, were credited to equity.

We adopted SFAS 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of our fiscal year 2006. In accordance with the modified prospective transition method, our consolidated financial statements for prior periods have not been restated to

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reflect, and do not include, the impact of SFAS 123(R). Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Share-based compensation expense recognized in our unaudited consolidated statement of operations for the three and nine months ended September 30, 2006 was $40,294 and $125,705 and included both compensation expense for share-based payment awards granted before, but not vested as of January 1, 2006 based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the share-based payment awards granted after January 1, 2006. There was no share-based compensation expense related to employee and director stock options and employee and director stock purchases recognized during the three and nine months ended September 30, 2005.

Upon adoption of SFAS 123(R), we continue to use the Black-Scholes option pricing method that we had used to establish fair value of options granted before January 1, 2006. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility and actual and projected employee stock option exercise behaviors. Any changes in these assumptions may materially affect the estimated fair value of the share-based award.

In November 2005, the FASB issued FSP FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). FSP 123R-3 provides a simplified alternative method to calculate the beginning pool of excess tax benefits against which excess future deferred tax assets (that result when the compensation cost recognized for an award exceeds the ultimate tax deduction) could be written off under Statement 123R. The guidance in FSP 123R-3 was effective on November 10, 2005. We may make a one-time election to adopt the transition method described in FSP 123R-3 before the end of our fiscal year ending December 31, 2006. No tax benefit has been recorded on the share-based compensation for the nine month period ended September 30, 2006.

New Accounting Pronouncements:

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. We are currently evaluating the potential impact of this statement.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109” (Interpretation No. 48). Interpretation No. 48 clarifies the accounting for uncertain tax positions in accordance with SFAS 109, “Accounting for Income Taxes.” Pursuant to Interpretation No. 48, the Company will be required to recognize in its financial statements the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit, based solely on the technical merits of the position as of the reporting date. Only tax positions that meet the “more-likely-than-not” threshold at that date may be recognized. The term “more-likely-than-not” means a likelihood of more than 50 percent. Interpretation No. 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods and transition. The cumulative effect of initially applying Interpretation No. 48 will be recognized as a change in accounting principle as of the date of adoption. We have begun to evaluate the impact of applying this interpretation as of January 1, 2007, the effective date of the interpretation for the Company. We do not expect Interpretation No. 48 to have a material impact on our financial position, results of operation or cash flows.

Non-GAAP Financial Measures:

Our executive officers consider “EBITDA” (earnings before interest, taxes, depreciation and amortization) a useful tool for measuring the operating performance of Southwest. EBITDA is also a widely used measure of operating performance in the gaming industry and a principal basis for valuation of gaming companies. We use EBITDA to establish budgets, analyze results as compared to our budgets, and as a basis for incentive compensation for some personnel. However, EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States and should not be considered an alternative to net income, cash flows from operating activities, or other performance measures derived in accordance with accounting principles generally accepted in the United States as indicators of our operating performance or as measures of our liquidity. Southwest has significant

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uses of cash flows, including capital expenditures, interest payments and debt principal repayments that are not reflected in our EBITDA calculations. Our management uses EBITDA, and we present it in this discussion and analysis, only as a supplement to measures prepared in accordance with accounting principles generally accepted in the United States. Please be aware that other companies in our industry may calculate EBITDA differently than we do, which limits its usefulness as a comparative measure.

Forward-Looking Statements:

This Quarterly Report on Form 10-QSB contains “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements often contain words such as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “continue” or “pursue,” or the negative or other variations of those words or comparable terminology. In particular, they include statements relating to, among other things, future actions, new projects, strategies, future performance, the outcome of contingencies such as legal proceedings and future financial results. We have based these forward-looking statements on our current expectations and projections about future events.

We caution the reader that forward-looking statements involve risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include, but are not limited to, the following factors as well as other factors described from time to time in our reports filed with the Securities and Exchange Commission:

·                  the continuation or extension of management contracts with our Tribal partners;

·                  our ability to build and maintain healthy personal and professional relationships with tribes and their officials;

·                  the potential change of policies and personnel of tribal governments, which could adversely affect our relationships;

·                  the effects of competition, including location of competitors and operating and market competition;

·                  access to available and feasible financing;

·                  our ability to recoup costs of capital investments through higher revenues;

·                  success of our customer tracking and customer loyalty programs;

·                  abnormal gaming holds;

·                  litigation outcomes and judicial actions, including gaming legislation, referenda and taxation;

·                  the effect of economic, credit and capital market conditions on the economy in general, and on gaming companies in particular;

·                  construction factors, including delays, zoning issues, environmental restrictions, soil and water conditions, weather and other hazards, site access matters and building permit issues;

·                  the effects of environmental and structural building conditions relating to the Company’s properties;

·                  changes in laws (including increased tax rates), regulations or accounting standards, third-party relationships and approvals, and decisions of courts, regulators and governmental bodies; and

Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Risk Factors

In reviewing this quarterly report on Form 10-QSB, you should carefully consider the matters concerning Southwest Casino Corporation described under the heading “Risk Factors” in the annual report on Form 10-KSB filed by the Corporation on March 31, 2006, which are incorporated in this document by reference.

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Item 3. Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) designed to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that this information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our management evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2006. Based on that evaluation and the similar evaluations of our disclosure controls and procedures as of December 31, 2005 and March 31, 2005, our principal executive officer and principal financial officer concluded that as of those dates our disclosure controls and procedures were ineffective because of the material weakness in our internal control over financial reporting described below. Notwithstanding the existence of this material weakness in our internal control over financial reporting, our management, including our principal executive officer and principal financial officer, believes that the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

A material weakness is a significant deficiency that, by itself or in combination with other control deficiencies, results in more than a remote likelihood that a material financial misstatement will not be prevented or detected. In connection with their audit of our financial statements for the year ended December 31, 2005, our independent auditors determined that a material adjustment to our consolidated financial statements was necessary related to the transition of North Metro Harness Initiative, LLC from a consolidated to an unconsolidated subsidiary.

Our management determined that this material weakness resulted from the relatively small size of our accounting department. To address this issue, we have hired a new Chief Financial Officer, Ms. Tracie Wilson, who began working for us in June. Ms. Wilson is a Certified Public Accountant with experience in public company financial reporting. Ms. Wilson provides us with additional expertise in preparation of our financial statements, including issues related to accounting for matters that are outside the ordinary course of our business. We believe the addition of Ms. Wilson will eliminate the material weakness in our internal control over financial reporting that was previously identified by our independent auditors. However, because Ms. Wilson joined Southwest late in the second quarter, our management has not had sufficient time to evaluate the impact of Ms. Wilson’s work on the effectiveness of our disclosure controls and procedures over the full reporting period.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting during the third quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

See Items 3 and 9 of our Annual Report on Form 10-KSB, filed March 31, 2006, for a description of our pending legal proceedings.

North Metro Harness Initiative, LLC (“North Metro”), in which Southwest Casino and Hotel Corp. owns a 50 percent membership interest, intervened in litigation brought by an anti-gambling citizens group against the Minnesota Racing Commission in an attempt to invalidate the class A and B racing licenses granted to North Metro. In June 2005, the District Court issued a summary judgment order dismissing plaintiff’s claims and in favor of the Minnesota Racing Commission and North Metro. On June 6, 2006 the Minnesota Court of Appeals affirmed the decision of the District Court to dismiss the case. The plaintiffs did not file a timely request for review of the appellate court ruling with the Minnesota Supreme Court, ending this litigation in July 2006.

Item 6. Exhibits

The following exhibits are attached to this Quarterly Report on Form 10-QSB:

31.1		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14.
31.2		Certification of Principal Financial and Accounting Officer Pursuant to SEC Rule 13a-14
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial and Accounting Officer Pursuant to 18.U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

In accordance with the requirements of the Securities and Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 14, 2006	SOUTHWEST CASINO CORPORATION
	By:	/s/ James B. Druck
		James B. Druck
		Chief Executive Officer (principal executive officer)
	By:	/s/ Thomas E. Fox
		Thomas E. Fox
		President and Chief Operating Officer (principal financial and accounting officer)

 

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