Southwest Casino--"Double Carpet" Odds that Management Wins.

In addition to managing Native American gaming facilities in Oklahoma and owning and operating three casinos in Cripple Creek, Colorado, Southwest Casino Corp. (SWCC.OB-$0.70) also provides consulting services for gaming operations.

Before commencing operations in the casino entertainment industry in 2004, Southwest Casino began as the shell of a publicly traded company called Lone Moose Adventures, Inc. Formed on January 2, 2002, Lone Moose was originally organized to take clients on adventure tours in the Wasatch mountain range of Utah. Since inception, Lone Moose conducted minimal operations and received only nominal revenue, for the company ran fewer than two-dozen adventure tours. Subsequently, Lone Moose ceased operations as a going concern. Upon closing, new management planned a reorganization and back door listing, and sold substantially all of the assets and liabilities of Lone Moose’s adventure tour business to Lone Moose’s founding shareholders.

Depending on the game and how wagers are placed, casinos earn anywhere from a 1 percent to 35 percent commission from your winnings. The 10Q Detective took an interest in Southwest Casino because this is one casino operator where the odds do favor the house—especially when it comes to the pay packages of its management.

On June 29, 2004—one month before the July 22nd reorganization of Lone Moose— Messrs. Druck (Southwest CEO), Halpern (Southwest – Chairman of the Board of Directors), and Fox (- President, Chief Operating Officer and Chief Financial Officer) struck separate Stock Purchase Agreements with Lone Moose Adventures that entitled each of Messrs. Druck, Halpern and Fox to purchase 66,960 shares of Lone Moose Adventures, Inc. Common Stock at a purchase price of $0.37335 per share for a total purchase price, for each of such block of 66,960 shares purchased, of $25,000.

Lone Moose announced on July 2, 2004 that the parties agreed in principle to pursue the contemplated reverse merger transaction

Then, On July 14, 2004, the Company issued 1,500,000 shares of its common stock under the terms of stock purchase agreements entered into on June 29, 2004, therewith each of Messrs. Druck, Halpern, and Fox received 500,000 shares. Today, each of these aggregate $25,000 investments is worth $350,000—a cool two-year ROI of 1,300 percent!

The Southwest Casino provides management services in connection with two Lucky Star casino facilities, one located in Concho, Oklahoma and the other located in Clinton, Oklahoma, under the terms of a management agreement with the Cheyenne and Arapaho Tribes of Oklahoma. In early 2005, the Tribes entered into a gaming compact with the State of Oklahoma that permitted the Tribes to offer an expanded scope of gaming, including permitted card games, at the casinos managed by Southwest. This coincided with a peak high for the stock trading price of Southwest Casino Common Stock (~$.3.75 per share) as investors probably anticipated a material increase in top-line growth from the addition of new management fees (the direct result of the Tribes signing the gaming compact that allowed new gaming opportunities such as card games and poker, as well as certain Class III electronic games).

In a filing with the SEC in early July 2004 (prior to the reorganization of Lone Moose into a Casino operator), the Company did state: “The purpose of the acquisition of securities of Lone Moose by each of Messrs. Druck, Halpern and Fox was to provide appropriate equity-based incentives to these individuals as the new executive managers of Lone Moose to pursue the long-term future growth of the company following consummation of the proposed reverse merger of Southwest Casino and Hotel Corp with and into a wholly-owned subsidiary of Lone Moose (Reverse Merger).” Like we said, the odds favor the House.

If any of our readers are thinking of Southwest Casino Corp. as a potential speculative gaming entertainment BUY for their stock portfolios—move it along. This a small-time casino operator in Colorado with Las-Vegas dreams. Current gaming activities are concentrated in Oklahoma and Colorado operations.

In FY 2005, Southwest did manage to scratch out net income of $566,350, share-net of $0.03, on total revenue of $20.7 million. Remember we said Southwest Casino was a ‘small-time’ operator. Looking at peer comparables, the Industry average for net income was $16.4 MILLION in 2005. And, looking at a true sign of management efficiency—operating margins: Southwest Casino had an operating margin of 2.3% in FY ’05 compared to the industry average of 6.98%--never mind that the better run casinos like MGM, Harrah’s or Aztar Corp. showed margins of 19.47%, 18.38%, and 16.81%, respectively.

In FY ’05 ending December 31, 2005, the Gold-Rush/Gold-Digger Casino’s posted a (1.3)% decline in casino revenues to $14.03 million. The revenues remained relatively flat as a result of competition in the market and an inability to add more games to the facility.

The Company’s third casino, Uncle Sam’s Casino, is a facility with only 67 slot machines that primarily serves the local residents market in Cripple Creek, Colorado. Casino revenues declined (25.3)% in 2005 to $952,067. In 2004, a new casino that also caters to the local residents entered the market, bringing with it hundreds of new-coin hungry-slot machines. As a result, Uncle Sam’s lost market share.

In FY ’05, Southwest Casino generated approximately 24%, or $4.9 million, of its revenue through its management agreement with the Cheyenne and Arapaho Tribes of Oklahoma for the Lucky Star casinos in Concho, Oklahoma and Clinton, Oklahoma. The current management agreement runs through May 20, 2007. Any extension of the management agreement beyond May 19, 2007 can only occur with the consent of the Cheyenne and Arapaho Tribes of Oklahoma and the approval of the National Indian Gaming Commission

There is a possibility that the Company could lose this contract. The National Indian Gaming Commission (NIGC) has expressed concern about the distribution of gaming proceeds by the Cheyenne and Arapaho Tribes of Oklahoma, for whom the Company manages casinos. In December 2004, the NIGC notified the Tribes that the NIGC was concerned the Tribes were not distributing properly the net revenue they receive from gaming operations. Albeit the NIGC’s concerns relate to the use of gaming revenue after Southwest has distributed it to the Tribes and are not related to management of the Tribes’ casinos. However, if the NIGC determines that the Tribes have committed a substantial violation of the Indian Gaming Regulatory Act, NIGC rules, or the Tribes’ gaming ordinance, it could bring an enforcement action against the Tribes. If an enforcement action were successful, potential penalties range from fines to, in extreme cases, an order closing the Tribes’ gaming operations. Closure of these facilities would eliminate a primary source of operating revenue and have a material adverse impact on the Company’s financial condition.

Financially, the Company is in tough shape. Southwest has incurred substantial operating losses since inception and had an accumulated deficit of $9,736,506 as of December 31, 2005. These losses are “primarily the result of expenses related to ongoing pursuit of new gaming opportunities.”

In our opinion, however, the balance sheet leaves little room for “new gaming opportunities.” The Company has ($2.71) million in working capital and long-term debt ($9.1 million) plus future long-term operating lease liabilities ($1.0 million) swamp stockholder equity ($6.2 million)—ratio of 162.9 percent! And the times-interest-earned ratio (how many times a company can cover it's interest payments) at FY ended December 2005 was 0.61—which means that the Company cannot AFFORD attainable growth—never mind sustainable growth.

Additionally, On October 20, 2005, the Company Entered into a new $2.5 million term loan agreement, secured by substantially all of the Company assets, including 12 shareholder guarantors, too. [ed. note. Messrs. Druck, Fox and Halpern in consideration of each of their agreements to guarantee personally up to $100,000 each of the loan were each granted warrants to purchase 50,000 shares of Common Stock at an exercise price of $0.58 per share.]