Nevada Gold & Casinos, Inc.

Consolidated Balance Sheets

		January 28,			April 30,
		2007			2006
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,478,677		$	4,296,154
Restricted cash			1,050,000			—
Accounts receivable			1,005,836			940,177
Accounts receivable - affiliates			227,186			499,999
Other current assets			423,726			428,532
Total current assets			4,185,425			6,164,862
Investments in unconsolidated affiliates			36,241,271			35,691,747
Investments in development projects			4,734,144			6,876,527
Notes receivable - affiliates			3,521,066			3,637,099
Notes receivable - development projects			19,336,380			22,667,272
Goodwill			5,462,918			5,462,918
Property and equipment, net of accumulated depreciation
of $1,126,820 and $622,876 at January 28, 2007 and
April 30, 2006, respectively			2,241,546			2,580,093
Deferred tax asset			5,678,620			1,460,722
Other assets			4,476,498			3,601,850
Total assets		$	85,877,868		$	88,143,090
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	1,123,079		$	1,550,405
Accrued interest payable			—			41,737
Other accrued liabilities			278,935			358,159
Guaranty liabilities			4,610,000			—
Long-term debt, current portion		$	6,164,555			7,051,845
Total current liabilities			12,176,569			9,002,146
Long-term debt, net of current portion			55,022,923			53,414,815
Deferred income			11,359			406,632
Other liabilities			749,652			157,633
Total liabilities			67,960,503			62,981,226
Commitments and contingencies			—			—
Minority interest			246,200			278,674
Stockholders' equity:
Common stock, $0.12 par value per share; 25,000,000
shares authorized; 13,935,330 and 13,912,330 shares
issued and 12,939,130 and 12,970,330 shares outstanding
at January 28, 2007 and April 30, 2006, respectively			1,672,240			1,669,479
Additional paid-in capital			18,438,720			18,122,632
Retained earnings			7,774,979			14,873,589
Treasury stock, 996,200 and 942,000 shares at January 28,
2007 and April 30, 2006, respectively			(10,216,950	)		(9,781,669	)
Accumulated other comprehensive income (loss)			2,176			(841	)
Total stockholders' equity			17,671,165			24,883,190
Total liabilities and stockholders' equity		$	85,877,868		$	88,143,090

 

The accompanying notes are an integral part of these consolidated financial statements.

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Nevada Gold & Casinos, Inc.

Consolidated Statements of Operations

(unaudited)

 

		Three Months Ended						Nine Months Ended
		January 28, 2007			Janaury 22, 2006			January 28, 2007			Janaury 22, 2006
Revenues:
Casino		$	1,417,141		$	1,083,053		$	4,608,249		$	4,359,820
Food and beverage			246,647			237,657			1,000,966			1,216,868
Other			32,111			26,508			102,510			96,698
Management fee			27,056			—			124,200			—
Credit enhancement fee			2,304,796			1,810,540			6,458,342			5,463,961
Gross revenues			4,027,751			3,157,758			12,294,267			11,137,347
Less promotional allowances			(263,949	)		(236,664	)		(944,491	)		(1,169,321	)
Net revenues			3,763,802			2,921,094			11,349,776			9,968,026
Expenses:
Casino			428,364			626,851			1,238,340			2,152,800
Food and beverage			118,335			215,882			599,306			690,093
Marketing and administrative			753,523			542,968			2,348,391			1,483,035
Facility			74,740			85,546			246,251			189,506
Corporate expense			1,581,033			1,615,425			4,868,959			4,226,455
Legal expense			270,388			400,027			1,223,604			874,952
Depreciation and amortization			276,183			246,100			812,685			461,927
Write-off of notes receivable related to
Native American gaming projects			—			—			3,171,958			—
Write-off of project development cost			15,000			—			388,100			—
Other			22,301			28,918			74,710			76,568
Total operating expenses			3,539,867			3,761,717			14,972,304			10,155,336
Operating income (loss)			223,935			(840,623	)		(3,622,528	)		(187,310	)
Non-operating income (expenses):
Earnings (loss) from unconsolidated affiliates			(1,411,615	)		428,118			(3,812,476	)		5,686,882
Interest expense, net			(948,707	)		(559,985	)		(2,720,960	)		(1,347,639	)
Gain on sale of marketable securities			11,849			105,374			48,646			105,374
Gain on termination of development contract			249,894			—			249,894			—
Minority interest			(460,092	)		(363,403	)		(1,286,831	)		(981,379	)
Income (loss) before income
tax (expense) benefit			(2,334,736	)		(1,230,519	)		(11,144,255	)		3,275,928
Income tax (expense) benefit			845,320			465,124			4,045,646			(1,169,235	)
Net income (loss)		$	(1,489,416	)	$	(765,395	)	$	(7,098,609	)	$	2,106,693
Per share information:
Net income (loss) per common share - basic		$	(0.12	)	$	(0.06	)	$	(0.55	)	$	0.16
Net income (loss) per common share -
diluted		$	(0.12	)	$	(0.06	)	$	(0.55	)	$	0.16
Basic weighted average number of shares
outstanding			12,937,427			13,028,525			12,937,004			12,946,118
Diluted weighted average number of shares
outstanding			12,937,427			13,028,525			12,937,004			13,690,800

 

The accompanying notes are an integral part of these consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1.   Basis of Presentation 

The interim financial information included herein is unaudited. However, the accompanying financial statements include all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly our Consolidated Balance Sheets at January 28, 2007 and April 30, 2006, Consolidated Statements of Operations for the three and nine month periods ended January 28, 2007 and January 22, 2006, and Consolidated Statements of Cash Flows for the nine months ended January 28, 2007 and January 22, 2006. Although we believe the disclosures in these financial statements are adequate to make the interim information presented not misleading, certain information relating to our organization and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended April 30, 2006 and the notes thereto included in our Annual Report on Form 10-K/A. The results of operations for the three and nine months ended January 28, 2007 are not necessarily indicative of the results expected for the full year.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period and disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, investments, intangible assets and goodwill, property, plant and equipment, income taxes, insurance, employment benefits and contingent liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. (See guarantees discussed in Note 13.)

Certain reclassifications have been made to conform prior year financial information to the current period presentation. Those reclassifications did not impact working capital, total assets, total liabilities, net income or stockholders’ equity.

Fiscal Year-End

 

The Company’s fiscal year ends on the last Sunday in April. This fiscal year creates more comparability of the Company’s quarterly operations, by generally having an equal number of weeks (13) and weekend days (26) in each fiscal quarter. Periodically, this system necessitates a 53-week year, which was the case in fiscal 2006. Fiscal 2007 commenced on May 1, 2006 and ends on April 29, 2007.

Note 2.   Revenue Recognition 

In accordance with gaming industry practice, we recognize casino revenues as the net win from gaming activities, which is the difference between gaming wins and losses. Casino revenues are net of accruals for anticipated payouts of progressive slot jackpots which are recorded as a progressive slot jackpot liability. Revenues from food, beverage, entertainment, and the gift shop are recognized at the time the related service or sale is performed or made.

The retail value of food and beverage and other services furnished to guests without charge is included in gross revenue and deducted as promotional allowances. We record the redemption of coupons and points for cash as a reduction of revenue. These amounts are included in promotional allowances in the accompanying consolidated statements of operations. The estimated cost of providing such complimentary services that is included in casino expense in the accompanying consolidated statements of operations is as follows:

		Three Months Ended						Nine Months Ended
		January 28, 2007			January 22, 2006			January 28, 2007			January 22, 2006
Food and beverage		$	166,343		$	192,834		$	448,041		$	733,138
Other			1,448			2,121			10,681			16,831
Total cost of complimentary services		$	167,791		$	194,955		$	458,722		$	749,969

 

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Note 3. Restricted Cash

At January 28, 2007, a $1,050,000 Certificate of Deposit was pledged to secure a $1 million operating line of credit for American Racing and Entertainment, LLC.

Note 4.   Investments in Unconsolidated Affiliates and Investments in Development Projects

We hold investments in various unconsolidated affiliates which are accounted for using the equity method of accounting under APB No.18. Our principal equity method investments are gaming facilities. Additionally, we have one equity method investee engaged in land development and one equity investee engaged in the operation of a restaurant franchise. As of January 28, 2007, the amount of consolidated retained earnings which represent undistributed earnings from our unconsolidated affiliates is approximately $20.2 million. Our net ownership interest, investments in and earnings from our unconsolidated affiliates are as follows:  

 

		Net OwnershipInterest						Investment						Equity in Earnings (Loss) Three Months Ended						Equity in Earnings (Loss) Nine Months Ended
Unconsolidated affiliates:		Janaury 28, 2007			April 30, 2006			Janaury 28, 2007			April 30, 2006			Janaury 28, 2007			January 22, 2006			Janaury 28, 2007			January 22, 2006
		(Percent)
Isle of Capri - Black Hawk, L.L.C. (1)			43.0			43.0		$	21,677,518		$	21,146,365		$	561,180		$	490,798		$	2,179,153		$	4,874,855
Route 66 Casinos, L.L.C. (2)			51.0			51.0			4,509,183			4,509,183			—			—			—			874,707
American Racing and Entertainment, LLC (3)			29.7			40.0			9,362,879			9,480,506			(2,076,991	)		(114,763	)		(6,127,627	)		(114,763	)
Buena Vista Development Company, LLC (4)			35.0			25.0			173,505			176,753			(2,550	)		—			(3,248	)		—
Sunrise Land and Mineral Corporation (5)			50.0			50.0			518,186			378,940			106,746			52,083			139,246			52,083
Restaurant Connections International, Inc. (6)			34.0			34.0			—			—			—			—			—			—
Total investments in unconsolidated affiliates								$	36,241,271		$	35,691,747
Total earnings (loss) from unconsolidated affiliates														$	(1,411,615	)	$	428,118		$	(3,812,476	)	$	5,686,882

 

(1)	Separate financial statements for this entity are included herein.
(2)	Equity method of accounting is utilized despite our ownership interest being greater than 50%. Effective with Route 66 Casinos’ calendar quarter ended September 30, 2005, we discontinued the recording of any estimated earnings due to the sale and the termination of the equipment leases. See Note 14.
(3)	Represents our equity investment in a racing and gaming development project in the State of New York. On January 18, 2007, the partners of American Racing were required to make a $3 million capital contribution in amounts proportionate to their ownership or be diluted to a rate of 150% of the contribution. We elected to forgo our proportionate contribution, thus our ownership percentage was reduced to 29.70%. In February 2007, our ownership percentage was further reduced to 25.05%.
(4)	This is an investment in a Native Indian gaming development project in the State of California. At May 5, 2006, our ownership interest increased to 30%. At November 5, 2006, our ownership interest increased to 35%.
(5)	Represents our equity investment in a real estate investment and mining project.
(6)	Investment in RCI was reduced to zero in fiscal year 2000 because our equity in accumulated losses exceeded our investment.

We also hold investments in various development projects that we consolidate. Our investments in development projects include real estate, gold mining and gaming facilities. Our net ownership interest and capitalized development costs in development projects are as follows:

		Net Ownership Interest						Capitalized Development Costs Investment
Development Projects:		Janaury 28, 2007			April 30, 2006			Janaury 28, 2007			April 30, 2006
		(Percent)
Dry Creek Casino, L.L.C. (1)			69			69		$	445,891		$	682,632
Gold Mountain Development, L.L.C. (2)			100			100			3,431,368			3,367,098
Goldfield Resources, Inc. (3)			100			100			480,812			480,812
Nevada Gold (Tulsa), Inc. (4)			100			100			—			1,783,295
Other (5)			100			100			376,073			562,690
Total investments- development projects								$	4,734,144		$	6,876,527

 

(1)	The remaining 31% that we do not own is recorded as minority interest.
(2)	Acquisition and development costs incurred for approximately 260 acres of real property in the vicinity of Black Hawk, Colorado.

 

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(3)	Acquisition cost incurred for 9,000 acres of mining claims in fiscal year 1999.
(4)	Development cost incurred for Muscogee (Creek) Nation gaming project. On December 8, 2006, we received a $2.2 million payment for fees due under our development agreement with the Muscogee Nation - Tulsa. This payment was in excess of our capitalized development costs of $1.9 million. As a result of this transaction, we mutually and amicably agreed to end our relationship with the Muscogee Nation - Tulsa.
(5)	Development cost incurred for other development projects.

 

Isle of Capri - Black Hawk, L.L.C. (“IC-BH”)

As of January 28, 2007, IC-BH owned and operated two casinos in the state of Colorado. Isle of Capri Casinos, Inc. operates the casinos pursuant to a management agreement with IC-BH for a management fee based upon a percentage of the revenues and operating profits of the casinos. The separate IC-BH consolidated balance sheets as of January 28, 2007 and April 30, 2006 and consolidated statements of income for the three and nine months ended January 28, 2007 and January 22, 2006 are as follows:

Isle of Capri-Black Hawk, L.L.C.

Consolidated Balance Sheets

(unaudited) 

		January 28,			April 30,
		2007			2006
Assets		(in thousands)
Current assets:
Cash and cash equivalents		$	14,633		$	15,245
Accounts receivable - trade			409			516
Accounts receivable - related parties			155			72
Deferred income taxes			361			346
Prepaid expenses and other			2,938			1,795
Total current assets			18,496			17,974
Property and equipment, net			234,347			240,294
Deferred financing costs, net of accumulated amortization			1,384			1,603
Deferred income taxes asset			6,027			3,749
Goodwill and other intangible assets			26,865			26,865
Prepaid deposits and other			2,968			5,199
Total assets		$	290,087		$	295,684
Liabilities and members' equity
Current liabilities:
Current maturities of long-term debt		$	2,029		$	2,025
Accounts payable - trade			1,588			5,968
Accounts payable - related parties			6,449			4,357
Accrued liabilities:
Interest			1,567			2,110
Payroll and related expenses			3,546			4,388
Property, gaming and other taxes			4,327			4,595
Progressive jackpot and slot club awards			2,646			2,944
Other			652			900
Total current liabilities			22,804			27,287
Long-term liabilities:
Long-term debt, less current maturities			203,407			208,098
Deferred income taxes			2,278			—
Total long-term liabilities			205,685			208,098
Total liabilities			228,489			235,385
Members’ equity:
Members’ equity			61,598			60,299
Total members' equity			61,598			60,299
Total liabilities and members' equity		$	290,087		$	295,684

 

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Isle of Capri-Black Hawk, L.L.C.

Consolidated Statements of Income

(unaudited)

		Three Months Ended						Nine Months Ended
		Janaury 28,			Janaury 22,			Janaury 28,			Janaury 22,
		2007			2006			2007			2006
Revenues		(in thousands)						(in thousands)
Casino		$	38,052		$	41,753		$	123,909		$	127,526
Rooms			1,900			1,477			7,584			4,548
Food, beverage and other			4,345			4,991			14,236			15,160
Gross revenues			44,297			48,221			145,729			147,234
Less promotional allowances			(9,510	)		(9,874	)		(31,825	)		(29,899	)
Net revenues			34,787			38,347			113,904			117,335
Operating expenses
Casino			5,657			6,549			18,752			18,421
Gaming taxes			7,286			8,096			23,997			24,774
Rooms			527			344			1,545			1,139
Food, beverage and other			542			1,261			2,660			3,593
Facilities			1,834			2,317			5,982			6,097
Marketing and administrative			8,979			8,977			29,765			27,605
Management fees			1,584			1,764			5,118			5,445
Depreciation and amortization			3,976			3,554			11,921			9,873
Total operating expenses			30,385			32,862			99,740			96,947
Operating income			4,402			5,485			14,164			20,388
Interest expense, net			(3,675	)		(2,783	)		(11,118	)		(8,706	)
Loss on extinguishment of debt						(2,110	)					(2,110	)
Other income			—			119			—			1,135
Income before income taxes			727			711			3,046			10,707
Income tax benefit			663			431			2,107			628
Net income		$	1,390		$	1,142		$	5,153		$	11,335

 

American Racing and Entertainment, L.L.C.

Summarized unaudited financial information for the three and nine months ended December 31, 2006 for American Racing and Entertainment, LLC (“American Racing”) is presented below:

		Three months ended			Nine months ended
		December 31, 2006			December 31, 2006
		(in thousands)			(in thousands)
Gross Revenue		$	20,326		$	36,199
Total Expenses			26,197			52,201
Minority Interest			(350	)		(355	)
Net loss		$	(5,521	)	$	(15,647	)

American Racing operation consists of two racetrack based video gaming facilities which commenced operations on July 4, 2006 and October 26, 2006, respectively.

 

Note 5.   Notes Receivable

Notes Receivable - Related Parties

Clay County Holdings, Inc.

 

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At January 28, 2007, we have a note receivable of $1,741,621 from Clay County Holdings, Inc. ("CCH"). The note bears interest at 12% per annum. The note was modified effective April 30, 2006 to provide for a maturity date of April 30, 2009. As part of the modification, no principal or interest payments are due until July 31, 2007, at which time principal payments of $150,000, plus accrued interest, are due on a quarterly basis, with additional payments due at the time any payments are received by CCH on a note receivable it holds from Restaurant Connections International. The note is additionally secured by a pledge of the net equity of common stock of the Company owned by CCH. The stock is subject to margin calls. In management’s opinion, as of January 28, 2007, the collateral is adequate to repay the note.

Service Interactive, Inc.

At January 28, 2007, we have a note receivable of $1,779,445 from Service Interactive, Inc. ("SI"). The note bears interest of 12% per annum. The note was modified effective April 30, 2006 to provide for a maturity date of April 30, 2009. As part of the modification, no principal or interest payments are due until July 31, 2007, at which time principal payments of $150,000, plus accrued interest, are due on a quarterly basis, with additional payments due at the time any payments are received by CCH on a note receivable it holds from Restaurant Connections International. The note is additionally secured by a pledge of the net equity of common stock of the Company owned by CCH. The stock is subject to margin calls. At the time of the extension of credit by us to SI, SI was a related party because we had the option to acquire common stock of SI and a former director was involved in SI. In management’s opinion, as of January 28, 2007, the collateral is adequate to repay the note.

Notes Receivable - Development Projects

At January 28, 2007, we have notes receivable of $19.3 million related to the development of gaming/entertainment projects. Through our wholly-owned subsidiary, Nevada Gold BVR, L.L.C., we currently own a 35% interest in Buena Vista Development and have a $14.8 million note receivable. This note bears an interest rate of prime plus 1%. In addition, $3.2 million is represented by a note receivable from Big City Capital, LLC, a third party. The note bears interest at a rate of 10% and is payable on or before ten years from the date of the note, with earlier repayment required out of cash flow from operations of such gaming/entertainment projects. This note receivable is guaranteed by an individual independent of us.

In addition to these two notes, we also made a loan to the La Jolla Band Indian tribe for $1.3 million. This note bears an average interest rate of 9% per annum with a maturity date based on the availability of project financing and/or cash flow from operations.

The repayment of these loans and accrued interest will be largely dependent upon the ability to obtain financing at each development project and/or the performance of each development project.

Note 6.   Long-Term Debt  

Long-Term Financing Obligations

Our long-term financing obligations are as follows:

		January 28,			April 30,
		2007			2006
$55.0 million Revolving Credit Facility, 8.5% interest, maturing
June 2008		$	55,000,000		$	52,000,000
$3.3 million Note Payable, 11% interest, maturing March 2007			3,272,500			3,272,500
$5.9 million Note Payable, LIBOR plus 450 basis points interest,
quarterly payment equal to distribution from IC-BH until it is
paid in full			1,801,482			3,283,907
$2 million Note Payable, LIBOR plus 425 basis points interest,
amortizing for 48 months with final payment due in January 2008			1,083,333			1,875,000
Automobile Loan, 7.5% interest, amortizing for 60 months with
final payment due in October 2010			30,163			35,253
Total			61,187,478			60,466,660
Less: current maturities			(6,164,555	)		(7,051,845	)
Total long-term financing obligations		$	55,022,923		$	53,414,815

 

The Revolving Credit Facility is secured by our interest in IC-BH and substantially all of our other assets. In addition, we granted to the lender certain pledges and security interests in and to all of our interests in the equity securities of our subsidiaries. Amounts borrowed under the Credit Facility are guaranteed on a joint and several basis by certain of our wholly owned subsidiaries, Black Hawk Gold, Ltd., Gold River, LLC, Nevada Gold BVR, LLC and Nevada Gold NY, Inc. Such guarantees are full and unconditional. The subsidiary guarantors also granted certain pledges and security interests in certain of their assets.

 

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On December 18, 2006, the lender of the $3.3 million note payable exercised his right to demand payment by March 18, 2007. As a result we have classified the note as a current maturity.

Note 7.   Stock-Based Compensation

Adoption of SFAS 123(R)

At January 28, 2007, we have a share-based compensation plan, which is described below.  Prior to May 1, 2006, we accounted for the plan under the recognition and measurement provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). No share-based employee compensation cost related to stock options was recognized in our Consolidated Statements of Operations prior to May 1, 2006, as all options granted under the plan had an exercise price equal to or more than the market value of the underlying common stock on the date of grant.

    

Effective May 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), using the modified prospective transition method. Under this transition method, share-based compensation cost recognized during the three and nine months ended January 28, 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (b) compensation cost for all share-based payments granted subsequent to May 1, 2006, based on the grant date fair value estimated using the Black-Scholes option pricing model. We recognize compensation expense for stock option awards and time-based restricted stock awards on a straight-line basis over the requisite service period of the award (or to an employee's eligible retirement date, if earlier). Performance-based restricted stock awards are recognized as compensation expense based on the fair value of our common stock on the date of grant, the number of shares ultimately expected to vest and the vesting period. Total share-based compensation expense included in our Consolidated Statements of Operations for the three and nine months ended January 28, 2007 is presented in the following table:

		Three Months Ended			Nine Months Ended
		January 28, 2007
Stock options		$	46,631		$	195,460
Restricted stocks
Less: Related tax benefit			(17,007	)		(71,286	)
Total share-based compensation expense, net of tax		$	29,624		$	124,174

 

As a result of adopting SFAS No. 123(R) on May 1, 2006, for the three and nine months ended January 28, 2007 our loss before income tax benefits was higher by $46,631 and $195,460, respectively and our net loss was higher by $29,624 and $124,174, respectively, than if we had continued to account for share-based compensation under APB No. 25.

 

Prior to the adoption of SFAS No. 123(R), we presented all tax benefits from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that cash flows resulting from the benefits of tax deductions in excess of recognized compensation cost be classified as financing cash flows. Accordingly, for the nine months ended January 28, 2007, the $3,637 excess tax benefit from the exercise of stock options classified as a financing cash flow would have been classified as an operating cash flow if we had not adopted SFAS No. 123(R).

Information about our share-based plans

Our 1999 Stock Option Plan, as amended (the “Stock Option Plan”), is discretionary and provides for the granting of awards, including options for the purchase of our common stock and for the issuance of stock appreciation rights, restricted and/or unrestricted common stock and performance stock awards to our directors, officers, employees and independent contractors. The number of shares of common stock reserved for issuance under the Stock Option Plan is 3,250,000 shares, and at January 28, 2007, 583,299 shares were available for grant. The plan is administered by the Compensation Committee (the “Committee”) of the Board of Directors. The Committee has discretion under the plan regarding the vesting and service requirements, exercise price and other conditions, in all cases subject to certain limits, including:

·

The incentive stock option plan allows for the issuance of up to 3.25 million shares, and

 

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·

For stock options, the exercise price of the award must equal the fair market value of the stock on the date of grant, and the maximum term of such an award is ten years

     

To date, the Committee has only awarded stock options under the plan. Our practice has been to issue new shares upon the exercise of stock options. Stock option rights granted prior to fiscal year 2006 under the plan generally have 5-year terms and are fully vested and exercisable immediately. Subsequent option rights granted generally have 3-year or 5-year terms and are exercisable in three or five equal annual installments.

 

A summary of activity under the Company’s share-based payment plans for the nine months ended January 28, 2007 is presented below:

		Shares			Weighted Average Exercise Price			Average Remaining Contractual Term (Year)			Aggregate Intrinsic Value
Outstanding at May 1, 2006			1,121,800		$	8.82
Granted			156,000			4.38
Exercised			(8,000	)		2.75
Forfeited or expired			(102,000	)		11.32
Outstanding at January 28, 2007			1,167,800		$	8.05			2.5		$	14,980
Exercisable at January 28, 2007			1,009,300		$	8.25			2.0		$	14,980

 

The weighted-average grant-date fair value of option granted during the nine month periods ended January 28, 2007 and January 22, 2006 was $1.92 and $4.48, respectively. The total intrinsic value of stock exercised during the nine month periods ended January 28, 2007 and January 22, 2006 was $16,287 and $401,560, respectively. The total income tax benefits from stock option exercised during the nine month periods ended January 28, 2007 and January 22, 2006 were $3,637 and $136,530 respectively. As of January 28, 2007, there was a total of $404,739 of unamortized compensation related to stock options, which cost is expected to be recognized over a weighted-average period of 2.3 years.

Compensation cost for stock options was based on the fair value of each award, measured by applying the Black-Scholes model on the date of grant, using the following weighted-average assumptions:

		Nine Months Ended January 28, 2007
Expected volatility			71.4	%
Expected term			2.5
Expected dividend yield			-
Risk-free interest rate			4.50	%
Forfeiture rate			-

Expected volatility is based on historical volatility on the Company’s stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior. The risk-free interest rate is based on the rates in effect on the grant date for US Treasury instruments with maturities matching the relevant expected term of the award.

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The following table provides pro forma net income and net income per share had the Company applied the fair value method of SFAS No. 123 for the three and nine months ended January 22, 2006:

 

		Three Months Ended			Nine Months Ended
		January 22,			January 22,
		2006			2006
Net income (loss) - as reported		$	(765,395	)	$	2,106,693
Less: total stock-based employee
compensation expense determined
under fair value based , net of
related tax effect			(28,248	)		(86,085	)
Net income (loss) - pro forma		$	(793,643	)	$	2,020,608
Basic earnings (loss) per share:
As reported		$	(0.06	)	$	0.16
Pro forma		$	(0.06	)	$	0.16
Diluted earnings (loss) per share
As reported		$	(0.06	)	$	0.16
Pro forma		$	(0.06	)	$	0.15

Restricted Stock Grants

During the nine months ended January 28, 2007, we issued 15,000 shares of our restricted common stock to a financial consulting firm for their consulting services on a contract entered in June 2006. We terminated the contract in September 2006. The 15,000 shares of restricted stock were recognized as a consulting expense based on the fair value of our common stock on the dates of issuance. The total expenses recorded were $97,750.

A summary of the activity of the Company's restricted stock is presented in the following tables. 

		Nine Months Ended January 28, 2007
		Shares			Weighted Average Grant Date Fair Value
Nonvested - May 1, 2006			-		$	-
Granted			15,000			6.52
Vested			15,000			6.52
Nonvested - January 28, 2007			-		$	-

 

Note 8. Stockholders’ Equity

Stock Repurchase

During the nine months ended January 28, 2007, we repurchased 54,200 shares of common stock at a total cost of $435,281. We repurchased 725,800 shares of common stock at a total cost of $7,696,819 in the nine months ended January 22, 2006.

Note 9. Comprehensive Income

Comprehensive income (loss) consisted of the following:

		Three Months Ended						Nine Months Ended
		January 28, 2007			January 22, 2006			January 28, 2007			January 22, 2006
Net income (loss)		$	(1,489,416	)	$	(765,395	)	$	(7,098,609	)	$	2,106,693
Other comprehensive income (loss)
Unrealized gain (loss) on securities
available for sale			(7,674	)		(13,008	)		3,017			3,335
Comprehensive income (loss)		$	(1,497,090	)	$$	(778,403	)	$	(7,095,592	)	$	2,110,028

 

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Note 10.   Computation of Earnings Per Share

The following is presented as a reconciliation of the numerators and denominators of basic and diluted earnings (loss) per share computations, in accordance with SFAS No. 128:

		Three Months Ended						Nine Months Ended
		January 28,			January 22,			January 28,			January 22,
		2007			2006			2007			2006
Numerator:
Basic:
Net income (loss) available to common
stockholders		$	(1,489,416	)	$	(765,395	)	$	(7,098,609	)	$	2,106,693
Diluted:
Net income (loss) available to common
stockholders		$	(1,489,416	)	$	(765,395	)	$	(7,098,609	)	$	2,106,693
Add: interest on convertible debt			—			—			—			48,812
Net income (loss) available to common
stockholders		$	(1,489,416	)	$	(765,395	)	$	(7,098,609	)	$	2,155,505
Denominator:
Basic weighted average number of
common shares outstanding			12,937,427			13,028,525			12,937,004			12,946,118
Dilutive effect of common stock
options and warrants			—			—			—			291,480
Dilutive effect of convertible debt			—			—			—			453,202
Diluted weighted average number of
common shares outstanding			12,937,427			13,028,525			12,937,004			13,690,800
Earnings (loss) per share:
Net income (loss) per common
share - basic		$	(0.12	)	$	(0.06	)	$	(0.55	)	$	0.16
Net income (loss) per common
share - diluted		$	(0.12	)	$	(0.06	)	$	(0.55	)	$	0.16

 

For the three and nine month periods ended January 28, 2007 and January 22, 2006, potential dilutive common shares issuable under options of 1,167,800, 1,167,800, 1,136,000 and 451,000, respectively, were not included in the calculation of diluted earnings per share as they were anti-dilutive.

Note 11.   Segment Reporting  

We operate in two major business segments (i) gaming and (ii) other. The gaming segment consists of Colorado Grande Casino, IC-BH, Dry Creek Casino, LLC, Route 66 Casinos, American Racing and Buena Vista Development.

Summarized financial information for our reportable segments is shown in the following table. The “other” column includes corporate-related items, results of insignificant operations, and segment profit (loss) and income and expenses not allocated to reportable segments.

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		As of and for the Three Months Ended January 28, 2007
		Gaming			Other			Totals
Gross revenue		$	4,010,849		$	16,902		$	4,027,751
Segment loss			(2,303,071	)		(31,665	)		(2,334,736	)
Segment assets			68,844,728			5,304,777			74,149,505
Equity investment:
Isle of Capri-Black Hawk, L.L.C.			21,677,518			—			21,677,518
Route 66 Casinos, L.L.C.			4,509,183			—			4,509,183
American Racing and Entertainment, L.L.C.			9,362,879			—			9,362,879
Buena Vista Development Company, L.L.C			173,505			—			173,505
Sunrise Land and Mineral Corporation			—			518,186			518,186
Depreciation and amortization			273,899			2,284			276,183
Additions to property and equipment			16,111			—			16,111
Interest expense, net			948,707			—			948,707
Income tax benefit			833,855			11,465			845,320
Earnings from Isle of Capri-Black Hawk, L.L.C.			561,180			—			561,180
Loss from Buena Vista Development Company, L.L.C.			(2,550	)		—			(2,550	)
Loss from American Racing and Entertainment, L.L.C.			(2,076,991	)		—			(2,076,991	)
Earnings from Sunrise Land and Mineral Corporation			—			106,746			106,746

		As of and for the Three Months Ended January 22, 2006
		Gaming			Other			Totals
Gross revenue		$	3,140,855		$	16,903		$	3,157,758
Segment profit loss			(1,204,499	)		(26,020	)		(1,230,519	)
Segment assets			70,190,662			5,517,459			75,708,121
Equity investment:
Isle of Capri-Black Hawk, L.L.C.			19,895,902			—			19,895,902
Route 66 Casinos, L.L.C.			4,509,183			—			4,509,183
American Racing and Entertainment, L.L.C.			8,116,833			—			8,116,833
Buena Vista Development Company, L.L.C			189,800			—			189,800
Sunrise Land and Mineral Corporation			—			372,690			372,690
Depreciation and amortization			244,014			2,086			246,100
Additions to property and equipment			285,697			—			285,697
Interest expense, net			559,985			—			559,985
Income tax benefit (expense)			455,289			9,835			465,124
Earnings from Isle of Capri-Black Hawk, L.L.C.			490,798			—			490,798
Loss from American Racing and Entertainment, L.L.C.			(114,763	)		—			(114,763	)
Earnings from Sunrise Land and Mineral Corporation			—			52,083			52,083

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		As of and for the Nine Months Ended January 28, 2007
		Gaming			Other			Totals
Gross revenue		$	12,243,559		$	50,708		$	12,294,267
Segment loss			(10,661,816	)		(482,439	)		(11,144,255	)
Segment assets			68,844,728			5,304,777			74,149,505
Equity investment:
Isle of Capri-Black Hawk, L.L.C.			21,677,518			—			21,677,518
Route 66 Casinos, L.L.C.			4,509,183			—			4,509,183
American Racing and Entertainment, L.L.C.			9,362,879			—			9,362,879
Buena Vista Development Company, L.L.C			173,505			—			173,505
Sunrise Land and Mineral Corporation			—			518,186			518,186
Depreciation and amortization			805,988			6,697			812,685
Additions to property and equipment			237,397			—			237,397
Interest expense, net			2,720,960			—			2,720,960
Income tax benefit			3,870,508			175,138			4,045,646
Earnings from Isle of Capri-Black Hawk, L.L.C.			2,179,153			—			2,179,153
Loss from Buena Vista Development Company, L.L.C.			(3,248	)		—			(3,248	)
Loss from American Racing and Entertainment, L.L.C.			(6,127,627	)		—			(6,127,627	)
Earnings from Sunrise Land and Mineral Corporation			—			139,246			139,246

 

		As of and for the Nine Months Ended January 22, 2006
		Gaming			Other			Totals
Gross revenue		$	11,085,513		$	51,834		$	11,137,347
Segment profit (loss)			3,507,178			(231,250	)		3,275,928
Segment assets			70,190,662			5,517,459			75,708,121
Equity investment:
Isle of Capri-Black Hawk, L.L.C.			19,895,902			—			19,895,902
Route 66 Casinos, L.L.C.			4,509,183			—			4,509,183
American Racing and Entertainment, L.L.C.			8,116,833			—			8,116,833
Buena Vista Development Company, L.L.C			189,800			—			189,800
Sunrise Land and Mineral Corporation			—			372,690			372,690
Depreciation and amortization			455,510			6,417			461,927
Additions to property and equipment			2,640,855			—			2,640,855
Interest expense, net			1,347,639			—			1,347,639
Income tax benefit (expense)			(1,251,772	)		82,537			(1,169,235	)
Earnings from Isle of Capri-Black Hawk, L.L.C.			4,874,855			—			4,874,855
Earnings from Route 66 Casinos, L.L.C.			874,707			—			874,707
Loss from American Racing and Entertainment, L.L.C.			(114,763	)					(114,763	)
Earnings from Sunrise Land and Mineral Corporation			—			52,083			52,083

 

Reconciliation of reportable segment assets to our consolidated totals is as follows:

		January 28,
		2007
Total assets for reportable segments		$	74,149,505
Cash and restricted cash not allocated to segments			2,528,677
Notes receivable not allocated to segments			3,521,066
Other assets not allocated to segments			5,678,620
Total assets		$	85,877,868

 

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Note 12. Other Assets

 

Other assets consist of the following:

		January 28, 2007			April 30, 2006
Accrued interest receivable		$	3,613,067		$	2,378,809
Unamortized deferred loan issue cost, net			863,431			1,223,041
Other assets		$	4,476,498		$	3,601,850

 

 

Note 13.   Commitments and Contingencies  

We have guaranteed approximately $13 million of mortgage debt of a subsidiary of American Racing that matures on March 31, 2007. Also, as of January 28, 2007, through our wholly-owned subsidiary, Nevada Gold NY Inc., we have an indirect guarantee of $5.9 million of American Racing’s $20 million senior debt that matures on April 1, 2007. In addition, our guarantee has further been reduced to $5.0 million due to our ownership percentage in ARE having been diluted to 25.05% as of February 2, 2007. The mortgage debt facility and the senior debt are essentially bridge financing secured by the Tioga Downs and Vernon Downs facilities. We assessed our obligations under the guarantees on these debt instruments pursuant to the provisions of FIN 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Others.” An initial liability of $4,610,000 has been recorded for these guarantees using expected present value measurement techniques and is included in other liabilities in the accompanying Consolidated Balance Sheet. We and ARE are currently having discussions with the current and potential lenders to refinance these debts and correspondingly the associated guarantees. There is no assurance that these debts will be refinanced or extended at favorable terms and conditions.

In addition, as of January 28, 2007, we have guaranteed River Rock Casino’s operating lease for approximately $254,000. This guarantee has been eliminated as part of the contract buyout (see Note 15). We have also guaranteed debt of $72,000 to third parties on behalf of SI for the performance of repayment obligations. In the event of SI's nonperformance under the terms of the obligations, our maximum potential future payments under these guarantees will be equal to the carrying amount of the liabilities.

We continue to pursue additional development opportunities that may require, individually and in the aggregate, significant commitments of capital, extensions of credit, up-front payments to third parties and guarantees by the Company of third-party debt. At January 28, 2007, we have outstanding commitments to extend credit related to development opportunities in the aggregate amount of $212,000.

We may assist Indian Tribes in obtaining funding from third parties for the development of casinos on Indian lands. We currently have an agreement with the La Jolla Band of Luiseno Indian (“The Band”) that requires us to use commercially reasonable efforts to assist The Band in obtaining one or more sources of additional financing for its casino project; however, as a result of a restructuring of our agreement with The Band on July 30, 2006, we are not required to fund the project or guaranty any financing of the project.

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Note 14. Legal Proceedings

We and our subsidiaries are, from time to time, defendants in various lawsuits relating to routine matters incidental to our business. As with all litigation, no assurance can be provided as to the outcome of the following matters and litigation inherently involves significant costs. Following is a summary of key litigation impacting us and our subsidiaries.

Route 66 Casinos

On September 27, 2002, we filed a claim for arbitration, seeking damages, specific performance and other relief against American Heritage, Inc. (d/b/a The Gillmann Group), the other member in Route 66 Casinos, LLC. Route 66 Casinos was jointly formed by us and The Gillmann Group to assist the Pueblo of Laguna in the development and financing of gaming facilities on land located 11 miles west of Albuquerque, New Mexico. We and The Gillmann Group entered into several contracts arising from The Gillmann Group's agreement to assist in the development and equipping of the Route 66 Casino. One such agreement, the Amended and Restated Operating Agreement of Route 66 Casinos, LLC, governed the relationship of the parties relating to the Route 66 Casinos gaming operation. Pursuant to this agreement, we were to receive 51% of the net revenue received by Route 66 Casinos from the gaming operation. We also loaned The Gillmann Group the amount of $250,000, which has been repaid to us.

We initiated arbitration proceedings pursuant to the Route 66 Casinos Operating Agreement; however, The Gillmann Group and Mr. Gillmann refused to participate on the basis that they believed the operating agreement was invalid. We then filed a lawsuit in state district court on October 3, 2002, in Harris County, Texas ( Nevada Gold & Casinos, Inc. v. American Heritage, Inc., et al. (No. 2002-51378)) (the "Texas Litigation"), initially seeking to recover payment pursuant to the promissory note. We amended our claims to include breach of contract, breach of fiduciary duty, fraud and other claims related to The Gillmann Group's repudiation of the Route 66 Casinos Operating Agreement.

The Gillmann Group then filed a lawsuit in state district court on October 4, 2002, in Clark County, Nevada (American Heritage, Inc., et al. v. Nevada Gold & Casinos, Inc., et al. (No. A457315)). In its lawsuit, The Gillmann Group sought judicial dissolution of Route 66 Casinos, LLC and sought a declaratory judgment that the operating agreement was void based upon fraudulent misrepresentation. We immediately moved to compel arbitration, which was denied by the Nevada district court. We appealed this ruling to the Nevada Supreme Court, and the related lawsuit in Texas was stayed pending the outcome of the Nevada appeal. On April 28, 2005, the Nevada Supreme Court ruled that the dispute was not subject to arbitration. In response, the Texas court lifted the stay of proceedings.

On April 13, 2006, following a trial on the merits, the jury returned its verdict in the Texas Litigation. The jury found that (1) Nevada Gold and American Heritage intended to be bound by the Amended and Restated Operating Agreement (the "Contract"); (2) American Heritage breached the Contract; (3) the breach by American Heritage was not excused; (4) Nevada Gold did not fraudulently induce American Heritage to enter into the Contract; (5) American Heritage returned to Nevada Gold everything of value that American Heritage received from Nevada Gold under the Contract; (6) Nevada Gold suffered damages of approximately $8.3 million as a result of the breach by American Heritage; and (7) Fred Gillmann, who is the President and sole shareholder of American Heritage, is personally responsible for the conduct of American Heritage.

Following the jury's verdict, Nevada Gold and the Defendants filed competing motions for the entry of judgment by the Court. On October 25, 2006, the Court entered judgment. The Court found American Heritage liable to Nevada Gold for $9,165,079 (reflecting the jury’s verdict, plus prejudgment interest), but held that Nevada Gold take nothing from Fred Gillmann. American Heritage has appealed the judgment against it to the Court of Appeals for the First District, Houston, Texas (the “Appeals Court”) and Nevada Gold has appealed the Court’s judgment to the Appeals Court that Nevada Gold take nothing from Fred Gillmann personally notwithstanding the jury’s verdict.

Rinaldo Corporation

On October 18, 2004, Rinaldo Corporation filed an action captioned Rinaldo Corporation vs. Nevada Gold & Casinos, Inc., Sierra Research and Consulting, LLC, Sheila L. Torkelson, Michael R. Derry (d/b/a Waste Not Tribal Services), and Does 1 Through 100, against us in the Superior Court of the State of California (No. S-1500-CV 253969 AEW). According to the Complaint, Rinaldo Corporation ("Rinaldo") and the Timbisha Shoshone Tribe of the Western Shoshone Nation entered into a Development Contract and Personal Property Lease on or about November 2, 2002, which obligates Rinaldo to (a) finance and provide technical assistance to the tribe in acquiring suitable real property and causing such land to be taken into trust by the United States; (b) design, construct and otherwise develop at its own expense the structure and related equipment to be used as the gaming facility; and (c) advance certain operating funds to the tribe while the gaming facility is being developed, constructed and brought into operation. In the Complaint, Rinaldo claims that we and the other named defendants wrongfully interfered with the agreement between Rinaldo and the tribe. Rinaldo alleges tortious interference with contract and prospective economic advantage, unfair competition and conspiracy and seeks more than $50 million in damages and unspecified punitive damages. Rinaldo also seeks a preliminary and permanent injunction barring us and the other defendants from engaging in further acts of alleged interference. On October 29, 2004, Rinaldo filed its First Amended Complaint. We demurred to Rinaldo's First Amended Complaint, and, at a hearing on January 5, 2005, the court orally sustained our demurrer with respect to one cause of action (with leave for Rinaldo to amend), and denied it with respect to the others. After Rinaldo amended, we answered, generally denying Rinaldo's allegations. Meanwhile, defendants Torkelson and Derry filed separate demurrers, asserting that they were protected by the doctrine of sovereign immunity. On May 11, 2005, the trial court sustained their demurrer, giving Rinaldo leave to amend. In response, Rinaldo filed a Third Amended Complaint on June 1, 2005, to which Torkelson and Derry demurred again. On August 4, 2005, the court sustained their demurrer without leave to amend, dismissing them in their personal capacities from the case. Subsequently, Rinaldo voluntarily dismissed Torkelson and Derry in their business capacities, leaving Nevada Gold as the only remaining defendant.

 

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In November 2005, Nevada Gold moved for summary judgment against Rinaldo, and the Court ruled on that motion on February 21, 2006. The Court dismissed all of Rinaldo's claims for tortious interference with contract, holding that the development contract on which Rinaldo had based those claims was invalid as a matter of law. The Court also dismissed Rinaldo's claim for damages under the California unfair competition statute. After the ruling, only Rinaldo's claims for tortious interference with prospective economic relations, civil conspiracy, and injunctive relief under the unfair competition statute remained.

We subsequently moved for summary judgment seeking to dispose of Rinaldo’s remaining claims, and the Court granted our motion. The Court’s ruling disposed of the entire case in our favor. The deadline for Rinaido to appeal has not yet arrived. We believe the claims against us to be without merit and we intend to vigorously and appropriately defend the claims asserted in this matter.

Note 15. Subsequent Events

On January 31, 2007, the River Rock Casino notified us of its intention to exercise the buy-out option pursuant to the development and loan agreement (as amended, the “development agreement”) with us. Pursuant to the buy-out option, the River Rock Casino had the option to pay seventeen equal monthly installments of $737,491 beginning February 15, 2007 through June 15, 2008.   On March 2, 2007, River Rock Casino and the members of Dry Creek Casino, LLC received a cash settlement of $11,350,000 in lieu of the monthly installments. Our share of the settlement is approximately $8.1 million. The exercise of the buy-out option effectively terminates the development agreement and any further obligations to pay the credit enhancement fee to us. Revenue is expected to decrease by approximately $2.0 million quarterly over the remaining term of the agreement.

On February 2, 2007, the partners of American Racing were required to make a $3 million capital contribution in amounts proportionate to their ownership or be diluted to a rate of 150% of the contribution. We did not make the contribution and our ownership percentage was reduced to 25.05%. On March 1, 2007, the partners of American Racing approved a $2.5 million capital call to be funded by March 31, 2007. Our portion of the contribution will be $626,500. If we do not make the contribution, our ownership in American Racing will be reduced to 22.75%.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report for the year ended April 30, 2006 filed on Form 10-K/A with the Securities and Exchange Commission.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. We prepare these financial statements in conformity with U.S. generally accepted accounting principles. As such, we are required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments. On an on-going basis, we evaluate our estimates; however, actual results may differ from these estimates under different assumptions or conditions. There have been no material changes or developments in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be Critical Accounting Policies and Estimates as disclosed in our Form 10-K/A for the year ended April 30, 2006. (See guarantees discussed in Note 13.)

 

Executive Overview

We were formed in 1977 and since 1994, have primarily been a gaming company involved in financing, developing, owning and operating commercial gaming projects and financing, developing and managing Native American owned gaming projects. Our gaming facility operations are located in the United States of America (“U.S.”), specifically in the states of Colorado, California and New York. Historically, we have relied upon our equity investment in IC-BH for the majority of our earnings and cash flow. In December 2005, IC-BH completed a $94.0 million capital expansion for IC-BH’s Colorado properties adding approximately 350 slot machines, 160 hotel rooms, and a new restaurant. In fiscal year 2004, DCC began receiving a credit enhancement fee from the River Rock Casino. On April 25, 2005, we acquired the Colorado Grande Casino from IC-BH and anticipate the casino will also add to our future revenues and earnings. In addition, as of January 28, 2007, we also owned a 29.7% (reduced to 25.05% in February 2007) interest in American Racing and Entertainment, LLC (“American Racing”), which operates racing facilities offering harness racing and VLTs to its gaming customers. Our business strategy will continue to focus on gaming projects but with a greater emphasis on owning and operating gaming establishments. 

 

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When compared to the nine month period ended January 22, 2006, the nine month period ended January 28, 2007 was impacted by the following items:

 

·

Recording our equity in the loss from American Racing in the fiscal 2007 period. American Racing incurred substantial preopening costs at both Tioga Downs and Vernon Downs during the period. Racing operations commenced at Tioga Downs on June 12, 2006 and its video gaming machine operations started on July 4, 2006. Racing operations commenced at Vernon Downs on September 5, 2006 and its video gaming operations started on October 26, 2006.

 

·	The discontinuation of estimated earnings contributions related to Route 66 Casinos, LLC, due to the sale and termination of equipment leases.

 

·	Lower than expected earnings from IC-BH.

 

·	Write-off $3.5 million of notes receivable and development costs related to gaming projects.

 

COMPARISON OF THE THREE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 22, 2006

Net revenues. Net revenues increased 29%, or $843,000, for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. In the three month period ended January 28, 2007, credit enhancement fees increased 27%, or $494,000, compared to the three month period ended January 22, 2006. Net revenues from the Colorado Grande increased 29% or $307,000 for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. Also, in the three month period ended January 28, 2007, we accrued $27,000 of management fees from American Racing.

Total operating expenses. Total operating expenses decreased 6% or $222,000, for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. Of the decrease, $96,000 is primarily the result of lower operating costs, excluding depreciation expense, related to Colorado Grande. In addition, the overall legal expense decreased 32% or $130,000. During the three months ended January 28, 2007. We recorded a $15,000 write-off of project development costs related to Native American gaming projects which we are no longer pursuing.

Earnings (loss) from unconsolidated affiliates. Earnings (loss) from unconsolidated affiliates decreased 430%, or $1.8 million, for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. Earnings of IC-BH increased 14% or $70,000. IC-BH’s net revenues decreased 9%, or $3.6 million for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. Also, IC-BH’s operating expense decreased 8%, or $2.5 million due to lower casino operating expense, and food, beverage and other expense. Losses of American Racing increased $2.0 million compared to the three month period ended January 22, 2006. It is primarily attributable to preopening expenses related to the Tioga Downs and Vernon Downs projects. Earning of Sunrise increased 105% or $55,000 due to higher lease income from mining claims.

Interest expense, net. Interest expense, net, consists of a net balance of interest expense and amortization of loan issue cost, offset by interest income. Interest expense increased 38%, or $376,000, for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. The increase is primarily due to a higher weighted average debt balance. Interest income increased 8%, or $43,000, for the three month period ended January 28, 2007 compared to the three month period ended January 22, 2006. The decrease is primarily due to a lower weighted average note receivable balance. Amortization of loan issue cost was $152,000 and $97,000 for the three month periods ended January 28, 2007 and January 22, 2006, respectively.

Net loss. Net loss was $1.5 million and $765,000 for the three month periods ended January 28, 2007 and January 22, 2006, respectively. The increase of $724,000 is primarily related to the $2.1 million loss from American Racing, the discontinuation of recording earnings from Route 66, the increase in interest expense, net which was partially offset by the $494,000 increase in credit enhancement fee, $250,000 gain related to the termination of our development agreement with Muscogee Nation - Tulsa, and $222,000 decrease in our overall operating expenses. The effective tax rate for the three month periods ended January 28, 2007 and January 22, 2006 was 36% and 38%, respectively.

COMPARISON OF THE NINE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 22, 2006

Net revenues. Net revenues increased 14%, or $1.4 million, for the nine month period ended January 28, 2007 compared to the three month period ended January 22, 2006. In the nine month period ended January 28, 2007, credit enhancement fees increased 18%, or $994,000, compared to the nine month period ended January 22, 2006. Net revenues from the Colorado Grande increased 6% or $257,000 for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. Also, in the nine month period ended January 28, 2007, we earned $124,000 in management fees from American Racing.

 

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Total operating expenses. Total operating expenses increased 47% or $4.8 million, for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. Of this increase, $3.6 million is attributable to the write-off of notes receivable and project development cost related to Native American gaming projects which we are no longer pursuing. We experienced $643,000 of higher corporate expense due to our pursuit of additional gaming opportunities, expanded casino operations, and increased overhead costs related to business expansion. Also, legal expense increased by $349,000 related to litigation. In addition, the overall depreciation and amortization expense increased by $351,000 related to Colorado Grande’s $2 million renovation project completed at the end of the second quarter of fiscal 2006.

Earnings (loss) from unconsolidated affiliates. Earnings (loss) from unconsolidated affiliates decreased 167%, or $9.5 million, for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. Earnings of IC-BH decreased 55% or $2.7 million. IC-BH’s net revenues decreased 3%, or $3.4 million for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. Also, IC-BH’s operating expenses increased 3%, or $2.8 million due to higher casino operating expense, marketing and administrative expense, and depreciation and amortization expense. For Route 66 Casinos, we learned in January 2006, through discovery in the litigation, that in November, 2005 the Gillmann Group, without our knowledge or consent, sold to the LDC the gaming devices and other equipment and property leased to the LDC and received $21.0 million, less certain adjustments. The equipment leases were terminated in connection with the transaction. Therefore, effective with Route 66 Casinos’ calendar quarter ended September 30, 2005, we discontinued the recording of any estimated earnings related to Route 66 Casinos due to the termination of the equipment leases, which lowered our earnings from unconsolidated affiliates by approximately $875,000 (also see Part II, Item 1.) During the nine month period ended January 28, 2007, we recorded equity in losses of American Racing of $6.1 million which is primarily attributable to preopening expenses related to the Tioga Downs and Vernon Downs projects. Earnings of Sunrise increased 167% or $87,000 due to higher lease income from mining claims.

Interest expense, net. Interest expense, net consists of a net balance of interest expense and amortization of loan issue cost, offset by interest income. Interest expense increased 53%, or $1.4 million for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. The increase is primarily due to a higher weighted average debt balance. Interest income increased 18%, or $269,000, for the nine month period ended January 28, 2007 compared to the nine month period ended January 22, 2006. The increase is primarily due to a higher weighted average note receivable balance. Amortization of loan issue costs was $450,000 and $250,000 for the nine month periods ended January 28, 2007 and January 22, 2006, respectively.

Net income (loss). Net income (loss) was ($7.1 million) and $2.1 million for the nine month periods ended January 28, 2007 and January 22, 2006, respectively. The decrease of $9.2 million is primarily related to the $2.7 million decrease in earnings from IC-BH, the $6.1 million loss from American Racing, the discontinuation of recording earnings from Route 66, the $3.6 million write-off of notes receivable and project development costs, the increase in interest expense, net, higher overall corporate expenses and higher casino operating and marketing expenses as a percentage of casino revenue related to the repositioning of the Colorado Grande Casino after the $2.0 million renovation project was completed at the end of the second quarter of fiscal 2006. The effective tax rate for the nine month periods ended January 28, 2007 and January 22, 2006 was 36% and 36%, respectively.

Liquidity and Capital Resources

Historical Cash Flows

The following table sets forth our consolidated net cash provided by (used in) operating, investing and financing activities for the nine month periods ended January 28, 2007 and January 22, 2006:

		Nine Months Ended
		January 28,			January 22,
		2007			2006
Net cash provided by (used in):
Operating activities		$	(1,385,977	)	$	2,218,260
Investing activities			(333,372	)		(29,208,270	)
Financing activities			(1,098,128	)		24,719,376

 

Operating activities. Net cash used in operating activities during the nine month period ended January 28, 2007 was $1.4 million compared to $2.2 million of net cash provided by operating activities during the nine month period ended January 22, 2006. The $3.6 million decrease in cash flow is mainly due to higher operating costs and interest payments. During the nine month period ended January 28, 2007, we received $6.5 million of credit enhancement fees from River Rock Casino and $1.6 million in distributions from IC-BH, compared to $5.5 million and $2.5 million respectively for the nine months ended January 22, 2006. We applied the distributions from IC-BH to repay a portion of the $5.9 million note payable to IC-BH related to our purchase of the Colorado Grande Casino.

 

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Investing activities. Net cash used in investing activities during the nine month period ended January 28, 2007 decreased by $28.9 million compared to the nine month period ended January 22, 2006. The decrease was primarily due to a decrease in the amount of loans and equity investment made to gaming projects. During the nine months ended January 28, 2007, we made loans totaling $1.4 million to American Racing which was subsequently converted into a capital contribution as part of our investment, and we put up a $1,050,000 Certificate of Deposit to guarantee a $1 million operating line of credit for American Racing. In addition, we received $2.2 million settlement fee for the termination of our development agreement with Muscogee Nation - Tulsa and $500,000 loan repayment from a third party related to a gaming project in which we are no longer involved.

 

Financing activities. Net cash provided by financing activities during the nine month period ended January 28, 2007 decreased by $25.8 million compared to the nine month period ended January 22, 2006. In the nine month period ended January 28, 2007, we received $3.0 million in borrowings from our $55.0 million credit facility compared to $36.6 million in the nine month period ended January 22, 2006. We repurchased 54,200 shares of our common stock in the open market, at a total purchase price of $435,000 compared to $7.7 million spent to acquire our common stock during the nine month period ended January 22, 2006, and we distributed $1.3 million to the minority interest owners of DCC. We also repaid $2.3 million on our term loans.

Future Sources and Uses of Cash

We expect that our future liquidity and capital requirements will be affected by:

	· debt service requirements;
	· working capital requirements;
	· cash receipt of River Rock Casino credit enhancement buyout;
	· $3.3 million note payable due in March 2007;
	· funding our portion of the initial operating losses and capital expenditures at American Racing;
	· capital requirements related to existing and future development projects and acquisitions;
	· disposition of non-gaming related assets; and
·	· obtaining funds via long-term subordinated debt instruments

At January 28, 2007, outstanding indebtedness under our credit facilities totaled $61.2 million. We have guaranteed approximately $13 million of mortgage debt of a subsidiary of American Racing that matures on March 31, 2007. Also, through our wholly-owned subsidiary, Nevada Gold NY., Inc, we have an indirect guarantee of $5.9 million of American Racing’s $20 million senior debt which has been reduced to $5.0 million effective February 2, 2007 that matures on April 1, 2007. ARE is in the process of negotiating a refinancing of these debts with current and potential lenders. There is no assurance that this debt will be refinanced or extended at favorable terms and conditions. If a refinancing or an extension is not obtained, we may be required to fund our portion of this guarantee. In addition, as of January 28, 2007, we have lease guarantees of approximately $254,000 relating to the River Rock Casino project which was subsequently eliminated due to exercise of the buy-out option by River Rock Casino (see Note 15) and we have guaranteed debt of approximately $72,000 of an affiliated company.

Historically, tax distributions from IC-BH, distributions from DCC of our portion of the credit enhancement fees from River Rock Casino and loan repayments from our notes receivable have been sufficient to satisfy our current debt obligations and working capital needs. However, we are now applying our quarterly distributions from IC-BH to the repayment of interest and principal due on the $5.9 million note which we expect will continue until the second quarter of fiscal year 2008. At January 28, 2007, the balance of the note payable to IC-BH was $1.8 million.

In November 2006, we examined our corporate overhead. As a result, we implemented several cost saving measures that will save approximately $1 million annually. These measures included the elimination of a number of corporate staff positions which resulted in a 30% reduction in our corporate full time equivalents, reduction of consulting contracts and a 10% salary reduction for senior executives. A $205,000 of severance expenses associated with the reduction of corporate staff is reflected in this fiscal quarter.

 

On February 2, 2007, the partners of American Racing were required to make a $3 million capital contribution in amounts proportionate to their ownership or be diluted to a rate of 150% of the contribution. We did not make the contribution and our ownership percentage was reduced to 25.05%.

 

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On January 31, 2007, the River Rock Casino notified us, of its intention to exercise the buy-out option pursuant to the development and loan agreement (as amended, the “development agreement”) with us. Pursuant to the buy-out option, the River Rock Casino will pay seventeen equal monthly installments of $737,491 beginning February 15, 2007 through June 15, 2008.   The exercise of the buy-out option effectively terminates the development agreement and any further obligations to pay the credit enhancement fee to us. On March 2, 2007, River Rock Casino and the members of Dry Creek Casino, LLC agreed to a cash settlement of $11,350,000 in lieu of the monthly installments. Our share of the settlement is approximately $8.1 million. Proceeds from this settlement will be used to repay our $3.3 million note payable which matures in March 2007. Revenues are expected to decrease by $2.0 million per quarter over the remaining term of the contract.

 

We are currently having discussions with various interested parties to dispose of our non-gaming related assets. Our plan is to divest of such assets and reinvest the funds in acquisition opportunities where we will have a majority equity position and long term management contracts.

 

On January 28, 2007, we had cash and cash equivalents of $1.5 million and restricted cash of $1.0 million.

We are highly leveraged and our consolidated financial statements have been prepared assuming that we will have adequate availability of cash resources to satisfy our liabilities in the normal course of business. We have made, and are in the process of making, arrangements to ensure that we have sufficient working capital to fund our obligations as they come due. These potential funding transactions include long-term second lien financing and other sources of funds from a recognized financial lender. We are also in negotiations with various other financial companies to acquire additional funds when needed. We believe that some or all of these sources of funds will be funded in a timely manner and will provide sufficient working capital for us to meet our obligations as they come due; however, there can be no assurance that we will be successful in achieving the desired level of working capital or at terms that are favorable to us. Should cash resources not be sufficient to grow the operations at the current pace and meet our current obligations as they come due, we would be required to curtail our activities and grow at a pace that cash resources could support which may require a restructuring of our debt.

Off-Balance Sheet Arrangements

At January 28, 2007, we have guaranteed approximately $13 million of mortgage debt of a subsidiary of American Racing that matures on March 31, 2007. Also, through our wholly-owned subsidiary, Nevada Gold NY., Inc, we have an indirect guarantee of $5.9 million of American Racing’s $20 million senior debt which has been reduced to $5.0 million effective February 2, 2007 that matures on April 1, 2007. ARE is in the process of negotiating a refinancing of the $20 million senior debt with current and potential lenders. There is no assurance that this debt will be refinanced or extended at favorable terms and conditions. If a refinancing or an extension is not obtained, we may be required to fund our portion of this guarantee.

 

In addition, we have certain off-balance sheet arrangements that may affect our financial condition, liquidity and results of operations, including a guarantee of $72,000 of indebtedness of an affiliate, and a guarantee of operating lease payments for River Rock Casino in the amount of $254,000. As of March 2, 2007, the guarantee related to the River Rock Casino has been eliminated.

In the event of nonperformance by SI under the terms of the obligations, our maximum potential future payment under these guarantees will be equal to the carrying amount of the liabilities. As of January 28, 2007, our maximum potential future payment under these guarantees was $326,000 which has been reduced to $72,000 as of March 2, 2007.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, foreign currency exchange rates, credit risk, commodity price and equity prices. Our primary exposure to market risk is credit risk concentrations. We do not believe we are subject to material interest risk.

Our credit facilities are fixed interest rate instruments and an interest rate change would not have any impact on our operations.

Item 4.   Controls and Procedures  

Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. As described in more detail in our Form 10-K/A filed on August 8, 2006, we identified material weaknesses in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) in connection with the work related to Management’s Annual Report on Internal Control over Financial Reporting. As a result of these material weaknesses, our previous Chief Executive Officer and previous Chief Financial Officer concluded that, as of April 30, 2006, our disclosure controls and procedures were not effective. We have taken various steps to improve the effectiveness of our disclosure controls and procedures in an effort to rectify the weaknesses by the end of the fiscal year. As a part of our fiscal year end closing procedures, we plan to have a review performed by an external firm to evaluate the effectiveness of our disclosure controls and procedures. Until such time, our recently appointed Chief Executive Officer and recently appointed Chief Financial Officer have continued the previous conclusion that as of the end of the period covered by this report, our disclosure controls and procedures were not effective. We have outlined a number of initiatives, as discussed below, that we believe will remediate these material weaknesses in fiscal year 2007.

·	performance of a more in-depth and comprehensive review of the earnings per share computation as it relates to fully dilutive shares,

 

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·	engagement of outside advisors to assist in evaluating and recording the tax implications of all transactions involving, but not limited to, purchase accounting, and
·	we have engaged a consultant to provide an additional level of review, and ensure that we are in compliance with all financial statement disclosure requirements.

There have not been any changes in our internal control over financial reporting during the three months ended January 28, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.   Legal Proceedings

We and our subsidiaries are, from time to time, defendants in various lawsuits relating to routine matters incidental to our business. As with all litigation, no assurance can be provided as to the outcome of the following matters and litigation inherently involves significant costs. Following is a summary of key litigation impacting us and our subsidiaries.

Route 66 Casinos

On September 27, 2002, we filed a claim for arbitration, seeking damages, specific performance and other relief against American Heritage, Inc. (d/b/a The Gillmann Group), the other member in Route 66 Casinos, LLC. Route 66 Casinos was jointly formed by us and The Gillmann Group to assist the Pueblo of Laguna in the development and financing of gaming facilities on land located 11 miles west of Albuquerque, New Mexico. We and The Gillmann Group entered into several contracts arising from The Gillmann Group's agreement to assist in the development and equipping of the Route 66 Casino. One such agreement, the Amended and Restated Operating Agreement of Route 66 Casinos, LLC, governed the relationship of the parties relating to the Route 66 Casinos gaming operation. Pursuant to this agreement, we were to receive 51% of the net revenue received by Route 66 Casinos from the gaming operation. We also loaned The Gillmann Group the amount of $250,000, which has been repaid to us.

We initiated arbitration proceedings pursuant to the Route 66 Casinos Operating Agreement; however, The Gillmann Group and Mr. Gillmann refused to participate on the basis that they believed the operating agreement was invalid. We then filed a lawsuit in state district court on October 3, 2002, in Harris County, Texas ( Nevada Gold & Casinos, Inc. v. American Heritage, Inc., et al. (No. 2002-51378)) (the "Texas Litigation"), initially seeking to recover payment pursuant to the promissory note. We amended our claims to include breach of contract, breach of fiduciary duty, fraud and other claims related to The Gillmann Group's repudiation of the Route 66 Casinos Operating Agreement.

The Gillmann Group then filed a lawsuit in state district court on October 4, 2002, in Clark County, Nevada (American Heritage, Inc., et al. v. Nevada Gold & Casinos, Inc., et al. (No. A457315)). In its lawsuit, The Gillmann Group sought judicial dissolution of Route 66 Casinos, LLC and sought a declaratory judgment that the operating agreement was void based upon fraudulent misrepresentation. We immediately moved to compel arbitration, which was denied by the Nevada district court. We appealed this ruling to the Nevada Supreme Court, and the related lawsuit in Texas was stayed pending the outcome of the Nevada appeal. On April 28, 2005, the Nevada Supreme Court ruled that the dispute was not subject to arbitration. In response, the Texas court lifted the stay of proceedings.

On April 13, 2006, following a trial on the merits, the jury returned its verdict in the Texas Litigation. The jury found that (1) Nevada Gold and American Heritage intended to be bound by the Amended and Restated Operating Agreement (the "Contract"); (2) American Heritage breached the Contract; (3) the breach by American Heritage was not excused; (4) Nevada Gold did not fraudulently induce American Heritage to enter into the Contract; (5) American Heritage returned to Nevada Gold everything of value that American Heritage received from Nevada Gold under the Contract; (6) Nevada Gold suffered damages of approximately $8.3 million as a result of the breach by American Heritage; and (7) Fred Gillmann, who is the President and sole shareholder of American Heritage, is personally responsible for the conduct of American Heritage.

Following the jury's verdict, Nevada Gold and the Defendants filed competing motions for the entry of judgment by the Court. On October 25, 2006, the Court entered judgment. The Court found American Heritage liable to Nevada Gold for $9,165,079 (reflecting the jury’s verdict, plus prejudgment interest), but held that Nevada Gold take nothing from Fred Gillmann. American Heritage has appealed the judgment against it to the Court of Appeals for the First District, Houston, Texas (the “Appeals Court”) and Nevada Gold has appealed the Court’s judgment to the Appeals Court that Nevada Gold take nothing from Fred Gillmann personally notwithstanding the jury’s verdict.

 

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Rinaldo Corporation

On October 18, 2004, Rinaldo Corporation filed an action captioned Rinaldo Corporation vs. Nevada Gold & Casinos, Inc., Sierra Research and Consulting, LLC, Sheila L. Torkelson, Michael R. Derry (d/b/a Waste Not Tribal Services), and Does 1 Through 100, against us in the Superior Court of the State of California (No. S-1500-CV 253969 AEW). According to the Complaint, Rinaldo Corporation ("Rinaldo") and the Timbisha Shoshone Tribe of the Western Shoshone Nation entered into a Development Contract and Personal Property Lease on or about November 2, 2002, which obligates Rinaldo to (a) finance and provide technical assistance to the tribe in acquiring suitable real property and causing such land to be taken into trust by the United States; (b) design, construct and otherwise develop at its own expense the structure and related equipment to be used as the gaming facility; and (c) advance certain operating funds to the tribe while the gaming facility is being developed, constructed and brought into operation. In the Complaint, Rinaldo claims that we and the other named defendants wrongfully interfered with the agreement between Rinaldo and the tribe. Rinaldo alleges tortious interference with contract and prospective economic advantage, unfair competition and conspiracy and seeks more than $50 million in damages and unspecified punitive damages. Rinaldo also seeks a preliminary and permanent injunction barring us and the other defendants from engaging in further acts of alleged interference. On October 29, 2004, Rinaldo filed its First Amended Complaint. We demurred to Rinaldo's First Amended Complaint, and, at a hearing on January 5, 2005, the court orally sustained our demurrer with respect to one cause of action (with leave for Rinaldo to amend), and denied it with respect to the others. After Rinaldo amended, we answered, generally denying Rinaldo's allegations. Meanwhile, defendants Torkelson and Derry filed separate demurrers, asserting that they were protected by the doctrine of sovereign immunity. On May 11, 2005, the trial court sustained their demurrer, giving Rinaldo leave to amend. In response, Rinaldo filed a Third Amended Complaint on June 1, 2005, to which Torkelson and Derry demurred again. On August 4, 2005, the court sustained their demurrer without leave to amend, dismissing them in their personal capacities from the case. Subsequently, Rinaldo voluntarily dismissed Torkelson and Derry in their business capacities, leaving Nevada Gold as the only remaining defendant.

In November 2005, Nevada Gold moved for summary judgment against Rinaldo, and the Court ruled on that motion on February 21, 2006. The Court dismissed all of Rinaldo's claims for tortious interference with contract, holding that the development contract on which Rinaldo had based those claims was invalid as a matter of law. The Court also dismissed Rinaldo's claim for damages under the California unfair competition statute. After the ruling, only Rinaldo's claims for tortious interference with prospective economic relations, civil conspiracy, and injunctive relief under the unfair competition statute remained.

We subsequently moved for summary judgment seeking to dispose of Rinaldo’s remaining claims, and the Court granted our motion. The Court’s ruling disposed of the entire case in our favor. The deadline for Rinaido to appeal has not yet arrived. We believe the claims against us to be without merit and we intend to vigorously and appropriately defend the claims asserted in this matter.

Item 1A. Risk Factors

Except as disclosed below, there have been no material changes in our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2006, as amended, in response to Item 1A of Part 1 to our Form 10-K/A.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.   Defaults Upon Senior Securities

None

Item 4.   Submission of Matters to a Vote of Security Holders

None

 

Item 5.   Other Information

On January 31, 2007, the River Rock Casino notified us, of its intention to exercise the buy-out option pursuant to the development and loan agreement (as amended, the “development agreement”) with us. Pursuant to the buy-out option, the River Rock Casino will pay seventeen equal monthly installments of $737,491 beginning February 15, 2007 through June 15, 2008.   The exercise of the buy-out option effectively terminates the development agreement and any further obligations to pay the credit enhancement fee to us. On March 2, 2007, River Rock Casino and the members of Dry Creek Casino, LLC agreed to a cash settlement of $11,350,000 in lieu of the monthly installments. Our share of the settlement is approximately $8.1 million.

 

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Item 6.   Exhibits

The following exhibits are to be filed as part of this report:

 

Exhibit  No.		Document
2.1		Stock Purchase Agreement dated as of April 25, 2005 among Isle of Capri Black Hawk, L.L.C., IC Holdings Colorado, Inc., Colorado Grande Enterprise, Inc., and CGC Holdings, L.L.C.(filed previously as Exhibit 2.1 of to the Company’s Form 8-K, filed April 29, 2005)
3.1A		Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit A to the company's definitive proxy statement filed on Schedule 14A on July 30, 2001)
3.1B		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.2 to Form S-8 filed October 11, 2002.
3.1C		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.3 to Form 10-Q filed November 9, 2004)
3.2		Amended and Restated Bylaws of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.2 to the company’s Form 10-QSB filed August 14, 2002)
4.1		Common Stock Certificate of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.1 to the company’s Form S-8/A, file no. 333-79867)
4.5		Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to the company’s Form S-8, file no. 333-126027)
10.1		Second Amended and Restated Operating Agreement of Isle of Capri Blackhawk L.L.C. (filed previously as Exhibit 10.1 to Form 10-K filed July 14, 2004)
10.2		First Amended and Restated Members Agreement dated April 22, 2003 by and between Casino America of Colorado, Inc., Casino America, Inc., Blackhawk Gold, Ltd., and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.2 to Form 10-K filed July 14, 2004)
10.3		License Agreement dated July 29, 1997 by and between Casino America, Inc. and Isle of Capri Black Hawk L.L.C. (filed previously as Exhibit 10.5 to the company’s Form 10-QSB, filed November 14, 1997)
10.4		Form of Indemnification Agreement between Nevada Gold & Casinos, Inc. and each officer and director (filed previously as Exhibit 10.5 to the company’s form 10-QSB, filed February 14, 2002)
10.5		Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to Form S-8, file no. 333-126027)
10.9		Investment Agreement dated April 21, 2005 by and among Casino Development & Management Company, LLC, Thomas C. Wilmot, Buena Vista Development Company, LLC and Nevada Gold BVR, L.L.C
10.10		Amended and Restated Operating Agreement dated April 21, 2005, by and between Casino Development & Management Company, LLC and Nevada Gold BVR, L.L.C.
10.11		Promissory Note dated May 4, 2005, in the amount of $14,810,200 executed by Buena Vista Development Company, LC as maker and payable to Nevada Gold BVR, L.L.C.
10.13		Employment Agreement by and between Nevada Gold & Casinos, Inc., and Jon A. Arnesen, dated as of August 31, 2005 (filed previously as Exhibit 10.13 to the Company's Form 10-Q/A, filed December 16, 2005)
10.14		Resignation Agreement by and between Nevada Gold & Casinos, Inc., and Christopher C. Domijan, dated as of September 6, 2005 (filed previously as Exhibit 10.14 to the Company's Form 10-Q/A, filed December 16, 2005)
10.15		Amended and Restated Credit Facility dated January 19, 2006 (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.15 to the Company's Form 8-K, filed January 25, 2006)
10.16 (**)		Form of Guarantee of Credit Facility among Nevada Gold and Casinos, Inc.; each of Black Hawk Gold, LTD, Gold River, LLC, Nevada Gold BVR, LLC, and Nevada Gold NY, Inc., and the Lender signing as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.16 to Form 10-Q filed March 3, 2006)
10.17 (**)		January 2006 Security Agreement dated January 19, 2006, by and between Nevada Gold & Casinos, Inc. , its wholly-owned subsidiary, Black Hawk Gold, Ltd., and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.17 to Form 10-Q filed March 3, 2006)
10.18 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Black Hawk Gold, LTD, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.18 to Form 10-Q filed March 3, 2006).

 

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10.19 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Nevada Gold BVR, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.19 to Form 10-Q filed March 3, 2006).
10.20 (**)		Commercial Pledge Agreement dated January 19, 2006 among Nevada Gold & Casinos, Inc., Gold River, LLC, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.20 to Form 10-Q filed March 3, 2006).
10.21 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Nevada Gold NY, Inc., and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.21 to Form 10-Q filed March 3, 2006).
10.23		Amended and Restated Operating Agreement of American Racing and Entertainment, L.L.C. dated effective as of March 1 2006, by and between Nevada Gold NY, Inc., Track Power, Inc. and Southern Tier Acquisition II LLC (filed previously as Exhibit 10.23 to Form 10-Q filed March 3, 2006).
10.24		Unconditional and Continuing Guaranty Agreement dated May 1, 2006, by Jeffrey Gural and Nevada Gold & Casinos, Inc., to and for the benefit of All Capital, LLC (previously filed as Exhibit 10.24 to Form 8-K filed May 5, 2006).
10.25		Unconditional and Continuing Guaranty Agreement dated May 1, 2006, by Jeffrey Gural and Nevada Gold & Casinos, Inc., to and for the benefit of Vestin Mortgage, Inc. (previously filed as Exhibit 10.25 to Form 8-K filed May 5, 2006).
10.26		Loan Agreement letter dated September 1, 2006, with respect to promissory notes and guaranty agreements between Big City Capital, LLC, Nevada Gold & Casinos, Inc. and Billy Bob Barnett. (filed previously as Exhibit 10.26 to Form 10-Q filed December 15, 2006)
10.27		Employment Agreement dated November 27, 2006 by and between Robert B. Sturges and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.27 to Form 10-Q filed December 15, 2006)
10.28(*)		Employment Agreement dated October 24, 2006 by and between James J. Kohn and Nevada Gold & Casinos, Inc.
10.29(*)		Employment Agreement dated , December 29, 2006 by and between Ernest E. East and Nevada Gold & Casinos, Inc.
31.1(*)		Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
31.2(*)		Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
32.1(*)		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(*)		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith

 

**	Portions of these exhibits have been omitted pursuant to a request for confidential treatment.

 

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Nevada Gold & Casinos, Inc.
By: /s/ James J. Kohn
James J. Kohn, Chief Financial Officer
Date: March 9, 2007

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INDEX TO EXHIBITS

 

Exhibit  No.		Document
2.1		Stock Purchase Agreement dated as of April 25, 2005 among Isle of Capri Black Hawk, L.L.C., IC Holdings Colorado, Inc., Colorado Grande Enterprise, Inc., and CGC Holdings, L.L.C.(filed previously as Exhibit 2.1 of to the Company’s Form 8-K, filed April 29, 2005)
3.1A		Amended and Restated Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit A to the company's definitive proxy statement filed on Schedule 14A on July 30, 2001)
3.1B		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.2 to Form S-8 filed October 11, 2002.
3.1C		Certificate of Amendment to the Articles of Incorporation of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.3 to Form 10-Q filed November 9, 2004)
3.2		Amended and Restated Bylaws of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 3.2 to the company’s Form 10-QSB filed August 14, 2002)
4.1		Common Stock Certificate of Nevada Gold & Casinos, Inc. (filed previously as Exhibit 4.1 to the company’s Form S-8/A, file no. 333-79867)
4.5		Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to the company’s Form S-8, file no. 333-126027)
10.1		Second Amended and Restated Operating Agreement of Isle of Capri Blackhawk L.L.C. (filed previously as Exhibit 10.1 to Form 10-K filed July 14, 2004)
10.2		First Amended and Restated Members Agreement dated April 22, 2003 by and between Casino America of Colorado, Inc., Casino America, Inc., Blackhawk Gold, Ltd., and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.2 to Form 10-K filed July 14, 2004)
10.3		License Agreement dated July 29, 1997 by and between Casino America, Inc. and Isle of Capri Black Hawk L.L.C. (filed previously as Exhibit 10.5 to the company’s Form 10-QSB, filed November 14, 1997)
10.4		Form of Indemnification Agreement between Nevada Gold & Casinos, Inc. and each officer and director (filed previously as Exhibit 10.5 to the company’s form 10-QSB, filed February 14, 2002)
10.5		Second Amended and Restated Nevada Gold & Casinos, Inc. 1999 Stock Option Plan (filed previously as Exhibit 4.6 to Form S-8, file no. 333-126027)
10.9		Investment Agreement dated April 21, 2005 by and among Casino Development & Management Company, LLC, Thomas C. Wilmot, Buena Vista Development Company, LLC and Nevada Gold BVR, L.L.C
10.10		Amended and Restated Operating Agreement dated April 21, 2005, by and between Casino Development & Management Company, LLC and Nevada Gold BVR, L.L.C.
10.11		Promissory Note dated May 4, 2005, in the amount of $14,810,200 executed by Buena Vista Development Company, LC as maker and payable to Nevada Gold BVR, L.L.C.
10.13		Employment Agreement by and between Nevada Gold & Casinos, Inc., and Jon A. Arnesen, dated as of August 31, 2005 (filed previously as Exhibit 10.13 to the Company's Form 10-Q/A, filed December 16, 2005)
10.14		Resignation Agreement by and between Nevada Gold & Casinos, Inc., and Christopher C. Domijan, dated as of September 6, 2005 (filed previously as Exhibit 10.14 to the Company's Form 10-Q/A, filed December 16, 2005)
10.15		Amended and Restated Credit Facility dated January 19, 2006 (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.15 to the Company's Form 8-K, filed January 25, 2006)
10.16 (**)		Form of Guarantee of Credit Facility among Nevada Gold and Casinos, Inc.; each of Black Hawk Gold, LTD, Gold River, LLC, Nevada Gold BVR, LLC, and Nevada Gold NY, Inc., and the Lender signing as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.16 to Form 10-Q filed March 3, 2006)
10.17 (**)		January 2006 Security Agreement dated January 19, 2006, by and between Nevada Gold & Casinos, Inc. , its wholly-owned subsidiary, Black Hawk Gold, Ltd., and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.17 to Form 10-Q filed March 3, 2006)
10.18 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Black Hawk Gold, LTD, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.18 to Form 10-Q filed March 3, 2006).
10.19 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Nevada Gold BVR, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.19 to Form 10-Q filed March 3, 2006).

 

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10.20 (**)		Commercial Pledge Agreement dated January 19, 2006 among Nevada Gold & Casinos, Inc., Gold River, LLC, and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.20 to Form 10-Q filed March 3, 2006).
10.21 (**)		Commercial Pledge Agreement dated January 19, 2006, among Nevada Gold & Casinos, Inc., Nevada Gold NY, Inc., and the Lender listed as a party thereto (portions of this exhibit have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Rule 24b-2 under the Exchange Act) (filed previously as Exhibit 10.21 to Form 10-Q filed March 3, 2006).
10.23		Amended and Restated Operating Agreement of American Racing and Entertainment, L.L.C. dated effective as of March 1 2006, by and between Nevada Gold NY, Inc., Track Power, Inc. and Southern Tier Acquisition II LLC (filed previously as Exhibit 10.23 to Form 10-Q filed March 3, 2006).
10.24		Unconditional and Continuing Guaranty Agreement dated May 1, 2006, by Jeffrey Gural and Nevada Gold & Casinos, Inc., to and for the benefit of All Capital, LLC (previously filed as Exhibit 10.24 to Form 8-K filed May 5, 2006).
10.25		Unconditional and Continuing Guaranty Agreement dated May 1, 2006, by Jeffrey Gural and Nevada Gold & Casinos, Inc., to and for the benefit of Vestin Mortgage, Inc. (previously filed as Exhibit 10.25 to Form 8-K filed May 5, 2006).
10.26		Loan Agreement letter dated September 1, 2006, with respect to promissory notes and guaranty agreements between Big City Capital, LLC, Nevada Gold & Casinos, Inc. and Billy Bob Barnett. (filed previously as Exhibit 10.26 to Form 10-Q filed December 15, 2006)
10.27		Employment Agreement dated November 27, 2006 by and between Robert B. Sturges and Nevada Gold & Casinos, Inc. (filed previously as Exhibit 10.27 to Form 10-Q filed December 15, 2006)
10.28(*)		Employment Agreement dated October 24, 2006 by and between James J. Kohn and Nevada Gold & Casinos, Inc.
10.29(*)		Employment Agreement dated , December 29, 2006 by and between Ernest E. East and Nevada Gold & Casinos, Inc.
31.1(*)		Chief Executive Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
31.2(*)		Chief Financial Officer Certification Pursuant to Section 13a-14 of the Securities Exchange Act.
32.1(*)		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(*)		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith

 

**	Portions of these exhibits have been omitted pursuant to a request for confidential treatment.

 

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