**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 
| **ý**                                        | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|
|                                              |       |                                                                                              |
| **For the  quarterly period ended June 30, 2005** |
|                                              |       |                                                                                              |
| **o**                                             | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                    |

 

**For theTransition Period From                To                **

 

**Commissionfile number 000-50572**

 

**SOUTHWEST CASINO CORPORATION**

(Exact name of smallbusiness issuer as specified in its charter)

 
| **Nevada**                                                       | ** ** | **87-0686721**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other  jurisdiction of incorporation or  organization) |       | (IRS Employer  Identification No.) |

 

**2001Killebrew Drive, Suite 350, Minneapolis, Minnesota 55425**

(Address of principalexecutive offices)

 

**(952)853-9990**

(Issuer’s telephone number)

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.   YES  ý  NO  o

 

Statethe number of shares outstanding of each of the issuer’s classes of commonstock as of the latest practicable date:  19,588,656

 

TransitionalSmall Business Disclosure Format (check one):    Yes  o      No  ý

 

 

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**SOUTHWESTCASINO CORPORATION**

 

**FORM 10-QSB**

**JUNE 30,2005**

 

**TABLE OFCONTENTS**

 
| Description    |                                                                                                                 |
|----------------|----------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                 |   |
| PART I.        | FINANCIAL INFORMATION                                                                                                | 3 |
| ITEM 1.        | Financial Statements                                                                                                 | 3 |
|           | Consolidated Balance Sheet  (Unaudited), June 30, 2005                                                               | 4 |
|           | Consolidated Statements of  Operations (Unaudited) for the Three Months and Six Months ended June 30,  2005 and 2004 | 5 |
|           | Consolidated Statements of  Cash Flows (Unaudited) for the Six Months ended June 30, 2005 and 2004                   | 6 |
|           | Notes to Unaudited  Consolidated Financial Statements                                                                | 7 |
| ITEM 2.        | Management’s  Discussion and Analysis or Plan of Operation                                                      | 15 |
| ITEM 3.        | Controls and Procedures                                                                                              | 22 |
|           |                                                                                                                 |   |
| PART II.       | OTHER INFORMATION                                                                                                    | 24 |
| ITEM 1.        | Legal Proceedings                                                                                                    | 24 |
| ITEM 2.        | Unregistered  Sales of Equity Securities and Use of Proceeds                                                         | 24 |
| ITEM 6.        | Exhibits                                                                                                             | 25 |
| SIGNATURE PAGE | 26                                                                                                                   |

 

*In this Form 10-QSB, references to “Southwest,” “thecompany,” “we,” “our” or “us,” unless the context otherwise requires, refer toSouthwest Casino Corporation.*

 

2

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 

**SOUTHWESTCASINO CORPORATION**

 

**Table ofContents**

 
| **FINANCIAL STATEMENTS** |                                                                                                                |
|--------------------------|---------------------------------------------------------------------------------------------------------------------|
|                     | Consolidated Balance Sheet  (Unaudited), June 30, 2005                                                              | 4 |
|                     | Consolidated  Statements of Operations (Unaudited)for the Three Months and Six Months ended  June 30, 2005 and 2004 | 5 |
|                     | Consolidated  Statement of Cash Flows (Unaudited) for the Six Months ended June 30, 2005  and 2004                  | 6 |
|                     | Notes  to Unaudited Consolidated Financial Statements                                                               | 7 |

 

3

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** **

**SOUTHWEST CASINO CORPORATION**

**Consolidated Balance Sheets (Unaudited)**

**June 30, 2005**

 
| ASSETS                                                                                                 | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------|------------|
|                                                                                                   |       |        |       |
| CURRENT ASSETS                                                                                         |       |        |       |
| Cash and Cash Equivalents                                                                              |       | $           | 1,307,567  |   |
| Cash – Restricted                                                                                 |       | 152,606     |       |
| Accounts Receivable                                                                                    |       | 111,289     |       |
| Management Fees Receivable                                                                             |       | 506,439     |       |
| Inventories                                                                                            |       | 139,901     |       |
| Prepaid Expenses                                                                                       |       | 665,743     |       |
| Total Current Assets                                                                                   |       | $           | 2,883,545  |   |
|                                                                                                   |       |        |       |
| PROPERTY AND EQUIPMENT                                                                                 |       |        |       |
| Real Estate Options                                                                                    |       | $           | 650,257    |   |
| Construction in Progress                                                                               |       | 1,274,180   |       |
| Leasehold Improvements                                                                                 |       | 15,671,888  |       |
| Furniture and Equipment                                                                                |       | 6,510,346   |       |
| Accumulated Depreciation                                                                               |       | (8,733,051  | )          |
| Net Property and Equipment                                                                             |       | $           | 15,373,620 |   |
|                                                                                                   |       |        |       |
| OTHER ASSETS                                                                                           |       |        |       |
| Intangible Assets                                                                                      |       | $           | 1,378,506  |   |
| Deposits                                                                                               |       | 110,900     |       |
| Deferred Tax Asset                                                                                     |       | 842,000     |       |
| Total Other Assets                                                                                     |       | $           | 2,331,406  |   |
|                                                                                                   |       |        |       |
| TOTAL ASSETS                                                                                           |       | $           | 20,588,571 |   |
|                                                                                                   |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                             |       |        |       |
|                                                                                                   |       |        |       |
| CURRENT LIABILITIES                                                                                    |       |        |       |
| Accounts Payable                                                                                       |       | $           | 2,944,185  |   |
| Accrued Expenses                                                                                       |       | 633,678     |       |
| Accrued Liabilities - Related Parties                                                                  |       | 606,967     |       |
| Notes Payable                                                                                          |       | 662,523     |       |
| Current Portion of Long-Term Liabilities                                                               |       | 774,352     |       |
| Convertible Subordinated Series A  Debentures                                                          |       | 75,000      |       |
| Accrued Interest Payable                                                                               |       | 76,312      |       |
| Total Current Liabilities                                                                              |       | $           | 5,773,017  |   |
|                                                                                                   |       |        |       |
| LONG-TERM LIABILITIES NET OF CURRENT  PORTION                                                          |       | $           | 8,640,034  |   |
|                                                                                                   |       |        |       |
| MINORITY INTEREST IN SUBSIDIARY                                                                        |       | $           | 854,442    |   |
|                                                                                                   |       |        |       |
| STOCKHOLDERS’ EQUITY                                                                              |       |        |       |
| Common Stock, $.001 Par Value, 50,000,000  Shares Authorized, 19,588,656 Shares Issued and Outstanding |       | $           | 19,588     |   |
| Additional Paid-in Capital - Warrants                                                                  |       | 29,750      |       |
| Additional Paid-in Capital                                                                             |       | 16,805,123  |       |
| Accumulated Deficit                                                                                    |       | (11,533,383 | )          |
| Total Stockholders’ Equity                                                                        |       | $           | 5,321,078  |   |
|                                                                                                   |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                        |       | $           | 20,588,571 |   |

 

See Notes to Unaudited Consolidated FinancialStatements

 

4

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**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Operations (Unaudited)**

**For the SixMonths Ended June 30, 2005 and 2004**

 
| ** **                                                             | ** ** | ** **         | ** ** | **Restated**       | ** ** | ** **           | ** ** | **Restated**         | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **The Six Months** | ** ** | **The Six Months** | ** ** | **The Three Months** | ** ** | **The Three Months** | ** ** |
| ** **                                                             | ** ** | **Ended**          | ** ** | **Ended**          | ** ** | **Ended**            | ** ** | **Ended**            | ** ** |
| ** **                                                             | ** ** | **June 30,2005**   | ** ** | **June 30,2004**   | ** ** | **June30,2005**      | ** ** | **June 30,2004**     | ** ** |
| ** **                                                             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| **REVENUES**                                                           | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Casino                                                                 |       | $                  | 7,397,990  |               | $          | 7,869,427            |       | $                    | 3,834,634  |   | $ | 4,057,020 |   |
| Food & Beverage/Hotel                                              |       | 201,529            |       | 192,205            |       | 107,408              |       | 109,275              |       |
| Management and Consulting                                              |       | 2,212,905          |       | 2,378,765          |       | 1,188,447            |       | 1,088,175            |       |
| Entertainment                                                          |       | 6,685              |       | 18,383             |       | 6,685                |       | 18,383               |       |
| Other                                                                  |       | 77,658             |       | 45,044             |       | 43,995               |       | 18,326               |       |
| Total Revenue                                                          |       | 9,896,767          |       | 10,503,824         |       | 5,181,169            |       | 5,291,179            |       |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| **EXPENSES**                                                           | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Casino                                                                 |       | $                  | 6,177,943  |               | $          | 5,860,145            |       | $                    | 3,060,644  |   | $ | 3,025,006 |   |
| Food & Beverage/Hotel                                              |       | 277,039            |       | 760,482            |       | 137,161              |       | 385,575              |       |
| Corporate Expense                                                      |       | 1,397,864          |       | 1,397,092          |       | 706,458              |       | 759,303              |       |
| Project Development Costs                                              |       | 515,545            |       | 569,479            |       | 196,896              |       | 218,685              |       |
| Entertainment                                                          |       | 52,599             |       | 40,810             |       | 41,726               |       | 31,936               |       |
| Depreciation and Amortization                                          |       | 1,191,016          |       | 1,032,359          |       | 595,877              |       | 511,175              |       |
| Total Expenses                                                         |       | 9,612,006          |       | 9,660,367          |       | 4,738,762            |       | 4,931,680            |       |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Income from Operations                                                 |       | $                  | 284,761    |               | $          | 843,457              |       | $                    | 442,407    |   | $ | 359,499 |   |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| **OTHER INCOME (EXPENSE)**                                             | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Interest Income                                                        |       | $                  | 4,061      |               | $          | 7,792                |       | $                    | 1,316      |   | $ | 786 |   |
| Interest Expense                                                       |       | (522,678           | )          | (538,084           | )          | (236,410             | )          | (266,850             | )          |
| Loss on Disposition of Property and  Equipment                         |       | (1,015             | )          | (4,917             | )          | (860                 | )          | (4,917               | )          |
| Income from Debt Forgiveness                                           |       | —             |       | 9,219              |       | —               |       | 9,219                |       |
| Total Other Income (Expense)                                           |       | (519,632           | )          | (525,990           | )          | (235,954             | )          | (261,762             | )          |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Income (Loss) from Continuing Operations Before  Income Taxes          |       | (234,871           | )          | 317,467            |       | 206,453              |       | 97,737               |       |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Income Tax Benefit (Expense)                                           |       | —             |       | (133,000           | )          | —               |       | (90,400              | )          |
| Minority Interest in Income of Consolidated  Subsidiary                |       | 127,884            |       | 10,000             |       | 93,448               |       | 10,000               |       |
| Equity in Earning of Unconsolidated Subsidiary                         |       |               |       | (449,585           | )          |                 |       | (449,585             | )          |
| Income (Loss) from Continuing Operations                               |       | (106,987           | )          | (255,118           | )          | 299,901              |       | (432,248             | )          |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| **DISCONTINUED OPERATIONS**                                            | ** ** | ** **         | ** ** | ** **         | ** ** | ** **           | ** ** | ** **           | ** ** |
| Loss from Discontinued Operations                                      |       | $                  | —     |               | $          | (256,582             | )          | $                    | —     |   | $ | (8,391 | ) |
| Income Tax Benefit                                                     |       | —             |       | 42,600             |       | —               |       | —               |       |
| Total Discontinued Operations                                          |       | —             |       | (213,982           | )          | —               |       | (8,391               | )          |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| **NET INCOME (LOSS)**                                                  |       | $                  | (106,987   | )                  | $          | (469,100             | )          | $                    | 299,901    |   | $ | (440,639 | ) |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Earnings per common share and common  equivalent share,                |       |               |       |               |       |                 |       |                 |       |
| Basic:                                                                 |       |               |       |               |       |                 |       |                 |       |
| Income (Loss) from continuing operations                               |       | (0.01              | )          | (0.07              | )          | 0.02                 |       | (0.12                | )          |
| Discontinued operations                                                |       | —             |       | (0.06              | )          | —               |       | (0.00                | )          |
| Net Income                                                             |       | $                  | (0.01      | )                  | $          | (0.13                | )          | $                    | 0.02       |   | $ | (0.12 | ) |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Common Equivalent Shares Outstanding                                   |       | 19,449,641         |       | 3,722,224          |       | 19,513,656           |       | 3,722,224            |       |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Earnings per common share and common  equivalent share, Fully-diluted: |       |               |       |               |       |                 |       |                 |       |
| Income (Loss) from continuing operations                               |       | (0.01              | )          | (0.07              | )          | 0.01                 |       | (0.12                | )          |
| Extraordinary item                                                     |       | —             |       | (0.06              | )          | —               |       | —               |       |
| Net Income                                                             |       | $                  | (0.01      | )                  | $          | (0.13                | )          | $                    | 0.01       |   | $ | (0.12 | ) |
|                                                                   |       |               |       |               |       |                 |       |                 |       |
| Common Equivalent Shares Outstanding                                   |       | 19,449,641         |       | 3,722,224          |       | 22,039,489           |       | 3,722,224            |       |

 

SeeNotes to Unaudited Consolidated Financial Statements

 

5

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**SOUTHWEST CASINO CORPORATION**

**Consolidated Statements of Cash Flows (Unaudited)**

**For the Six Months Ended June 30,2005 and 2004**

 
| ** **                                                              | ** ** | ** **         | ** ** | **Restated**       | ** ** |
|-------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                              | ** ** | **The Six Months** | ** ** | **The Six Months** | ** ** |
| ** **                                                              | ** ** | **Ended**          | ** ** | **Ended**          | ** ** |
| ** **                                                              | ** ** | **June 30,2005**   | ** ** | **June 30,2004**   | ** ** |
| ** **                                                              | ** ** | ** **         | ** ** | ** **         | ** ** |
| Cash Flows from Operating Activities:                                   |       |               |       |               |       |
| Net Loss                                                                |       | $                  | (106,987   | )                  | $          | (469,100 | ) |
| Adjustments to Reconcile Net Loss to                                    |       |               |       |               |       |
| Net Cash Provided by (Used In) Operating  Activities:                   |       |               |       |               |       |
| Minority Interest                                                       |       | (127,884           | )          | (10,000            | )          |
| Depreciation and Amortization                                           |       | 1,161,252          |       | 1,066,681          |       |
| Equity (Loss) on Unconsolidated Subsidiary                              |       | —             |       | 539,985            |       |
| (Gain) Loss on Disposition of Property and  Equipment                   |       | 348                |       | 4,917              |       |
| Common Stock Issued for Non-Cash  Compensation                          |       | 10,875             |       | —             |       |
|                                                                    |       |               |       |               |       |
| Change in Current Assets and Liabilities                                |       |               |       |               |       |
| Write off of Real Estate Option cost  incurred in prior years           |       | 249,778            |       | —             |       |
| (Increase) Decrease in Restricted Cash                                  |       | 49,541             |       | —             |       |
| (Increase) Decrease in Receivables                                      |       | (240,254           | )          | 61,037             |       |
| (Increase) Decrease in Inventory                                        |       | 14,823             |       | 15,365             |       |
| (Increase) Decrease in Prepaid Expenses                                 |       | (25,133            | )          | (192,093           | )          |
| Increase (Decrease) in Accounts Payable                                 |       | 86,734             |       | (197,063           | )          |
| Increase (Decrease) in Accrued Expenses                                 |       | (336,685           | )          | 162,302            |       |
| Increase (Decrease) in Accrued Interest  Payable                        |       | (33,463            | )          | 7,956              |       |
| Net Cash Provided By Operating Activities                               |       | $                  | 702,945    |               | $          | 989,987 |   |
|                                                                    |       |               |       |               |       |
| CASH FLOWS FROM INVESTING ACTIVITIES                                    |       |               |       |               |       |
| Proceeds from Sale of Property and  Equipment                           |       | $                  | —     |               | $          | 24,780 |   |
| Purchase of Property and Equipment                                      |       | (356,039           | )          | (980,444           | )          |
| Payment of Capitalized License                                          |       | (194,244           | )          | —             |       |
| (Increase) Decrease in Deposits                                         |       | (10,876            | )          | —             |       |
| Investments - subsidiaries and affiliates                               |       | —             |       | (832,414           | )          |
| Proceeds from principal received on  long-term notes receivable         |       | —             |       | 402,686            |       |
| Proceeds from (payments to) escrow                                      |       | —             |       | 9,699              |       |
| Net Cash (Used In) Investing Activities                                 |       | $                  | (561,159   | )                  | $          | (1,375,693 | ) |
|                                                                    |       |               |       |               |       |
| CASH FLOWS FROM FINANCING ACTIVITIES                                    |       |               |       |               |       |
| Net Advances (Payments) on Short-Term Notes  Payable                    |       | $                  | (220,578   | )                  | $          | 350,000 |   |
| Payment of Deferred Financing and Offering  Costs                       |       | —             |       | (79,605            | )          |
| Proceeds from debenture issuance                                        |       |               |       | 850,000            |       |
| Proceeds from Long-Term Borrowings                                      |       | (370,522           | )          | (578,457           | )          |
| Proceeds from Outside Investors - Minority  Interest                    |       | 982,325            |       | 10,000             |       |
| Proceeds from Issuance of Preferred Stock  & Warrants               |       | 49,000             |       | 24,000             |       |
| Payment of Subordinated Debentures                                      |       | (25,000            | )          | —             |       |
| Net Cash Provided by Financing Activities                               |       | $                  | 415,225    |               | $          | 575,938 |   |
|                                                                    |       |               |       |               |       |
| Net Increase (Decrease) in Cash and Cash  Equivalents                   |       | 557,011            |       | 190,232            |       |
|                                                                    |       |               |       |               |       |
| CASH AND CASH EQUIVALENTS                                               |       |               |       |               |       |
| Beginning of Year                                                       |       | 750,556            |       | 728,290            |       |
| End of Year                                                             |       | $                  | 1,307,567  |               | $          | 918,522 |   |
|                                                                    |       |               |       |               |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION                       |       |               |       |               |       |
| Interest paid                                                           |       | $                  | 495,529    |               | $          | 273,376 |   |
| Income taxes paid                                                       |       | —             |       | 45,153             |       |
|                                                                    |       |               |       |               |       |
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING  AND FINANCING ACTIVITIES |       |               |       |               |       |
| Warrants issued in exchange for services                                |       | $                  | 10,900     |               | $          | 188,400 |   |
| Purchase of equipment with financing                                    |       | —             |       | 1,144,500          |       |
| Capital Assets acquired with Accounts  Payable                          |       | 72,201             |       | 248,236            |       |

 

See Notes to Unaudited Consolidated FinancialStatements

 

6

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

**NOTE 1 – ORGANIZATION AND NATURE OFOPERATIONS**

 

Southwest Casino Corporation

 

The current structure ofSouthwest Casino Corporation resulted from a July 22, 2004 reorganizationconsummated by Lone Moose Adventures, Inc. (now Southwest Casino Corporation),a Nevada corporation, Lone Moose Acquisition Corporation, a Minnesotacorporation and wholly-owned subsidiary of Lone Moose Adventures, SouthwestCasino and Hotel Corp., a Minnesota corporation, and certain shareholders ofLone Moose Adventures.  In thereorganization, Lone Moose Acquisition Corporation merged with and intoSouthwest Casino and Hotel Corp. Southwest Casino and Hotel Corp. was the surviving corporation in thatmerger and became a wholly-owned subsidiary of Lone Moose Adventures.  Lone Moose Adventures changed its name toSouthwest Casino Corporation immediately after that merger.

 

In the reorganization, Lone Moose Adventures (now Southwest CasinoCorporation) issued 16,161,343 shares of its common stock to shareholders ofSouthwest Casino and Hotel Corp. to acquire 100% of the issued and outstandingshares of common stock, Series C convertible preferred stock, and otherconvertible securities of Southwest Casino and Hotel Corp.  The reorganization represents a recapitalizationof Southwest Casino Corporation with accounting treatment similar to that usedin a reverse acquisition, except that no goodwill or intangible isrecorded.  A recapitalization ischaracterized by the merger of a private operating company into a non-operatingpublic shell corporation with nominal net assets and typically results in theowners and managers of the private company having effective operating controlafter the transaction.  Southwest CasinoCorporation emerged as the surviving reporting entity after the reorganization.

 

Southwest Casino Corporation, through its wholly-owned subsidiaries,operates three casinos in Cripple Creek, Colorado and manages Native Americangaming facilities under contractual agreements. Southwest Casino Corporation’s operations include the following consolidatedsubsidiaries:

 

Southwest Casino and Hotel Corp.

 

Southwest Casino and Hotel Corp. was formed in 1992 and providesmanagement consulting services for casinos under contractual agreements. Thecontractual agreements will expire in May 2007 unless extended by an additionalcontractual agreement.  In addition,SWC&H operates Uncle Sam’s Casino in Cripple Creek, Colorado under a 5-yearlease which was extended for an additional 5 years ending in 2009.

 

Gold Rush I, LLC

 

Gold Rush I, LLC was formed during 1999 and operates the Gold RushHotel and Casino and Gold Digger’s Casino in Cripple Creek, Colorado under along term capitalized lease agreement.

 

Southwest Entertainment. Inc.

 

Southwest Entertainment, Inc., located in Minneapolis, Minnesota, wasformed on November 4, 1998. The company operates an outdoor amphitheatre forentertainment events in Cripple Creek, Colorado.

 

Southwest Casino Deadwood, LLC

 

Southwest Casino Deadwood, LLC, located in Deadwood, South Dakota, wasformed on December 7, 1999 and began operating B.B. Cody’s Casino under leasein July 2000.  During December 2003, theCompany decided to discontinue operations in Deadwood. (See Note 10.)

 

North Metro Harness Initiative, LLC.

 

North Metro Harness Initiative, LLC (a development stage Minnesotalimited liability company) was formed on June 16, 2003 for the purpose ofdeveloping, owning, and operating a harness racetrack and card room north of

 

7

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

Minneapolis, Minnesota, in Anoka County.  North Metro was issued a license by theMinnesota Racing Commission on February 16, 2005.  As a result of the Minnesota Racing Commission’sdecision, the Commission is being sued by a group opposed to theracetrack.  North Metro cannot moveforward with its development until this matter is resolved.  North Metro’s activities are described morefully in Note 15.

 

SW Missouri, LLC

 

SW Missouri, LLC is a 30% shareholder in Southwest Missouri Gaming,LLC, which was pursuing state and local regulatory approval and acquiringproperty for a riverboat casino in Rockaway Beach, Missouri.  This initiative was defeated in a statewideprimary election held on August 3, 2004. It is unlikely, but still possible that this initiative will be revivedif the project was to gain greater support from the surrounding communities,including Branson, MO.

 

### **NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

### ** **

The unaudited financial statements of the Company havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission. Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America.  In the opinion ofmanagement, all adjustments considered necessary for a fair presentation havebeen included in the accompanying financial statements. The results ofoperations for the six months and three months ended June 30, 2005 and 2004 arenot necessarily indicative of the results to be expected for a full year.

 

These financial statements should be read in conjunction with thefinancial statements and notes included in the Company’s financial statementsfor the year ended December 31, 2004.

 

# **Principles of Consolidation**

 

# **The accompanying consolidatedfinancial statements include the accounts of Southwest Casino Corporation andits subsidiaries.  All materialinter-company transactions and balances have been eliminated in consolidation.**

 

# **Basis of Accounting**

 

# **The consolidated financialstatements of the Company are prepared using the accrual basis of accountingwhereby revenues are recognized when earned and expenses are recognized whenincurred.  This basis of accountingconforms to generally accepted accounting principles in the United States ofAmerica.**

 

Use of Estimates

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during theperiod.  Actual results could differ fromthose estimates.

 

Revenue Recognition

 

Casino revenue is the net win from gaming activities, which is thedifference between gaming wins and losses. Revenue from food, beverage and hotel operations is recorded upondelivery of goods or services, and excludes promotional allowances.  Revenue from casino management and consultingcontracts with outside parties is recognized over the term of theagreements.  Consideration given inexchange for entering into long-term contracts is amortized over the life ofthe agreement.

 

8

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

Operating Segments

 

The Company has segregated its activities into three operating segmentsbased on operating and management characteristics related to its sources ofrevenue or basis for accumulating assets or expenses.  The segments are defined as casinooperations, casino management for unrelated parties, and casino developmentactivities.  Separate operations areaggregated based on the above general segment descriptions.

 

Investments

 

Investments in entities where the Company has morethan a 20% but less than a 50% financial and voting interest are recorded onthe equity method of accounting.  Whenthe Company is a primary beneficiary of a Variable Interest Entity as definedunder FASB Interpretation 46(R), or when the Company has an investment of morethan 50% but less than 100%, the Company consolidates the entity and adjuststhe investment by minority interest holder for the portion of the income orloss allocable to the minority owner. See discussion of North Metro Harness Initiative, LLC in Note 15.

 

**NOTE 3 – RESTRICTED CASH**

 

Restricted Cash at June 30, 2005 represents a bank escrow account setup to repurchase Series A convertible subordinated debentures that wereoutstanding as of July 14, 2004.  SeeNote 7.

 

# **NOTE 4 –PROMOTIONALALLOWANCES**

# ** **

# **Revenue does not include the retail amount of rooms,food, and beverage provided gratuitously to customers, which was approximately$549,000 and $589,000 for the six months ended June 30, 2005 and 2004,respectively, and was approximately $247,000 and $309,000 for the three monthsended June 30, 2005 and 2004 respectively.**

 

**NOTE 5 – INTANGIBLE ASSETS AND CASINO MANAGEMENTAGREEMENT**

 
| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Intangible Assets consisted of the  following at June 30: |       |     |       |     |       |
|                                                      |       |     |       |     |       |
| Casino management contract rights                         |       | $        | 977,126    |     | $          | 1,486,931 |   |
| Minnesota Class A and B Racing License                    |       | 401,380  |       | —   |       |
| Total                                                     |       | $        | 1,378,506  |     | $          | 1,486,931 |   |

 

Future amortization of management contractrights are as follows:

 

| **Twelve Months Ended June 30,** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
|                             |       |       |       |
| 2006                             |       | $          | 509,805    |   |
| 2007                             |       | $          | 467,321    |   |

 

The Company entered into an agreement withthe Cheyenne and Arapaho Tribes of Oklahoma (CATO) for management of itscasinos located in Oklahoma that was to expire on May 19, 2004. In exchange forextending the contract through May 19, 2007, the Company has transferred titleto a tract of land to CATO.  The exchangetook place in 2003.  Since the assettransfer is related to the extension agreement for management services, thecost of the land is being amortized over the term of the agreement.

 

The Company earned management revenuesrelated to the agreement with CATO of $2,212,905 and $2,378,765 for the sixmonths ended June 30, 2005 and 2004, respectively.  The Company earned management revenuesrelated to the agreement with CATO of $1,188,447 and $1,088,175 for the threemonths ended June 30, 2005 and 2004, respectively.

 

9

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

The Company has also expendedfunds to acquire a Class A and a Class B License from the Minnesota RacingCommission.  Although this license isrenewed on an annual basis, the costs of obtaining the initial license areconsidered to have an indefinite useful life because it is expected to generatecash flows indefinitely.

 

**NOTE 6 – NOTES PAYABLE**

 

The Company may borrow up to $450,000 under arevolving line of credit.  Interest ispayable at a variable rate (7.25% as of June 30, 2005). The line is due May 5,2006, and is collateralized by substantially all assets.  At June 30, 2005, the line had a balance of$446,292 with $3,708 available to draw. The line of credit is included in notes payable on the accompanyingbalance sheet.

 

The Company has entered into a collateral agreementand promissory note to collateralize a $500,000 bond related to the developmentof North Metro Harness Initiative, LLC. The promissory note is due on June 1,2006, with a variable interest ratio (7.25% as of June 30, 2005).**At June 30, 2005 the note had not beendrawn. The note is personally guaranteed by the Directors and a stockholder ofthe Company.

 

On October 12, 2004, the Company borrowed $500,000amortized over one year at $42,934 per month, at a variable rate (7.25% as ofJune 30, 2005) and personally guaranteed by the Directors of the Company.  The last payment is due October 31,2005.  The balance of the loan was$171,231 as of June 30, 2005.

 

On June 24, 2005, the Company borrowed $45,000 with aninterest rate of 7% due October 12, 2005. The note is personally guaranteed by the Directors of the Company.

 

**NOTE 7 – SUBORDINATED DEBENTURES**

 

During 1993, the Company sold $8,250,000 of Series A convertiblesubordinated debentures paying interest at a rate of 9.25% per year and due andpayable on July 15, 1998.  On July 8,2004, the Company offered to redeem all remaining outstanding Series Adebentures, in the principal amount of $362,500, which were then in default, inexchange for payment of all principal plus interest accrued through July 14,2004, or conversion of the principal to common stock plus payment of accruedinterest through July 14, 2004.  TheCompany has paid all amounts necessary to redeem the remaining Series Aconvertible subordinated debentures in accordance with this offer into anescrow account established for this purpose. On February 14, 2005, a debenture holder converted his $25,000 debentureinto 22,728 shares of common stock. Therefore, as of June 30, 2005, Series Aconvertible subordinated debentures in the principal amount of $75,000 remainedoutstanding with accrued interest payable of $76,312.  In accordance with the July 8, 2004redemption offer, we are no longer accruing interest on the outstanding SeriesA debentures.

 

**NOTE 8 – PRIOR PERIOD ADJUSTMENT**

 

The statements of operations and cash flows for the six months endedJune 30, 2004 have been restated for correction of an error in the recording ofcapital leases. The adjustments for the three months ended June 30, 2004results in a reduction of net income of $7,973 and $15,947 for the six monthsended June 30, 2004 from amounts previously reported.

 

**NOTE 9 – STOCK OPTIONS AND WARRANTS**

 

On March 25, 2005, the Company issued 125,000 shares of common stock toa consultant to the racetrack development who exercised a warrant to purchasethose shares at a price of $0.12 per share.

 

On May 2, 2005, the Company issued 75,000 shares of common stock to aconsultant to the racetrack development who exercised a warrant to purchasethose shares at a price of $0.12 per share.

 

10

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

##### **NOTE 10 –DISCONTINUED OPERATIONS AND IMPAIRMENT**

 

During2003, as a result of continued losses from operations, the Company decided todiscontinue the operation of its casino in Deadwood, South Dakota. As a result,during 2004, the Company sold or abandoned certain assets and transferred theremaining assets to other casino operations. As of December 31, 2003, the valueof the assets sold was recorded as assets held for sale on the accompanyingbalance sheet. For the year ended December 31, 2003, the Company recorded aloss of $282,550 for the difference between the net book value of the assetssold or abandoned and the net proceeds received subsequent to December 31,2003. During the three months ended June 30, 2004, the Company incurred anadditional loss on disposal of assets of approximately $500 related to thisdiscontinued operation.

 

Revenuesfrom the Deadwood Casino totaled approximately $262,678, for the six monthsended June 30, 2004.

 

Inconnection with the discontinued operation, during the three months ended March31, 2004, the Company incurred termination and severance costs.  The total amount expected to be incurred isapproximately $73,500, which was recorded as an expense of the discontinuedoperation in the accompanying statement of operations.  The liability related to the termination andseverance benefits is as follows:

 
| Liability Balance, December 31, 2003 | ** ** | $      | — | ** ** |
|--------------------------------------|------------|--------|--------|------------|
|                                 |       |   |   |
| Six Months Ended June 30, 2004:      |       |   |   |
| Costs Charged to Expense             |       | 73,500 |   |
| Costs Paid                           |       | 73,500 |   |
|                                 |       |   |   |
| Liability Balance, March 31, 2004    |       | $      | — |       |

 

The company paid all termination benefits by June 30, 2004.

 

# **NOTE 11 – RELATEDPARTY TRANSACTIONS**

 

The Company has a liability to certain officers and stockholders forunpaid compensation and expenses of $352,650 and $279,428 as of June 30, 2005and 2004, respectively.

 

In connection with the Company’s investment in Southwest MissouriGaming, LLC, the Company signed a one-year promissory note agreeing to pay toPrime Inc., the other member of Southwest Missouri Gaming, $367,000 plusinterest at a variable rate equal to prime plus 2 percent for its share ofexpenses in connection with Southwest Missouri Gaming’s unsuccessful efforts todevelop a riverboat casino in Rockaway Beach, Missouri.  Under the note, the Company agreed to pay$5,000 per month, a principal payment of $100,000 on July 1, 2005, and thebalance of the note on December 31, 2005. The Company made the $100,000 principal payment on June 8, 2005.  The note is secured by slot machines owned byGold Rush I, LLC.  The balance of thenote as of June 30, 2005 is $254,307 and the interest rate as of June 30, 2005is 8%.

 

During the six months ended June 30, 2005 and 2004, the Company paidBerc & Fox Limited $788 and $5,887 for tax and accounting services,respectively.  Thomas Fox is ashareholder and officer in Berc & Fox Limited.

 

During the six months ended June 30, 2005, the Company paid JenniferSparlin Druck $1,000 for entertainment services at the Gold RushPalladium.  Ms. Druck is the wife ofJames Druck, an officer of the Company.

 

#### **NOTE 12 – PROJECT DEVELOPMENT COSTS**

 

In February 2004, an option to purchase the Gold Rush real estate wasnegotiated with the lessor.  This optionwas for a term of one year that expired on February 28, 2005, during whichtime, the Company could purchase the

 

11

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

lessor’s interest in the property. As consideration for this option, the Company dismissed certain claimsagainst the lessor and other costs incurred in connection with a disputeregarding provisions of the lease.  Thesecosts amounted to $249,778.  In 2005,these costs were written off as project development expense because the Companydid not exercise its option to purchase the Gold Rush real estate.

 

Project costs incurred in connection with the development of theracetrack and card room in Minnesota were $255,767 and $207,605 for the six monthsended June 30, 2005 and 2004, respectively, and were $186,896 and $116,705 forthe three months ended June 30, 2005 and 2004, respectively.

 

In addition, during the six months and three months ended June 30,2004, project costs of $811,459 and $551,565, respectively, were incurred inthe pursuit of a riverboat gaming opportunity in Rockaway Beach, Missouri.

 

#### **NOTE 13 – SEGMENT INFORMATION**

 

Segmented information related to the three months ended June 30, 2005follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
|                                        |       |           |       |           |       |            |       |            |       |       |       |
| Revenues                                    | ** ** | $              | 3,992,722  |           | $          | 1,188,447       |       | $               | —     |       | $          | — |   | $ | 5,181,169 | ** ** |
| Segmented profit (loss) before income taxes |       | 71,576         |       | 321,773        |       | (186,896        | )          | 93,448          |       | 299,901    |       |
| Segmented assets                            |       | 15,080,286     |       | 2,588,114      |       | 2,920,171       |       | —          |       | 20,588,571 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |  |

 

Segmented information related to the threemonths ended June 30, 2004 follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
|                                        |       |           |       |           |       |            |       |            |       |       |       |
| Revenues                                    | ** ** | $              | 4,203,004  |           | $          | 1,088,175       |       | $               | —     |       | $          | — |   | $ | 5,291,179 | ** ** |
| Segmented profit (loss) before income taxes |       | 281,053        |       | 35,369         |       | (668,270        | )          | 10,000          |       | (341,848   | )          |
| Segmented assets                            |       | 16,484,505     |       | 4,695,093      |       | 2,055,166       |       | —          |       | 23,234,764 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |  |

 

Segmented information related to the sixmonths ended June 30, 2005 follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
|                                        |       |           |       |           |       |            |       |            |       |       |       |
| Revenues                                    | ** ** | $              | 7,683,862  |           | $          | 2,212,905       |       | $               | —     |       | $          | — |   | $ | 9,896,767 | ** ** |
| Segmented profit (loss) before income taxes |       | (233,668       | )          | 254,565        |       | (255,767        | )          | 127,884         |       | (106,987   | )          |
| Segmented assets                            |       | 15,080,286     |       | 2,588,114      |       | 2,920,171       |       | —          |       | 20,588,571 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |  |

 

Segment information related to the six monthsended June 30, 2004 follows:

 
| ** **                                  | ** ** | **Casino**     | ** ** | **Casino**     | ** ** | **Casino**      | ** ** | **Reconciling** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|-----------------|------------|------------|------------|
| ** **                                  | ** ** | **Operations** | ** ** | **Management** | ** ** | **Development** | ** ** | **Items (1)**   | ** ** | **Total**  | ** ** |
|                                        |       |           |       |           |       |            |       |            |       |       |       |
| Revenues                                    | ** ** | $              | 8,125,059  |           | $          | 2,378,765       |       | $               | —     |       | $          | — |   | 10,503,824 |   |
| Segmented profit (loss) before income taxes |       | 924,834        |       | (37,888        | )          | (1,009,064      | )          | 10,000          |       | (112,118   | )          |
| Segmented assets                            |       | 16,484,505     |       | 4,695,093      |       | 2,055,166       |       | —          |       | 23,234,764 |       |
|                                             |            |                |            |                |            |                 |            |                 |            |            |            |  |  |  |  |

 

----

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

 

12

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

NOTE 14 – EARNINGS PER SHARE

 

The following is a reconciliation of basic and diluted earnings pershare for the three months ended June 30, 2005.

 
| ** **                       | ** ** | ** **       | ** ** | **Weighted**      | ** ** | ** **    | ** ** |
|----------------------------------|------------|------------------|------------|-------------------|------------|---------------|------------|
| ** **                       | ** ** | ** **       | ** ** | **Average**       | ** ** | ** **    | ** ** |
| ** **                       | ** ** | **Net Earnings** | ** ** | **Equity**        | ** ** | **Earnings**  | ** ** |
| ** **                       | ** ** | **(Numerator)**  | ** ** | **(Denominator)** | ** ** | **Per Share** | ** ** |
|                             |       |             |       |              |       |          |       |
| Basic Earnings per Share         |       | $                | 299,901    |              | $          | 19,513,656    |       | $ | .02 |   |
|                             |       |             |       |              |       |          |       |
| Effect of Dilutive Securities:   |       |             |       |              |       |          |       |
| Outstanding Options and Warrants |       | —           |       | 2,525,833         |       |          |       |
|                             |       |             |       |              |       |          |       |
|                             |       | $                | 299,901    |              | $          | 22,039,489    |       | $ | .01 |   |

 

The Company had a net loss for the six months ended June 30, 2005 and2004 and the three months ended June 30, 2004; therefore, a calculation ofearnings per share on a fully diluted basis would be anti-dilutive.

 

**NOTE 15 – CONSOLIDATED VARIABLE INTEREST ENTITY**

 

The Company formed North MetroHarness Initiative, LLC on June 16, 2003 and was the sole member of North Metrountil June 8, 2004.  On June 8, 2004, theCompany sold a 50 percent membership interest in North Metro to MTR-Harness,Inc. (“MTR-Harness”).  Under the terms ofthe North Metro Member Control Agreement: MTR-Harness contributed $10,000 toNorth Metro and a made a conditional commitment to provide an additional$7,490,000 if North Metro received the racing licenses from the MinnesotaRacing Commission required for development of the North Metro facility; theCompany agreed to contribute $1 million for pre-licensing costs to North Metroand an additional $1,500,000 after North Metro received its racing licenses;and the Company and MTR-Harness divided voting rights and decision-making powerover North Metro equally, 50 percent each.

 

The Company evaluated whether North Metro should be treated as avariable interest entity (“VIE”) subject to consolidation during the applicablereporting period under FIN 46(R).  TheCompany determined that North Metro should be treated as a VIE for thefollowing reason:

 

The Company lacked the ability through voting or similar rights to makedecisions regarding North Metro’s activities because the Company’s votingrights were not proportionate to the Company’s obligation to absorb expectedlosses of the entity during the second quarter and the first six months of2005.  As of June 30, 2005, the Companyhad provided approximately 68 percent of North Metro’s financial support, butheld only 50 percent of the North Metro voting power.  Because the Company would absorb financiallosses of North Metro that were disproportionate to its 50 percent decisionmaking power, we determined that North Metro is a VIE subject to consolidation.

 

North Metro has received a letter of commitment for debt financing forapproximately 79% of the expected total project cost of the race track and cardroom, with the remaining 21% to be provided in the form of equity by NorthMetro.  Terms of the commitment include a$33,000,000 loan amortized over 10 years with interest at a variable rate(1.74% above prime rate) and a 7% interest rate floor, and a $4,250,000 loanamortized over 5 years with interest at a fixed rate of 20%.  In addition, 50% of net available cash flow(after scheduled debt service and income taxes) will be required to be held inan account to redeem the debt. Redemption under this provision occurs when the account equals theprincipal amount of the loan outstanding. Security for the loan will include a first mortgage, corporate guaranteeof the Company, and security interests in other assets of the Company.  The closing and funding of the loan areexpected to occur after various court challenges to North Metro’s Class A and Bracing licenses are resolved.

 

13

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**SOUTHWESTCASINO CORPORATION**

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2005 AND 2004**

 

The Company, through North Metro, has entered into an agreement for thedevelopment of the land, building and related property to operate a racetrackand card room.  Fees related to theagreement total 3% of the project cost not to exceed $750,000, which is definedas the total development cost less the cost to purchase the land.  The agreement began on May 1, 2003, andcontinues until the completion of the project, unless earlier terminated.  Fees are payable at a rate of $6,000 permonth, plus applicable out of pocket expenses, beginning on May 1, 2003.  Upon the start of construction, two thirds ofthe expected fee (less previous monthly payments) is due.  If the agreement is terminated prior to thecompletion of the project, any unpaid fees are determined based on thecompleted status of the project at the time of termination, as defined in theagreement.

 

The Company, through North Metro, has entered into consultingagreements with non-related parties to monitor legislation and perform lobbyingactivities, and other public relations and development activities related toestablishing and developing the race track and card room.  The agreements are generally on amonth-to-month basis, and may be terminated by either party to theagreement.  The Company has monthlyobligations related to these agreements of approximately $20,000 per month forthe first six months of 2005.  Thismonthly obligation is reduced to $12,000 each month for the balance of 2005.

 

The Company has included the following assets of North Metro in itsconsolidated financial statements for the periods ended:

 
| ** **                | ** ** | **June 30, 2005** | ** ** |
|---------------------------|------------|-------------------|------------|
| Cash and Cash Equivalents |       | $                 | 282,684    |   |
| Accounts Receivable       |       | 1,587             |       |
| Prepaid Expenses          |       | 310,083           |       |
| Real Estate Options       |       | 650,257           |       |
| Construction in progress  |       | 1,274,180         |       |
| Capitalized Licenses      |       | 401,380           |       |
|                      |       |              |       |
| Total Assets              |       | $                 | 2,920,171  |   |

 

# **NOTE 16 –SUBSEQUENT EVENTS**

 

At the Company’s annual meetingof shareholders on July 14, 2005, the shareholders of the Company approved twoamendments to the Company’s Articles of Incorporation regarding capitalizationof the Company.  The shareholdersapproved an amendment to the Articles of Incorporation to authorize theissuance of up to 30 million shares of preferred stock with rights and preferencesto be determined by the Board of Directors of the Company without the need forfurther shareholder approval.  Theshareholders also approved an amendment to the Articles of Incorporation toincrease the authorized number of shares of the Company’s common stock from 50million shares to 75 million shares.

 

In July 2005, North Metro Harness Initiative, LLC, in which Southwestowns a 50 percent membership interest, exercised two options to purchaseapproximately 178 acres of real property in Anoka County, Minnesota intendedfor the development of North Metro’s harness racetrack and card room.  Under the option agreements, North Metro isnow obligated to close the purchase of these properties within 90 days.  The total purchase price for the twoproperties is approximately $9.2 million less the amount of option paymentsmade prior to exercise.  North Metro’sdecision to exercise these options means that Southwest will need to completeits previously committed capital contributions to North Metro in the amount of$1.5 million prior to closing the purchase of these properties.  In addition, it is likely that Southwest willneed to make an additional capital contribution of approximately $1 million tofund the purchase of the real property and North Metro’s ongoing operations.

 

14

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**Item 2.****   ****Management’s Discussion andAnalysis or Plan of Operation**

 

The following is a discussionand analysis of the financial position and operating results of SouthwestCasino Corporation (referred to in this discussion, together with itsconsolidated subsidiaries where appropriate, as “Southwest”, the “Company”, “we”,“our” and “us”) for the six months and three months ended June 30, 2005 and2004.

 

***Summary ofConsolidated Operating Results:***

 

For the quarter ended June 30, 2005,Southwest had net earnings of $299,901 on revenues of $5,181,169 as compared toa net loss of $440,639 on revenues of $5,291,179 for the same period of2004.  This amounts to earnings of $0.02per outstanding share ($0.01 per share on a fully-diluted basis) for the secondquarter of 2005 as compared to a loss of $0.12 per outstanding share in thesecond quarter of 2004.

 

For the six months ended June 30, 2005, Southwest had a net loss of$106,987 on revenues of $9,896,767 as compared to a net loss of $469,100 onrevenues of $10,503,824 for the same period of 2004.  This amounts to loss of $0.01 per outstandingshare for the six months ended June 30, 2005 as compared to a loss of $0.13 peroutstanding share in the first six months of 2004.

 

***Overview:***

 

Our principal business is the management, operation and development ofgaming facilities in emerging and established gaming jurisdictions.  Currently, we operate three casinos inCripple Creek, Colorado — Gold Rush, Gold Digger’s and Uncle Sam’s.  We also manage two Native American gamingoperations in Oklahoma for the Cheyenne and Arapaho Tribes of Oklahoma - LuckyStar Concho and Lucky Star Clinton. Lucky Star Concho is located on U.S. Highway 81, just north of theOklahoma community of El Reno.  LuckyStar Clinton is located 60 miles west of Lucky Star Concho in the community ofClinton, Oklahoma on Old Route 66 near Interstate I-40.  An amendment to our management contract withthe Tribes to develop and manage a third site at Canton Lake has been ratifiedby the Tribes and has been submitted to the National Indian Gaming Commissionfor approval.

 

We continually evaluate other management, consulting, development andacquisition opportunities related to gaming that have the potential to generatenew revenue streams for us.

 

***Project DevelopmentCosts:***

 

*North Metro Harness Initiative, LLC*- In December 2003, we filed a license application with the Minnesota RacingCommission.  This license application wasamended to add a subsidiary of MTR Gaming Group, Inc. as our 50% partner. MTRHarness Inc. of Minnesota has committed to contribute $7,500,000 upon theapproval of the license.  As of June 30,2005, MTR has contributed $1,090,000.  OnJanuary 19, 2005, the Minnesota Racing Commission approved North Metro’s racinglicenses, which will enable us to develop and operate a harness race track anda 50-table card room in Columbus Township, Anoka County, Minnesota.  A local citizens group has filed two lawsuitsagainst the Minnesota Racing Commission in an attempt to get our licensesrevoked.  The Ramsey County, Minnesota,District Court granted the Minnesota Racing Commission’s motion for summaryjudgment and dismissed the first lawsuit on June 23, 2005.  Representatives of the citizens group statedin published reports at the time of dismissal that they intended to appeal thedecision.  No appeal has been filed as ofthe date of this report.  The secondlawsuit remains pending in the Minnesota Court of Appeals.  We believe that these attempts to overturnNorth Metro’s racing licenses will be unsuccessful.  However, the ongoing litigation has delayedconstruction until the lawsuits are resolved. At this time, we cannot predict when that will occur

 

For the six months ended June 30, 2005 and 2004, we have expensed$127,884 and $197,605 respectively, net of loss allocated to minority interest,related to the North Metro project. For the three months ended June 30, 2005and 2004, we have expensed $93,448 and $106,705 respectively, net of lossallocated to minority interest. In addition, we have capitalized $2,325,817 inreal estate options, construction in progress, and license costs as of June 30,2005.

 

15

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*Other Project Development Costs:* In the six months ended June 30, 2005, theCompany’s option to acquire the real estate currently leased by Gold Rush I,LLC expired which resulted in a write-off of capitalized costs of $249,778.

 

During 2003 and 2004, the Company pursued a change in the Missouriconstitution that would have enabled us to apply for a riverboat gaming licenseon the White River at Rockaway Beach. This initiative was defeated in a statewide primary election held inAugust 2004.  During the six months and threemonths ended June 30, 2004, the company expensed $811,459 and $551,565, includingequity investment losses.

 

***Operating segments:***

 

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

 

**Casino Operations:**

  Gold Rush/ Gold Diggers Casino

  Uncle Sam’s Casino

 

**Casino Management:**

  Lucky Star – Concho

  Lucky Star – Clinton

 

**Casino operations**:

 

**Gold Rush/Gold Digger’s Casino Results**

 
| **Second Quarter** | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|--------------------|------------|-----------|------------|-----------|------------|--------------------------------------|------------|
|               |       |      |       |      |       |                                 |       |
| Casino revenues    |       | $         | 3,593,365  |      | $          | 3,708,972                            |       | (3.1 | )% |
| Total revenues     |       | 3,740,333 |       | 3,835,085 |       | (2.5                                 | )%         |
| EBITDA             |       | 954,306   |       | 877,266   |       | 8.8                                  | %          |
| EBTDA margin       |       | 25.5      | %          | 22.8      | %          |                                 |       |
|                    |            |           |            |           |            |                                      |            |  |  |

 

***Second Quarter*** –We were able to improve operating results in the 2nd quarter of 2005by improving utilization of employees and controlling costs despite lowerrevenues. The Cripple Creek market is still absorbing the additional 600 slotmachines added to the market in 2004, but the increase of 8.8% in EBITDA overlast year and 62% over first quarter of 2005 is encouraging.  While the second quarter is traditionallybetter than first quarter, in 2004 2nd quarter was only 19% higherthan 1st quarter 2004.  Webelieve that beginning in the third quarter of 2005 we will realize an increasein revenues quarter over prior year quarter as well as continued improvement inEBITDA.

 
| **First Six Months** | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|----------------------|------------|-----------|------------|-----------|------------|--------------------------------------|------------|
|                 |       |      |       |      |       |                                 |       |
| Casino revenues      |       | $         | 6,926,469  |      | $          | 7,171,815                            |       | (3.4 | )% |
| Total revenues       |       | 7,200,612 |       | 7,406,919 |       | (2,8                                 | )%         |
| EBITDA               |       | 1,542,055 |       | 1,616,952 |       | (4.6                                 | )%         |
| EBITDA margin        |       | 21.4      | %          | 21.8      | %          |                                 |       |
|                      |            |           |            |           |            |                                      |            |  |  |

 

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***First Six Months***– As a result of focusing on improved controls over operating expenses, theEBITDA margins are lower by only .4% as compared to the first six months of2004 despite lower revenues in 2005.  Thelower revenues result from increased competition in town — over 600 slotmachines were added to the market in 2004 — and bad weather on key weekends inthe first quarter this year.  In 2004, weenjoyed an unusually mild winter, which contributed to increased revenues for2004.  We have been able to reduce 2005operating expenses despite increases in costs associated with our new playertracking and slot accounting system that has not yet been approved by theColorado Division of Gaming and, therefore, requires additional manpower tomeet reporting requirements.  We arecurrently in testing on the new system and plan to be automated by the end ofthe 3rd quarter, which will also reduce our operating costs goingforward. Once the system is fully operational, we anticipate that it willprovide us with a competitive advantage in the Cripple Creek market.

 

**Uncle Sam’s Casino**

 
| **Second Quarter** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|--------------------|------------|----------|------------|----------|------------|--------------------------------------|------------|
|               |       |     |       |     |       |                                 |       |
| Casino revenues    |       | $        | 241,269    |     | $          | 348,048                              |       | (30.7 | )% |
| Total revenues     |       | 242,265  |       | 349,536  |       | (30.7                                | )%         |
| EBITDA             |       | (168,386 | )          | (103,226 | )          | (63                                  | )%         |
| EBITDA margin      |       | (69.5    | )%         | (29.5    | )%         |                                 |       |
|                    |            |          |            |          |            |                                      |            |  |  |

 

***Second Quarter***-Uncle Sam’s Casino is a facility with only 67 slot machines that serves thelocal residents market in Cripple Creek, which is the most vulnerable toincreased competition. The opening of a new casino that also caters to thelocal residents market in July 2004 has substantially impacted casino revenues atthis facility.  In addition, a casinoadjacent to this location began construction on an expansion that has made itmore difficult for patrons to frequent our facility.  In the second quarter, we added poker on thesecond floor of our facility, but it has not improved the performance of thisfacility.  We are currently evaluatingwhether changes in personnel and improved on-site marketing can create anatmosphere to recapture the locals market that is vital to the economic successof this facility.

 
| **First Six Months** | ** ** | **2005** | ** ** | **2004** | ** ** | **Percentage  Increase  (Decrease)** | ** ** |
|----------------------|------------|----------|------------|----------|------------|--------------------------------------|------------|
|                 |       |     |       |     |       |                                 |       |
| Casino revenues      |       | $        | 471,521    |     | $          | 697,612                              |       | (32.4 | )% |
| Total revenues       |       | 473,126  |       | 699,757  |       | (32.4                                | )%         |
| EBITDA               |       | (322,171 | )          | (130,903 | )          | (146                                 | )%         |
| EBITDA margin        |       | (68.1    | )%         | (18.7    | )%         |                                 |       |
|                      |            |          |            |          |            |                                      |            |  |  |

 

***First Six Months***– Despite our efforts to improve the operations of Uncle Sam’s Casino, wecontinue to realize substantial losses as a result of the opening of a newcasino that also caters to local residents and the addition of over 600 slotmachines in July 2004 to the Cripple Creek market.  We currently see improvements in revenuesmonth over month, but we have not yet achieved satisfactory results despite theaddition of a poker room, a change in personnel and increased efforts inon-site marketing.

 

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**Casino Management*:***

 

**Lucky Star Concho**

 

***Second Quarter*** -Management fees from Lucky Star Concho were $771,607 for the 2ndquarter of 2005 as compared to $682,224 for the 2nd quarter of 2004,an increase of 13%. The increase in management fees is significant because wewere able to realize increased management fees despite the decrease in ourmanagement fee percentage that took effect in May 2004.  Increased management fees primarily resultfrom the approval of the Tribes’ compact with the state of Oklahoma and theTribes approval of our Class III gaming license, which has allowed the facilityto begin offering blackjack, poker, and video poker.  In May 2005, we also opened a 150-seatrestaurant.  The expanded gaming opportunitiesalong with the new restaurant has increased patronage and significantlyimproved the profitability of this facility. We anticipate improvement in management fees quarter over quarter willcontinue despite additional competition that will come from other tribal gamingfacilities in the Oklahoma City market and from Remington Park, a racetrack inOklahoma City that will also be allowed to offer the same type of gamingmachines as the tribal locations.  However,Remington Park will not be allowed player banked card games and its hours ofoperations will be limited to 106 hours per work and not more than 18 hours inany 24-hour period, while we will continue to operate 24 hours per day and 7days per week.

 

***First Six Months***– Management fees from Lucky Star Concho were $1,355,036 for the six monthsended June 30, 2005 as compared to $1,510,586 for the six month ended June 30,2004, a decrease of 10.3%.  The decreaseis the result of the decrease in our management fee percentage that took effectin May 2004.  As discussed above, theoperating results for the facility in the first six months of 2005 exceeded theoperating results for the first six months of 2004.  As a result, the decrease in management feesreceived was less than the decrease in our management fee percentage.  We are encouraged by the operating resultsand anticipate continued growth over the next two quarters despite increasedcompetition that we expect to impact fourth quarter operations.

 

**Lucky Star Clinton**

 

***Second Quarter*** -Management fees from Lucky Star Clinton were $416,840 for the 2ndquarter of 2005 as compared to $405,951 for the 2nd quarter of 2004,an increase of 2.7%. The increase in management fees is significant because wewere able to realize greater management fees despite a decrease in ourmanagement fee percentage that took effect in May 2004.  This is a result of continued improvement inoperating results. While we believe that the approval of the Tribes compactwith the state of Oklahoma, and the Tribes approval of our Class III gaminglicense, which will allow the facility to offer blackjack, poker, and videopoker in the future, provides opportunities for additional revenue growth, wecurrently do not have enough parking or a large enough facility to takeadvantage of these expanded gaming opportunities.  We have discussed with the Tribes thepossibility of expanding both the Concho and Clinton facilities.

 

***First Six Months***– Management fees from Lucky Star Clinton were $857,869 for the six monthsended June 30, 2005 as compared to $868,179 for the six month ended June 30,2004, a decrease of 1.2%.  As a result ofimproved performance overall at this facility, the decrease in our managementfee revenue is significantly less than the decrease in our management feepercentage that took effect in May 2004. We are encouraged by the operating results to date and anticipatecontinued growth over the next two quarters resulting from reconfiguring thegaming floor to accommodate the new gaming devices that are now permitted in themarket, despite the limitations due to the size of the facility and space forparking.

 

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**OtherFactors Affecting Net Income:**

 
| ** **                                     | ** ** | **Second quarter** | ** ** | **Percentage  Increase** | ** ** | **First six months** | ** ** | **Percentage  Increase** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------------------|------------|----------------------|------------|--------------------------|------------|
| **Income/(Expense)**                           | ** ** | **2005**           | ** ** | **2004**                 | ** ** | **(Decrease)**       | ** ** | **2005**                 | ** ** | **2004** | ** ** | **(Decrease)** | ** ** |
| Income (Expense) Southwest Entertainment,  Inc |       | (45,032            | )          | (25,854                  | )          | 74.2                 | %          | $                        | (68,207    | ) | (46,921 | ) | 45 | % |
| Corporate Expenses                             |       | 706,458            |       | 714,044                  |       | (1.1                 | )%         | 1,397,864                |       | 1,397,092 |   | N/M |   |
| Interest Expense (net)                         |       | (236,410           | )          | (267,201                 | )          | (11.5                | )%         | (522,678                 | )          | (538,084 | ) | (2.9 | )% |
| Other (income) Loss                            |       | 456                |       | 5,088                    |       | N/M                  |       | 3,046                    |       | 12,094 |   | N/M |   |
| Effective tax rate                             |       | 0                  | %          | 42                       | %          | N/M                  |       | 0                        | %          | 42 | % | N/M |   |
| Minority interests                             |       | 93,448             |       | 10,000                   |       | 834                  | %          | 127,884                  |       | 10,000 |   | 1178.8 | % |
| Discontinued operations, net of income  taxes  |       | 0                  |       | (8,391                   | )          |                 |       | 0                        |       | (256,582 | ) |   |   |
|                                                |            |                    |            |                          |            |                      |            |                          |            |  |  |  |  |  |

 

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N/M= Not Material

 

***SouthwestEntertainment, Inc.*** is a wholly owned subsidiaryof Southwest Casino and Hotel Corp. that conducts concerts at the Gold RushPalladium, a 1,200 seat outdoor amphitheater adjacent to the Gold RushCasino.  We conduct musical events forthe purpose of attracting people to Cripple Creek and our casino properties.

 

**Second Quarter** -During the second quarter, our one show in 2005 was not as successful as ourone show in 2004.

 

**First Six Months**- In addition to lowerrevenues on the one show in 2005, we incurred increased maintenance costsduring the first six months of 2005, as compared to the first six months of2004.

 

***Corporate expenses***decreased 1.1% in the second quarter primarily due to decreases in payroll andrelated costs and travel related expenses that were partially offset byincreases in insurance expense, consulting fees, and rent expense over the sameperiod for the prior year.  For the sixmonths ended June 30, 2005 and 2004 corporate expenses did not change.  Although, there was a decrease in payroll andrelated costs and travel related expenses, it was offset by an increase inadvisory fees incurred in connection a contract entered into in July 2004 andan increase in insurance expense, primarily related to the cost of Directorsand Officers insurance for a public company and an increase in policy limits.

 

***Interest Expense***decreased 11.5% for the second quarter of 2005 and 2.9% for the first sixmonths of 2005 as compared to 2004.  Thedecrease in interest expense is due primarily to an agreement with IGT tofinance our player tracking system in Colorado and amortization of long-term debtin Colorado.

 

***Minority interest***represents the allocation of NMHI expenses to MTR Harness, Inc., the other 50percent member of NMHI, in accordance with our agreement to shareexpenses.  The increase in sharing ofexpenses results from the Minnesota Racing Commission’s approval of NMHI’s racinglicenses application.

 

***Effective tax rates***for all periods are lower than the federal and state statutory rates dueprimarily to the valuation allowance for deferred tax assets and lack ofcertainty that net operating loss carryforwards available to offset futureincome will not be limited under Section 382 of the Internal Revenue Code of1986.

 

***DiscontinuedOperations*** reflect the results of operations forSouthwest Casino Deadwood, LLC, which we closed February 28, 2004.

 

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***Liquidity andCapital Resources:***

 

We generate cash flow from our Oklahoma management activities andcasino operations in Colorado.  We usethe cash flows generated to fund reinvestment in existing properties for bothrefurbishment and replacement of assets, and to pursue additional growthopportunities.  We supplement the cashflows generated by our operations with funds provided by financing activitiesto balance our cash requirements.

 

Our cash flows from operations will be sufficient to meet our normaloperating requirements during the next twelve months.  However, we will need additional equity anddebt financing to fund the development of the racetrack and card room inMinnesota, and to pay for the player tracking and slot accounting systeminstalled in Colorado.

 

We continue to review additional opportunities to acquire or invest incompanies, properties and other projects that meet our strategic and return oninvestment criteria.  If a materialacquisition or investment is completed, our operating results and financialcondition could change significantly in future periods.

 

Net cash provided by operating activities during the first six monthsof 2005 was $702,946 compared to $989,987 during the first six months of 2004,a decrease of $287,041. The decrease between periods is due primarily to anincrease in management fees receivable of $191,468 in the first six months of2005 and a decrease in accrued expenses of $336,685 offset by an increase inaccounts payable of $86,734 and a write-off of land option costs of $249,778included in the net operating loss.

 

Net cash used in investing activities for the first six months of 2005was $(561,159) compared to net cash used in investing activities of$(1,375,693) during the first six months of 2004, a decrease of $814,534.  The decrease in use of cash in 2005 isprimarily due to the absence of an investment in an unconsolidated subsidiaryof $832,414 that occurred during the first six months of 2004.

 

Net cash provided by financing activities for the six months ended June30, 2005 was $415,255 compared to net cash provided by financing activities forthe six months ended June 30, 2004 of $575,938, a decrease of $160,683.  Funds in the amount of $982,325 were providedby our minority partner in NMHI, offset by payments on short-term and long-termborrowings.  Funds in the amount of$850,000 were provided by the Company’s sale of convertible debentures duringthe first six months of 2004, and were also offset by payments on long-termborrowings.

 

***Line of Credit.***  We renewed our $450,000 line of credit onApril 15, 2005 and it is now due on May 5, 2006 with a variable interest rate(currently 6.35%). At June 30, 2005, $446,292 had been drawn on the line ofcredit.  The note is secured by the assetsof Southwest Casino and Hotel Corp. including management fees from ourmanagement contract in Oklahoma.

 

***Promissory Note.* **We haveentered into a collateral agreement and promissory note to collateralize a$500,000 bond related to the development of North Metro Harness Initiative,LLC.  The promissory note was renewed onMay 1, 2005 due on June 1, 2006, with a variable interest rate (currently6.75%).  At June 30, 2005, the note hadnot been drawn.  The note is personallyguaranteed by four of our stockholders.

 

***Effects of Current Economic and Political Conditions:***

 

**CompetitivePressures:**

 

Many casinooperators are either entering or expanding in our markets – Colorado andOklahoma — thereby increasing competition. As companies complete new orexpanded projects, supply has sometimes grown at a faster pace than demand, andcompetition has increased significantly. Furthermore, several operators,including Southwest, have plans for additional developments or expansions.

 

Although, theshort-term effect on Southwest of such competitive developments generally hasbeen negative, we are not able to determine the long-term impact, whetherfavorable or unfavorable, that development and expansion trends and events willhave on current or future markets. We believe that the

 

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geographicdiversity of our operations, our service training, our rewards and customerloyalty programs, and our continuing efforts to improve our facilities willinsure continued customer loyalty and will enable us to face the competitivechallenges present within our industry.

 

**PoliticalUncertainties:**

 

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

 

The casinoentertainment industry represents a significant source of tax revenues to thevarious jurisdictions in which casinos operate. From time to time, various state and federal legislators and officialshave proposed changes in tax laws, or in the administration of tax laws, thatwould affect the industry.  It is notpossible to determine with certainty the scope or likelihood of possible futurechanges in tax laws or in the administration of tax laws.  If adopted, changes in tax law could have amaterial adverse effect on our financial results.

 

***Significant Accounting Policies andEstimates:***

 

Weprepare our Consolidated Financial Statements in conformity with accountingprinciples generally accepted in the United States.  Certain of our accounting policies,including, but not limited to, the estimated lives assigned to our assets, thedetermination of bad debt, asset impairment, fair value of guarantees, and thecalculation of our income tax liabilities, require that we apply significantjudgment in defining the appropriate assumptions for calculating financialestimates.  By their nature, thesejudgments are subject to an inherent degree of uncertainty.  Our judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our customers and information available fromother outside sources, as appropriate. We cannot assure you that our actual results will not differ from ourestimates.  For a discussion of oursignificant accounting policies and estimates, please refer to Management’sDiscussion and Analysis or Plan of Operation and Notes to ConsolidatedFinancial Statements presented in the 2004 Financial Statements included in ourAnnual Report on Form 10-KSB.

 

***Non-GAAP Financial Measures:***

 

Our executive officers consider “EBITDA” (earnings before interest,taxes, depreciation and amortization) a useful tool for measuring the operatingperformance of Southwest.  EBITDA is alsoa widely used measure of operating performance in the gaming industry and aprincipal basis for valuation of gaming companies.  We use EBITDA to establish budgets, analyzeresults as compared to our budgets, and as a basis for incentive compensationfor some personnel.  However, EBITDA isnot a measurement of financial performance under accounting principlesgenerally accepted in the United States and should not be considered analternative to net income, cash flows from operating activities, or otherperformance measures derived in accordance with accounting principles generallyaccepted in the United States as indicators of our operating performance or asmeasures of our liquidity.  Southwest hassignificant uses of cash flows, including capital expenditures, interestpayments and debt principal repayments that are not reflected in our EBITDAcalculations.  Our management uses EBITDA,and we present it in this discussion and analysis, only as a supplement tomeasures prepared in accordance with accounting principles generally acceptedin the United States.  Please be awarethat other companies in our industry may calculate EBITDA differently than wedo, which limits its usefulness as a comparative measure.

 

***Forward-Looking Statements:***

 

ThisQuarterly Report on Form 10-QSB contains “forward-looking statements”intended to qualify for the safe harbor from liability established by the PrivateSecurities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relatestrictly to historical or current facts. These statements often contain wordssuch as “may,” “will,” “project,” “might,” “expect,” “believe,” “anticipate,”

 

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“intend,” “could,” “would,” “estimate,”“continue” or “pursue,” or the negative or other variations of those words orcomparable terminology.  In particular,they include statements relating to, among other things, future actions, newprojects, strategies, future performance, the outcome of contingencies such aslegal proceedings and future financial results. We have based these forward-looking statements on our currentexpectations and projections about future events.

 

Wecaution the reader that forward-looking statements involve risks anduncertainties that cannot be predicted or quantified and, consequently, actualresults may differ materially from those expressed or implied in theforward-looking statements.  These risksand uncertainties include, but are not limited to, the following factors aswell as other factors described from time to time in our reports filed with theSecurities and Exchange Commission:

 

•                  changes in laws (including increased taxrates), regulations or accounting standards, third-party relations andapprovals, and decisions of courts, regulators and governmental bodiesapplicable to us;

•                  the effects of competition, includinglocation of competitors and operating and market competition;

•                  our ability to build and maintain healthypersonal and professional relationships with tribes and their officials;

•                  the potential change of policies andpersonnel of tribal governments that could adversely affect our relationships.

•                  ability of our customer tracking and customerloyalty programs;

•                  abnormal gaming holds;

•                  access to available and feasible financing;

•                  our ability to recoup costs of capitalinvestments through higher revenues;

•                  litigation outcomes and judicial actions;

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

•                  the effect of economic, credit and capitalmarket conditions on the economy in general, and on gaming companies inparticular;

•                  the effects of environmental and structuralbuilding conditions relating to our properties; and

•                  acts of war or terrorist incidents.

 

Anyforward-looking statements are made pursuant to the Private SecuritiesLitigation Reform Act of 1995 and, as such, speak only as of the date made. Weundertake no obligation to publicly update any forward-looking statements,whether as a result of new information, future events or otherwise.  Weadvise you, however, to consult any further disclosures we make on relatedsubjects in any annual, quarterly and current reports that we file with orfurnish to the Securities and Exchange Commission.

 

***Risk Factors***

 

Inreviewing this quarterly report on Form 10-QSB, you should carefully considerthe matters concerning Southwest Casino Corporation described under the heading“Risk Factors” in the annual report on Form 10-KSB filed by the Corporation onMarch 31, 2005, which are incorporated in this document by reference.

 

**Item3.  Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) designed to ensure that informationrequired to be disclosed by us in the reports we file or submit under theSecurities Exchange Act of 1934, as amended, is recorded processed, summarized,and reported,

 

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withinthe time periods specified in the Securities and Exchange Commission’srules and forms and that this information is accumulated and communicatedto our management, including our principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.  Our management evaluated,with the participation of our Chief Executive Officer and Chief FinancialOfficer, the effectiveness of the design and operation of our disclosurecontrols and procedures as of June 30, 2005. Based on that evaluation, and after review of revised policies andprocedures adopted in response to material weaknesses in our internal controlsidentified by our external auditors, and described under “Changes in InternalControls” below, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of thatdate.

 

**Changes in Internal Controls**

 

Wemade the following changes in our internal control over financial reportingduring the three and six months ended June 30, 2005 in response to materialweaknesses identified by our external auditors related to their audit of ourfinancial statements for 2004:

 

•                  We have established procedures under whichmanagement will review organizational and startup costs related to our newventures as incurred and record those items to the appropriate expense or assetclassification.

 

•                  We have established internal policiesdesigned to insure that all business units discuss in a timely manner withmanagement and our accounting function agreements and transactions that mayhave qualitative or quantitative importance to our business and our financialstatements in order to assure that necessary accounting entries are recordedand disclosure issues are considered.

 

•                  We have adopted a policy to assure properapproval of all journal entries.  Alljournal entries will be approved by our Chief Financial Officer, corporatecontroller, or other designated individual and must be initialed by thepreparer and individual approving the journal entry.  All journal entries are accompanied by a fullexplanation and adequate supporting data.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

 

SeeItems 3 and 9 of our Annual Report on Form 10-KSB, filed March 31,2005, for a description of Southwest’s pending legal proceedings.

 

OnJune 15, 2005, the Horsemen’s Benevolent and Protective Association (“HBPA”)filed Stipulation of Voluntary Dismissal of its petition requesting theMinnesota Court of Appeals to review the decision of the Minnesota RacingCommission to grant Class A and B racing licenses to North Metro HarnessInitiative, LLC.  Southwest owns a 50percent membership interest in North Metro through its subsidiary SouthwestCasino and Hotel Corp.  The appellatecourt issued an order dismissing the appeal on June 20, 2005.  The HBPA’s challenge to the licenses had beenconsolidated with a similar challenge from an anti-gambling group that seeks tohave the North Metro licenses invalidated. The dismissal of the HBPA’s appeal does not affect the anti-gamblinggroup’s challenge, which remains pending. We cannot predict the outcome of the anti-gambling group’s appeal atthis time.  The invalidation of thelicenses would prevent North Metro from developing the racetrack and card roomand prevent us from realizing revenue or profit from this project.

 

OneJune 23, 2005, Judge Monahan of Second District Court, Ramsey County, Minnesotagranted the Motion for Summary Judgment brought by the Minnesota RacingCommission.  In doing so, Judge Monahandismissed with prejudice all claims brought by an anti-gambling group thatalleged members of the Minnesota Racing Commission had violated the state’s “OpenMeeting Law” while considering whether to grant Class A and B racing licensesto North Metro Harness Initiative, LLC. In his Order for Summary Judgment, Judge Monahan also stated thatMinnesota Law does not permit invalidation of North Metro’s licenses as aremedy if a court finds that members of the Minnesota Racing Commissionviolated the Open Meeting Law.  Inpublished newspaper reports at the time of the Court’s ruling, representativesof the anti-gambling group stated that they intend to appeal this ruling.

 

**Item 2.  Unregistered Sales of Equity Securities and Useof Proceeds.**

 

Duringthe first quarter of fiscal 2005, we did not issue any equity securitieswithout registration under the Securities Act of 1933, except as describedbelow:

 

OnMay 2, 2005, we issued 75,000 shares of common stock to an unrelated thirdparty who has provided services in connection with the North Metro HarnessInitiative racetrack project upon exercise of an outstanding warrant topurchase those shares at a price of $0.12 per share.

 

Nounderwriting commission or discounts were paid with respect to the sale ofthese unregistered securities.  The sale was made in reliance on eitherSection 4(2) of the Securities Act of 1933 as a transaction by anissuer not involving any public offering or Regulation D of the SecuritiesAct.  We made inquiries to establish that the sale qualified for theseexemptions from the registration requirements.  In particular, weconfirmed that with respect to the exemption claimed underSection 4(2) of the Securities Act that (i) the sale was made bypersonal contact from officers and directors of Southwest or other personsclosely associated with Southwest, (ii) the investor made representationsthat he or she was sophisticated in relation to his or her investment (and gaveus no reason to believe that this representation was incorrect), (iii) thepurchaser gave assurance of investment intent and the certificates for theshares bear a legend accordingly, and (iv) offers and sales within anyoffering were made to a limited number of persons.

 

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**Item6.  Exhibits**

 

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

 

31.1                           Certification of Chief Executive OfficerPursuant to SEC Rule 13a-14.

 

31.2                           Certification of Chief Financial OfficerPursuant to SEC Rule 13a-14

 

32.1                           Certificationof Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2                           Certification of Chief Financial OfficerPursuant to 18.U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

In accordance with the requirements of theSecurities and Exchange Act of 1934, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
| August  15, 2005 | **SOUTHWEST CASINO CORPORATION** |
|------------------|----------------------------------|
|             |                             |   |
|             |                             |   |
|             | By:                              | /s/  James B. Druck |   |
|             |                             | James  B. Druck |   |
|             |                             | Chief  Executive Officer and Secretary |   |
|             |                             | (principal  executive officer) |   |
|             |                             |   |   |
|             | By:                              | /s/  Thomas E. Fox |   |
|             |                             | Thomas  E. Fox |   |
|             |                             | President  and Chief Financial Officer |   |
|             |                             | (principal  financial and accounting officer) |   |

 

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