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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ___________
Commission File Number 0-9099
FLORIDA GAMING CORPORATION
(Name of Small Business Issuer in its Charter)
Delaware 59-1670533
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 South Kings Highway
Fort Pierce, Florida 34945-3099
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number
including area code: (407) 464-7500
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock ($.10 par value) and Class A Convertible Preferred Stock ($.10 par
value)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
The registrant's revenues for the most recent fiscal year: $4,086,026.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 25, 1996
Common stock, par value of $.10 per share -- $9,252,055.
The number of shares of the registrant's common stock outstanding as of
March 25, 1996 - 3,271,033 shares.
Transitional Small Business Disclosure Format
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Florida Gaming Corporation (the "Company") currently owns and operates a
jai-alai fronton and pari-mutuel wagering facility located in Fort Pierce,
Florida (the "Fronton"). The Company is actively exploring other opportunities
in the pari-mutuel and gaming industry, including opportunities to develop,
finance and operate gaming projects with federally recognized Indian tribes.
The Company's business at the Fronton consists of, among other things, live
jai-alai, inter-track pari-mutuel wagering, and the sale of food and alcoholic
beverages. The term "pari-mutuel wagering," which refers to the betting by
members of the public against each other, as used in this report includes
wagering on both live performances and inter-track wagering ("ITW").
Since its inception and before the acquisition of the Fronton, the Company
engaged in several other lines of business, none of which are currently in
operation. In 1993, the Company sold 699,480 shares of common stock to Freedom
Financial Corporation ("Freedom") and the present management assumed control of
the Company. The acquisition of the Fronton was consummated in February, 1994.
The Company's principal place of business and executive offices are located
at Fort Pierce Jai-alai, 1750 South Kings Highway, Fort Pierce, Florida 34945-
3099. The Company changed its name from Lexicon Corporation to Florida Gaming
Corporation on March 17, 1994. The Company was incorporated in Delaware in
1976.
THE SPORT OF JAI-ALAI; FORM OF JAI-ALAI PLAYED AT THE FRONTON
Jai-alai, a sport of Basque origins, was introduced to Florida as a
professional sport in 1926. In the United States, jai-alai is played by either
one or two man teams, in a round robin fashion, with the winning team or player
remaining on the court until defeated. Originally a form of handball, jai-alai
has developed over time into a game of high speed and strategy. Players compete
against each other in a three-walled arena and score win points against each
other by successfully positioning the ball ("pelota") in play in such a way that
the opposition is unable to return it. The pelota is propelled by means of a
wicker sling ("cesta"). The combination of the extremely hard pelota, which is
slightly smaller than a baseball, and the sling-shot action of the cesta, makes
jai-alai the fastest ball game sport in the world.
The Fronton employs a combined round robin and elimination system of play.
Games are played among eight teams or individuals,
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with the loser of each point retiring to the end of the playing line. The
winner of the game is the one to first score a pre-determined number of points.
The Company believes this system of play makes it extremely difficult to
predetermine the winner or order of finish.
Games are supervised by the general manager of the Fronton, the players'
manager and judges appointed by the Fronton. The Florida Department of Business
and Professional Regulation, Division of Pari-Mutuel Wagering (the "DPMW")
annually licenses each player, the general manager of the Fronton, the players'
manager and the judges. The DPMW also assigns two of its employees to act as
officials in addition to the judges provided by the Fronton and assigns an
auditing official to supervise pari-mutuel operations. Player compensation is
based largely upon performance. Player contracts and/or rules of the DPMW
prohibit wagering by the players or their families and contact between players
and spectators before and during play.
PARI-MUTUEL WAGERING AT THE FRONTON
Under the laws of Florida, pari-mutuel wagering on jai-alai games is
prohibited unless made in a fronton holding a permit under an applicable state
statute. Wagers may be placed at the Fronton on performances conducted by the
Company at the Fronton (live wagering) or on performances (including jai-alai,
thoroughbred racing, harness racing, and dog racing) conducted by other pari-
mutuel operators sending (simulcasting) performances from other pari-mutuels to
the Fronton. This type of wagering is referred to as inter-track wagering
(ITW). The Fronton acts as the broker for wagers by the public and deducts a
commission negotiated as guest (receiving) facility with each host (sending)
facility as authorized by law. Neither the Fronton nor the State of Florida has
any interest in which player or team wins a given game. Though authorized by
law to do so, the Company does not broadcast (simulcast) any of its jai-alai
performances for ITW purposes. The Company has no plans to engage in such
broadcasting in the future because the Company does not believe that at this
time the potential revenues justify the capital expenditures for the required
broadcasting equipment. See "Item 1. Description of Business--Fronton's
Schedule of Jai-Alai Performances."
Customers may wager on jai-alai performances in a variety of ways. For
example, wagers may be for win, place, and show (first, second and third); for
teams or individuals to place first and second with the order not specified
(called "Quinella"); to place first and second with the order specified (called
"Perfecta"); or to place first, second and third with the order specified
(called "Trifecta").
Wagers are placed by purchasing tickets in the Fronton at wagering areas
equipped with ticket issuing machines. The Fronton
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has totalizator equipment furnished by Autotote Limited which automatically
registers any type of bet in addition to verifying and cashing all winning
tickets.
FRONTON'S SCHEDULE OF JAI-ALAI PERFORMANCES
In July of 1993 the Florida legislature enacted legislation, see "Item 1.
Description of Business--Government Regulation," relating to taxation of jai-
alai which, among other provisions, restored the exemption from state taxation
of a portion ($30,000 for the Fronton) of daily Handle, and fixed the tax on
Handle per performance for live jai-alai at 7.1%. The new legislation did not
take effect at the Fronton until it began its 1993-1994 operating season on
November 26, 1993, as live jai-alai had not been conducted at the Fronton since
May 1, 1993. In April 1994, the Florida Legislature passed legislation,
effective July 1, 1994, that decreases the tax paid by the Company on Handle
from 7.1% to 5%, as well as reduce the daily license fee from its current rate
of $80 per jai-alai game to $40 under certain circumstances. See "Item 1.
Description of Business--Government Regulation."
Pursuant to the permit granted to it under Florida law, the Fronton, in
order to conduct ITW, must offer a "full schedule" of jai-alai performances, per
year, of at least 100 live evening and/or matinee performances. In addition,
the Fronton may offer ITW year-round so long as a pari-mutuel facility in
Florida is providing live pari-mutuel activities on any such day that ITW is
offered at the Fronton. Thus, because the Fronton complies with this "full
schedule" requirement, the Fronton is currently permitted to conduct an
unlimited number of performances per year as well as to receive simulcast
transmissions of performances from other pari-mutuel facilities. During the
jai-alai season from January 6, 1995 through April 30, 1995, 115 live jai-alai
performances were conducted at the Fronton.
The Fronton has received a permit from the DPMW to conduct live jai-alai
performances from December 1, 1995 through and including April 27, 1996. The
Fronton has applied to the DPMW for a permit to conduct live performances from
January 3, 1997 through and including April 30, 1997. The Fronton typically
remains open for inter-track wagering on days in which live jai-alai
performances are not conducted.
The Company is permitted to operate a limited number of charitable and
scholarship nights in addition to its regular performances. The taxes otherwise
due to the State of Florida for such nights are allocated to various charitable
causes and scholarships as determined by the Fronton in accordance with Florida
law.
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COMPETITION AND MARKETING
The gaming industry is highly competitive. Other gaming companies have
substantially greater financial resources and larger management staffs than the
Company. Because of the growing popularity and profitability of gaming
activities, competition is significantly increasing. The Company competes for
customers with other forms of legal wagering, including charitable gaming, pari-
mutuel wagering and state lotteries.
Further expansion of non-Indian gaming could also significantly and
adversely affect the Company's business. In particular, the expansion of casino
gaming in or near the geographic areas from which the Company attracts or
expects to attract a significant number of its customers, such as Florida or
California could have a material adverse effect on the Company's business. The
Company expects that it will experience significant competition as the emerging
casino industry matures.
The Company believes that its primary market area includes approximately
500,000 adults age 21 or over within 35 miles of the Fronton. The major
population centers in the vicinity of the Fronton include Fort Pierce, Port St.
Lucie, Vero Beach, Stuart, and Okeechoebee.
The Company competes with other entertainment providers for its customers.
The Company does not, however, consider itself to be in direct competition with
any fronton or other pari-mutuel facility permitted to operate in Florida at
this time. Florida's pari-mutuel legislation does not permit the operation of
any jai-alai facility within a geographic radius of fifty miles or closer to any
other jai-alai facility. See "Item 1. Description of Business--Government
Regulation." The closest pari-mutuel facilities to the Fronton are dog racing
facilities in West Palm Beach, approximately 50 miles south of the Fronton, and
in Melbourne, approximately 53 miles north of the Fronton.
There are currently 41 permits issued by the State of Florida to persons
operating or in the process of operating, pari-mutuel facilities in the state,
33 of which are active. Of the 33 active permit-holders, only 10 are held by
operators of jai-alai frontons. Other permit-holders engage in thoroughbred or
quarter horse racing, harness racing or dog racing. In addition to the
Company's Fronton in Fort Pierce, permit-holders are operating jai-alai frontons
in Dania, Miami, Ocala, Orlando, Tampa, and West Palm Beach.
An important element of the Company's business plan for the Fronton is the
use of different marketing techniques. Among the approaches planned are the use
of radio, including live remote broadcasts, television, newspapers and magazines
and other possible promotions. The management of the Company also believes that
it
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has increased the Fronton's visibility in the marketplace by causing the Fronton
to become a more integral part of the Fort Pierce and surrounding business and
social communities through community involvement. Through word-of-mouth and
involvement in the community, the Company believes that it has increased the
awareness of the people in surrounding areas of the entertainment opportunities
at the Fronton.
EXPANSION POLICY
In the course of its business, the Company has had numerous discussions,
and continues to have discussions, regarding joint ventures and business
combinations related to the pari-mutuel and gaming industry, including the
acquisition of other jai-alai frontons. No assurances can be given about the
likelihood or timing of any such transaction.
POTENTIAL GAMING JOINT VENTURES
CASINO AMERICA. The Company has entered into a letter of intent dated
October 4, 1994 (the "Letter of Intent") with Casino America, Inc. ("Casino
America") to form a joint venture (the "Joint Venture") to build and operate a
casino at the Fronton. Casino America owns and operates three riverboat and
dockside casinos located in Mississippi and Louisiana and Pompano Raceway a
Harness Track located in Pompano Beach, Florida. If the Joint Venture is
formed before passage of an amendment to the Florida Constitution to permit
casino gaming at the Fronton, the Company will contribute its interest in the
Fronton to the Joint Venture with a credit to its capital account of $5,000,000.
Casino America will contribute up to $2,500,000, as needed, to construct a
100,000 square foot indoor facility suitable for a casino or flea market. If
casino gaming is not permitted in Florida within six years from October 4, 1994,
Casino America has a continuing option to convert the money contributed to the
Joint Venture to a promissory note from the Joint Venture payable in equal
payments over a ten year period with interest at 8% per annum. If casino gaming
is permitted at the Fronton before October 4, 2000, the value of the assets
contributed by the Company to the Joint Venture will be adjusted to increase the
Company's capital account up to $22,500,000. Casino America would fund its
capital account on an as needed basis up to $22,500,000. All profits and losses
of the Joint Venture will be allocated between the partners based upon capital
accounts.
The Letter of Intent provides that Casino America will be the manager of
the casino and all casino-related activities. The Company will manage the
operation of the jai-alai fronton, inter-track wagering and all other non-casino
related activities. Each corporation will receive a management fee based on
costs. The Letter of Intent provides that Casino America has the exclusive
right to enter into a Joint Venture with the Company for six years from October
4, 1994, and Casino America has a right of first
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refusal to enter into other potential casino gaming opportunities in Florida
with the Company for such period and during the term of the Joint Venture.
The formation of the Joint Venture is subject to certain conditions,
including the satisfactory completion of due diligence by Casino America, the
receipt of all required regulatory approvals, the approval of each partner's
board of directors, the execution of a definitive joint venture agreement, and
the approval of the Company's stockholders, if required by law. If no
definitive Joint Venture agreement is executed by March 31, 1995, and the Letter
of Intent is not extended by either party no later than June 30, 1995, either
party may terminate discussions in connection with the Joint Venture and neither
party shall have any liability to the other, except as otherwise specified in
the Letter of Intent. By letter dated March 21, 1995, Casino America extended
the period of time to June 30, 1995. [Beginning of insert cut off top of fax]
No definitive Joint Venture Agreement has yet been executed, and though
the June 30, 1995, date has passed the Comany and Casino America are continuing
negotiations.
Freedom Financial Corporation ("Freedom") has informed the Company that
Casino America has purchased 22,500 shares of Freedom's 7% Series AA Mandatorily
Redeemable Preferred Stock (the "Freedom Preferred Stock") for an aggregate
purchase price of $2,250,000. Freedom has also issued 1,181 shares of Freedom
Preferred Stock to Casino America in payment of dividends. The Freedom
Preferred Stock is convertible into shares of the Company's Common Stock owned
by Freedom at prices ranging from $7.50 per share of Common Stock to $15.00 per
share of Common Stock, depending upon the timing of the conversion and passage
of an amendment to the Florida Constitution permitting casino gaming at the
Fronton. The Freedom Preferred Stock is convertible into a minimum of 157,873
shares of the Common Stock and a maximum of 315,746 shares of the Common Stock.
Casino America is the sole holder of Freedom Preferred Stock. Freedom has
granted certain piggyback registration rights to Casino America with respect to
the Freedom Preferred Stock and the shares of the Company's Common Stock into
which it is convertible.
GOLD STAR. On February 13, 1996, the Company announced the signing of a
letter of intent with Gold Star International, Inc. ("GSI") to acquire the
capital stock of Gold Star Casinos, Inc., ("Gold Star"), a wholly owned
subsidiary of GSI.
Headquartered in Coconut Grove, Florida, Gold Star holds the exclusive
rights to operate the casino concessions on two cruise ships operating from
Clearwater and St. Petersburg, Florida and a ferry boat which operates between
Bar Harbor, Maine and Yarmouth, Nova Scotia. Upon closing, Gold Star will also
have an option to acquire an assignment of 50% of the profits form the casino
concession aboard a cruise ship operating from Ft. Lauderdale, Florida. After
the exercise of the option, Gold Star's casino
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operating concessions would involve about 22,500 square feet of gaming space and
a total of 1,175 gaming positions.
The Letter of Intent anticipates that GSI will receive, at closing, 200,000
shares of the Company's common stock in exchange for 100% of the stock of Gold
Star Casinos, Inc. GSI can also receive up to 300,000 additional shares of the
Company's common stock over a four-year period pursuant to the "earn-out"
provisions of the Letter of Intent.
The Letter of Intent is not a binding agreement between the parties.
Consummation of the transaction is subject to several significant conditions,
including the completion of due diligence investigations by both parties, the
negotiation and execution of a definitive acquisition agreement between the
parties, the negotiation of employment arrangements with certain member of GSI's
management, the approval of the parties' respective Boards of Directors and GSI
stockholders, and the receipt of consents from the GSI senior lenders. Because
of these factors, neither consummation of the transaction, nor the operating
results anticipated therefrom can be assured. The Letter of Intent provides
that the parties will try to close the proposed transaction within 90 days.
EMPLOYEES
The Company had 38 jai-alai players under contract as of March 25, 1996.
The 1995-1996 season is from December 1, 1995 through and including April 27,
1996.
Players' compensation includes base salary, prizes for winning games played
(first, second, third places), and bonuses. The Company enters into seasonal
contracts with its players with no provision for vacation. Florida law
prohibits any fronton facility from requiring a jai-alai player to perform on
more than six consecutive calendar days.
The Company competes with all other frontons in the United States and
elsewhere for high quality jai-alai players. To the extent additional frontons
are opened in the future, the demand for high quality players will increase the
competition and costs associated with signing such individuals.
As of March 22, 1996, in addition to jai-alai players, the Company employed
approximately 128 employees, none of which are unionized. During the year,
other than during the live jai-alai season, the Company expects to employ
approximately 61 people, including part-time employees. The Company believes
that its present employee relations with its jai-alai players, some of whom
belong to the International Jai-Alai Players Association/U.A.W., and the
Company's other employees are satisfactory.
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SALE OF ALCOHOL; MINORS
Under Florida law, the operator of a jai-alai fronton may also obtain a
license for the sale of alcoholic beverages. These licenses may be revoked or
suspended for violation of applicable alcoholic beverage control regulations or
of any other laws or regulations.
Minors (persons under the age of 18) may attend events at the Fronton so
long as they are accompanied by an adult guest. Minors may not engage in any
pari-mutuel wagering. In addition, minors may be employed at the Fronton so
long as their employment does not cause them to be directly involved with
alcoholic beverages or wagering.
INDUSTRY OVERVIEW
The jai-alai industry generally has declined in the last several years
due to an industry-wide strike by jai-alai players and the passage of
legislation authorizing a state-wide lottery in 1987. Average state-wide
handle per performance for the State of Florida fiscal years ended June 30,
1995 and 1994 was approximately $102,000 and $101,000, respectively. During
the State of Florida's June 30, 1995 fiscal year, handle per performance at
the Company' Fronton increased from $31,918 to $36,090, or 13.1% compared to
the 1994 fiscal year. There can be no assurance that the jai-alai industry
will improve significantly, if at all, in the future. Because the Company's
jai-alai business is tied directly to many if not all of the factors which
influence the jai-alai industry as a whole, another players strike or the
enactment of unfavorable legislation could have an adverse impact on the
Company's operations.
Inter-track wagering has grown significantly since its initiation in the
State of Florida in August 1990. The state-wide ITW handle for the State of
Florida's fiscal year ended June 30, 1991 was approximately $109 million. The
state-wide ITW handle for the State of Florida's fiscal years ended June 30,
1994 and 1995 increased to approximately $383 million and $443 million,
respectively. ITW handle at the Company's Fronton has demonstrated similar
growth in recent years, increasing from $17.2 million in the year ended December
31, 1994 to $20.4 million for the year ended December 31, 1995.
All Florida permit-holders are authorized to engage in ITW year-round,
subject to certain restrictions, all of which are not discussed herein. ITW is
permitted on thoroughbred racing, harness racing, dog racing, and jai-alai. ITW
is permitted at a pari-mutuel facility so long as at least one facility in
Florida is providing live pari-mutuel performances on any such day that ITW is
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offered. The Fronton currently engages in ITW broadcasts originating solely
from Florida pari-mutuel facilities.
Pursuant to the statute and subject to certain restrictions, Florida jai-
alai frontons and dog racing tracks may receive broadcasts of dog races or jai-
alai games conducted at tracks or frontons located outside of Florida ("out-of-
state host facilities"). Among the restrictions applicable to such broadcasts,
however, are the following: (1) that the receipt of out-of-state broadcasts by
the Florida fronton or dog racing track (the "Florida guest facility") only be
permitted during the Florida guest facility's operational meeting, (2) in order
for the Florida guest facility to receive such broadcasts, the out-of-state host
facility must hold the same type of class of pari-mutuel permit as the Florida
guest facility, i.e., horse to horse, jai-alai to jai-alai, etc., (3) the guest
facilities may not accept wagers on out-of-state races or games that exceed 20%
of the total races or games on which wagers are accepted live. All wagering
placed on out-of-state ITW broadcasts is included in the amount taxed pursuant
to the Pari-Mutuel Law.
The Fronton, as a guest facility when it participates in ITW, is entitled
by statute to a minimum of 7% of the total contributions to the pari-mutuel pool
when the ITW broadcast is by a host horse racing facility. The Fronton is
eligible by statute to receive a minimum of 5% of the total contributions to the
pari-mutuel pool when the ITW broadcast is by facilities other than horse racing
facilities (greyhound and jai-alai). In addition, the Fronton is authorized to
receive admissions, and program revenue when conducting ITW.
INDIAN GAMING
GENERAL. The Company is actively exploring other opportunities in the
pari-mutuel and gaming industry, including opportunities to develop, finance and
operate gaming projects with federally recognized Indian tribes in accordance
with IGRA. See "Government Regulation." According to the National Indian
Gaming Association, there are currently 557 federally recognized Indian tribes
in the United States, of which approximately 185 tribes conduct gaming
activities ranging from bingo to full scale casino gaming. In enacting IGRA,
Congress recognized that the operation of gaming by Indian tribes was a means of
promoting tribal economic development, self-sufficiency, and strong tribal
governments, which historically have been principal goals of federal Indian
policy. Based on gaming industry statistics indicating that Indian gaming is
one of the fastest growing segments of the gaming industry, the Company believes
Indian gaming presents promising business opportunities.
The Company plans to focus on developing, either alone or through joint
ventures with other parties, small- to medium-sized
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gaming projects that have the potential to generate $1,000,000 to $10,000,000 in
annual profits. The Company estimates that projects generating financial
returns in this range will usually require a capital investment of from $5
million to $50 million. The Company believes that major gaming companies are
reluctant to consider a management relationship with a tribe if the gaming
project does not have the potential to generate annual profits of at least
$30,000,000. The Company believes there are many tribes with the capability and
interest to develop gaming projects of the size targeted by the Company.
FINANCING. The Company plans to obtain funds to meet its present and any
future obligations to finance Indian gaming projects from a variety of potential
sources, including cash flow from operations, borrowing, proceeds from the sale
of the Company's securities, and joint venture arrangements. The Company's
agreements relating to Indian gaming projects currently provide, and will
provide in the future, that the Company becomes obligated to fund major
development expenses such as land acquisition, construction and equipment
expenses, and working capital only after all regulatory approvals and other
conditions required for the commencement of gaming are satisfied. The Company
generally is responsible for budgeted organizational, planning and
predevelopment costs during the initial planning and regulatory approval phase.
Obtaining regulatory approvals and meeting the other conditions imposed on
start-up Indian gaming ventures by IGRA is generally a lengthy process, and
predevelopment expenses can be significant. The Company expects to fund
organizational, planning and predevelopment costs from cash flow from
operations, funds made available by the Freedom Financial Corporation and
proceeds from the sale of securities. The Company believes funds currently
available from these sources will be sufficient to meet the Company's current
obligations for ongoing predevelopment expenditures, and its commitment to loan
up to $5 million to the Rincon, San Luiseno Band of Mission Indians if and when
the Rincon Band is permitted to operate gaming machines at its casino. See
"Rincon, San Luiseno Band of Mission Indians." When the Company's role in a
prospective Indian gaming venture includes financing and constructing a casino,
the Company expects that sources of financing for land acquisition, construction
and equipment costs, and working capital for the project will be available at
such time that regulatory approvals and all other material conditions for
commencement of Indian gaming operations have been satisfied. See "Government
Regulation."
POSSIBLE VENTURES. In 1995, the Company entered into two agreements with
Indian tribes relating to gaming ventures. The terms of those agreements are
summarized in the following sections. In 1995, the Company also entered into
letters of intent with several parties relating to possible Indian gaming
ventures. Letters of intent and other arrangements with Centrum X Corporation,
EagleVisions Gaming Group of The Americas, Inc., the
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Apache Tribe of Oklahoma, and certain co-ventures relating to a project with the
Oklevueha Band of Seminole-Yamazee Indians expired or were terminated before the
establishment of any Indian gaming operations.
PONCA TRIBE OF NEBRASKA. On August 28, 1995, the Company (through a wholly
owned subsidiary) entered into an agreement with the Ponca Tribe of Nebraska to
provide financing for, develop, construct and manage a casino for the Ponca
Tribe planned for the Omaha, Nebraska metropolitan area. The agreement provides
that financing for start-up expenses, land acquisition, construction, equipment
and other development expenses and working capital for the gaming operation
would be provided through a development loan by the Company to the Ponca Tribe
in a principal amount up to $50,000,000. The development loan would bear
interest at an annual rate equal to the prime rate plus two percent. The
Company would be entitled to receive 30% of the net revenues of the casino,
including gaming and certain non-gaming revenues, for five years beginning when
gaming commences in a permanent facility. The Ponca Tribe would receive 70% of
the net revenues from gaming and non-gaming activities at the casino, from which
monthly principal and interest payments on the development loan would be
deducted, subject to a minimum guaranteed monthly payment to the Ponca Tribe of
$10,000 for Class II gaming, and an additional $25,000 per month for Class III
gaming. The developmental loan would be secured by security interests in all
assets, revenues and accounts of the Ponca Tribe's gaming operation except for
land and real property.
The project is subject to many substantial conditions, including approval
of the agreement by the National Indian Gaming Commission, approval by the
Bureau of Indian Affairs of the acquisition of land suitable as a site for
gaming to be placed in trust for the Ponca Tribe, the negotiation and completion
of a gaming compact between the State of Nebraska and the Ponca Tribe, among
other conditions. There can be no assurance all of these conditions can be
satisfied. See "Government Regulation--The Indian Gaming Regulatory Act of
1988."
The Company is currently reevaluating the feasibility of the proposed
gaming venture with the Ponca Tribe of Nebraska in light of recent developments
that have significantly diminished the prospects for Indian gaming in the state.
To date, the State of Nebraska has declined all requests by Nebraska tribes to
negotiate a gaming compact. On February 6, 1996, the Nebraska legislature
failed to pass legislation that would have authorized a voter referendum on
legalizing casino gaming in the state. In addition, as a result of a November
1995 federal appeals court decision, the Bureau of Indian Affairs has
indefinitely suspended action on land-in-trust applications from Indian tribes
in Nebraska and certain other states. As of February 29, 1996, the Company had
provided $92,498 for predevelopment expenses of the project.
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RINCON, SAN LUISENO BAND OF MISSION INDIANS. On September 11, 1995, the
Company entered into a Loan Agreement and related agreements with the Rincon,
San Luiseno Band of Mission Indians, which presently owns and operates the River
Oaks Casino, located approximately 40 miles north of San Diego, California. The
Rincon Band, which currently operates bingo and other activities classified as
Class II gaming, is seeking to operate electronic gaming machines, a Class III
gaming activity, if and when an injunction currently prohibiting the operation
of gaming machines at River Oaks is lifted by the United States District Court
for the Southern District of California. The Loan Agreement will take effect
when gaming machines are in operation at River Oaks.
The Company has agreed to loan up to $5,000,000 to the Rincon Band for
working capital to renovate, improve and expand the Tribe's gaming facilities.
In lieu of interest, the Company would receive a royalty equal to 12.5% of the
gross receipts of the facility (excluding gaming machines)during the seven-year
term of the agreement, plus 12-1/2% of the "drop" or "handle" from gaming
machines during the first five years and 11% of the "drop" or "handle" during
the sixth and seventh years. The Loan is secured by security interests granted
to the Company in the equipment, accounts, revenues and other property of River
Oaks other than land and real estate. See "Government Regulation." As of
February 29, 1996, the Company had made short term working capital advances of
$340,000 to the Rincon Band, which will become repayable under the terms of the
Loan Agreement if and when the Loan Agreement takes effect. The Loan Agreement
can be terminated by the Company if it does not take effect by June 30, 1996.
There are three casinos other than River Oaks currently operating in San
Diego County, all of which are owned by Indian tribes and which together operate
approximately 2,500 gaming machines. The operation of gaming machines at River
Oaks, however, is currently prohibited by a preliminary injunction issued by the
United States District Court for Southern California. The injunction was sought
by the United States Attorney for Southern California, based upon federal
circuit court decisions that the operation of gaming machines by Indian tribes
in California was prohibited by the IGRA because gaming machines were prohibited
by California law, and to date the California Governor has refused to enter into
a gaming compact with California tribes. In light of the litigation, the
ability of California Indian tribes to continue to conduct Class III gaming
activities in the future is uncertain. See "Government Regulation."
On October 5, 1995, the Rincon Band filed a motion to modify the
injunction. The Company has been advised that in connection with the motion,
the Rincon Band, at the direction of the Court, has participated in discussions
with the U.S. Attorney and the three Indian tribes currently operating Class III
gaming facilities in San Diego County concerning a framework for the continued
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conduct of Class III gaming by Indian tribes in the County until the current
litigation in the federal and California state courts is completed. The Company
cannot predict the outcome of these discussions, and there can be no assurance
that the injunction against the Rincon Tribe will be lifted or that the Loan
Agreement will take effect.
In light of the discussions, the Company and the Rincon Band have discussed
amending certain provisions of the Loan Agreement to reflect the possibility
that the Rincon Band may be permitted to operate fewer than the 400 gaming
machines contemplated by the Loan Agreement. No amendment to the Loan Agreement
is expected to be completed until there are further developments in the
proceedings in the federal district court.
GOVERNMENT REGULATION
GENERAL.
The Company is actively exploring opportunities in the pari-mutuel and
gaming industry, including opportunities to finance, develop and operate gaming
facilities on lands held in trust for Indian tribes by the United States
Government. Gaming ventures are regulated by federal and state laws and
regulations applicable to the gaming industry generally and to the distribution
of gaming equipment. In addition to a variety of generally applicable state and
federal laws governing business operations, the Company's Indian gaming ventures
will be subject to extensive regulation by special federal, state and tribal
laws and regulations applicable to commercial relationships with Indians
generally, as well as Indian gaming and the management and financing of Indian
casinos. The following description of the regulatory environment in which the
Company operates is intended to be a summary and is not intended to be a
complete recitation of all applicable law. Moreover, because the regulatory
environment is dynamic and evolving, it is impossible to predict how certain
provisions will be ultimately interpreted or how they may affect the Company.
Changes in such laws or regulations could have a material adverse impact on the
Company's ability to finance, develop and operate its operations, including any
Indian gaming ventures.
The Company will need to secure regulatory approvals from state and local
authorities or, in the case of Indian gaming activities, from federal and tribal
authorities for each of its prospective gaming ventures. No assurance can be
given that any of these approvals will be secured in a timely fashion or at all.
The denial of regulatory approvals would prohibit the opening of the new
facilities and any delay in securing such approvals could result in postponement
of their scheduled openings. Although it is not expected that the Company's
management agreements for gaming ventures will require expenditures for land
acquisition and construction costs before regulatory approvals are obtained, it
is
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anticipated that each of the Company's new gaming ventures will require the
commitment of funds for organization, planning and certain other start-up costs
before required regulatory approvals can be obtained. No assurance can be given
that the Company will be able to recoup its initial investment in these
ventures.
FLORIDA LAW AND REGULATION.
OVERVIEW. Pari-mutuel wagering must be conducted in compliance with the
applicable Florida statutes and regulations of the DPMW. In the 1992 Special
Session, the Florida Legislature enacted several new statutes governing pari-
mutuel activities in the State of Florida and repealed many laws enacted before
the 1992 Special Session regarding pari-mutuels in Florida. Certain provisions
of the new pari-mutuel statute, which governs all pari-mutuel activities
relating to horse racing, dog racing, and jai-alai, were amended in the 1994
Regular Session, which ended on April 15, 1994. The amendments from the 1994
Regular Session became effective July 1, 1994. The new pari-mutuel statute, as
amended, is referred to herein as the "Pari-Mutuel Law."
THE ROLE OF THE DPMW. The DPMW, in its administration of the Pari-Mutuel
Law, is authorized to "adopt reasonable rules for the control, supervision, and
direction of all applicants, permittees, and licensees and for holding,
conducting, and operating of all" pari-mutuel activities in Florida. In
addition to its taxation powers already described above, the DPMW's powers
include, but are not limited to (1) testing occupational license holders
officiating at or participating in any race or game at any pari-mutuel facility
for a controlled substance or alcohol, and (2) excluding "certain persons" from
any pari-mutuel facility in Florida, including but not limited to persons who
have engaged in conduct that violates certain Florida laws or regulations.
Certain forms of conduct are expressly prohibited at pari-mutuels and include
but are not limited to, (1) conniving to prearrange the outcome of a game, (2)
use of alcohol or a controlled substance by an official or participant in a jai-
alai performance, and (3) bookmaking. Failure to comply with the requirements
of the Pari-Mutuel Law can result in a fine imposed by the DPMW of up to $1,000
per offense, as well as a suspension or revocation of a permit, pari-mutuel
license, or an occupational license.
PARI-MUTUEL PERMIT AND LICENSE REQUIREMENTS. Each fronton must obtain an
initial permit and an annually renewable license specifying the number of
performances authorized at the fronton during the year with respect to which
such license is issued. A permit for any new pari-mutuel must either be enacted
by the Legislature, or be ratified by the electorate of the county in which it
is to be located. Currently only two counties, Levy and Polk, will allow, under
state law, ratification of a pari-mutuel permit. Pari-mutuel permits and
licenses (see below) may be revoked or suspended by the DPMW for, in the case of
licenses,
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willful violations of laws, rules or regulations or, as to permits, by a vote of
the county electorate. Any amendment or repeal of the Pari-Mutuel Laws or
suspension or revocation of the Company's permits or licenses, could be
materially adverse to its business.
DISCOURAGEMENT OF SHARE ACCUMULATIONS. Florida law requires that before
any person or company obtains a 5% or greater equity interest in a pari-mutuel
operator and exercises control with respect to those shares, such person or
company must receive the approval of the DPMW. Such person or company must
submit to a background investigation equivalent to that required of permit-
holders to determine that such person or company has the requisite
qualifications for holding a permit (i.e., that such person or company has not
violated certain laws or engaged in certain conduct). Consistent with Florida
law, the Company cannot issue shares of Common Stock to a person or company who
would thereby have obtained a 5% or greater equity interest, whether in a single
transaction or series of integrated transactions, until the purchaser has
received the approval of the DPMW.
REQUIRED NUMBER OF LIVE JAI-ALAI PERFORMANCES. In order to qualify to
offer ITW, a fronton must offer a "full schedule" of live races per year. A
"full schedule" of jai-alai means the operation of at least 100 live evening or
matinee performances during a year. In this context, a live performance must
consist of no fewer than 8 games conducted live for each of a minimum of three
performances per week at the permit-holder's facility under a single admission
charge. The Company anticipates it will offer at least 100 live evening or
matinee performances on an annual basis.
OCCUPATIONAL AND TOTALIZATOR LICENSE REQUIREMENTS. The DPMW requires that
persons "connected with" pari-mutuels have one of two forms of occupational
licenses.
One form of occupational license is the "unrestricted license" issued to
persons with access to restricted areas such as the backside, racing animals,
jai-alai player rooms, the mutuels, or money room, or to persons, who by virtute
of the position they hold, might be granted access to such areas. Any person
obtaining an unrestricted license must undergo a Federal Bureau of Investigation
and Florida Department of Law Enforcement criminal records check as well as
submit fingerprints with their application for a license. The category of
persons qualifying for unrestricted licenses includes, but is not limited to,
trainers, officials, doctors, jai-alai players, owners, members of management,
officers, directors, stockholders, and other professional employees.
Another form of occupational license is the "restricted license" issued to
persons who are denied access to restricted areas. Applicants for a restricted
license do not usually have to undergo a criminal background check nor submit
fingerprints with
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their application, although the DPMW may require such if it deems necessary.
The DPMW also requires all totalizator operators, including the Company's
vendor, Autotote Limited, to possess an annual totalizator license. Among the
various requirements imposed by the DPMW, the totalizator operator is required
to agree in writing to pay the DPMW an amount equal to any loss of state revenue
from missed or canceled performances due to acts of the totalizator owner,
operator, agents, or employees, and for any failure of the totalizator system,
unless such acts are beyond the control of the above-listed persons. Every
licensed totalizator operator must file a performance bond issued by a surety
approved by the DPMW in the amount of $250,000 insuring the state against such
revenue loss. Licensed totalizator operators must also pay an annual license
fee not to exceed $100.
Businesses, such as vendors and contractual concessionaires, must also
obtain an occupational license from the DPMW. Minors may be employed by a pari-
mutuel facility as long as their employment is not directly involved with
alcoholic beverages or wagering.
DAILY LICENSE FEE. During the 1993-1994 live jai-alai session, a license
fee of $80 was assessed against the Fronton for each jai-alai game conducted at
the Fronton per day. Effective July 1, 1994, the amendments to the Pari-Mutuel
Law reduced this fee to $40 per game. The amendments provide, however, that
should an amendment to the Florida Constitution be adopted that would permit
casino gambling at pari-mutuels such as the Fronton, the fee would return to $80
per jai-alai game. Such fee is paid to the DPMW to defray regulatory costs.
TAXATION. The pari-mutuel tax structure applicable to frontons operating
in Florida provides for distribution of taxes, on a daily basis, based on the
Handle. As discussed below, the pari-mutuel tax structure changed effective
July 1, 1994, as a result of amendments adopted by the Florida Legislature in
the 1994 Regular Session. The various taxes applicable to the Fronton are as
follows:
1. Tax on Handle: Until July 1, 1994, wagering on live jai-alai was
subject to a tax of 7.1% on the Handle; however, where the live Handle
was less than $30,000 per performance during the State of Florida
1991-1992 fiscal year, as in the case of the Fronton, this tax was
paid only on the Handle in excess of $30,000 per day. Effective July
1, 1994, the tax rate was amended so that a tax of 5%, rather than
7.1%, is paid on Handle in excess of $30,000 per day where the live
Handle for such jai-alai fronton has been less than $15 million during
the preceding state fiscal year. However, the Pari-Mutuel Law also
provides that, should casino gaming be conducted at a jai-alai
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fronton (i.e., assuming an amendment to the Florida Constitution is
adopted), the tax rate will return to 7.1% as it was under the pre-
amended statute. When a fronton has paid a total of admissions tax,
daily license fee and tax on Handle for live performances in excess of
the tax revenues from wagering on live jai-alai performances paid by
the fronton in fiscal year 1991-1992, the tax on Handle for live jai-
alai wagering drops to 3.3%, with no exception.
2. Breaks Tax -- Jai-Alai permit-holders must pay a tax equal to the
"breaks." The "breaks" are that portion of each pari-mutuel pool,
computed by rounding down to the nearest multiple of $.10, which is
not re-distributed to the contributors or withheld by the permit-
holder as takeout (commission). Breaks tax may be retained, however,
by the jai-alai permit-holder for special prize awards.
3. Admission Tax: In addition to a sales tax of 6%, the Fronton must pay
an admission tax equal to 15% of the entrance fee or 10 cents,
whichever is greater, for any person attending a jai-alai game.
4. Daily License Fee: Effective July 1, 1994, the daily license fee of
$80 per game paid by jai-alai frontons was reduced to $40 per game.
The amendments adopted in the 1994 Regular Session provide, however,
that should an amendment to the Florida Constitution be adopted that
would permit casino gaming at pari-mutuels such as the Fronton, the
fee would return to $80 per jai-alai game.
5. Jai-Alai Tournament of Champions: The amendments adopted in the 1994
Regular Session create a special jai-alai meet called the "Jai-Alai
Tournament of Champions" (the "Tournament"). The Tournament, which
may be held only once a year and for no longer than four performances
over four days, permits permit-holders selected to participate in the
Tournament to do so even though they would not otherwise be authorized
to conduct a meet at such time. In addition, the participants do not
have to pay any taxes on Handle for performances during the Tournament
and may apply any credit they receive, up to $150,000 aggregated
between all participants, to supplement awards for the performance
conducted during the Tournament as well as to taxes otherwise due and
payable by them to the State of Florida.
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TRIBAL LAW AND LEGAL SYSTEMS.
APPLICABILITY OF STATE AND FEDERAL LAW. Federally recognized Indian tribes
are independent governments, subordinate to the United States, with sovereign
powers, except as those powers may have been limited by treaty or by the United
States Congress. Absent tribal consent or the consent of the United States
Congress, state laws do not apply to Indian tribes or tribal agencies. Indian
tribes maintain their own governmental systems and often their own judicial
systems. Indian tribes have the right to tax persons and enterprises conducting
business on Indian lands, and also have the right to require licenses, and to
impose other forms of regulations and regulatory fees on persons and businesses
operating on their lands.
WAIVER OF SOVEREIGN IMMUNITY; JURISDICTION; EXHAUSTION OF TRIBAL REMEDIES.
Indian tribes enjoy sovereign immunity from unconsented suit similar to that of
the states and the United States. To sue an Indian tribe or a tribal agency or
instrumentality, the tribe must have effectively waived its sovereign immunity
with respect to the matter in dispute. Further, in most commercial disputes
with Indian tribes, the jurisdiction of the federal courts, which are courts of
limited jurisdiction, may be difficult or impossible to obtain. A commercial
dispute is unlikely to present a federal question, and some courts have ruled
that an Indian tribe as a party is not a citizen of any state for purposes of
establishing diversity jurisdiction in the federal courts. State courts may
also lack jurisdiction over suits brought by non-Indians against Indian tribes.
The remedies available against an Indian tribe also depend, at least in part,
upon the rules of comity requiring initial exhaustion of remedies of tribal
tribunals and, as to some judicial remedies, the tribe's consent to
jurisdictional provisions contained in the disputed agreements. The United
States Supreme Court has held that where a tribal court exists, the jurisdiction
in that forum must first be exhausted before any dispute can be properly heard
by federal courts which would otherwise have jurisdiction. Where a dispute as
to the existence of jurisdiction in the tribal forum exists, the tribal court
must first rule as to the limits of its own jurisdiction.
In its current contracts with Indian tribes, the Company has negotiated,
and intends to negotiate in any future contracts with Indian tribes, the tribe's
agreement to waive its sovereign immunity for the limited purpose of any
proceeding by the Company (or its affiliate) under certain circumstances to
enforce repayment of loans by the Company to the tribe and the Company's other
rights under the contract. If such a waiver of sovereign immunity were held to
be ineffective, the Company could be precluded from judicially enforcing its
rights and remedies against the tribe. In certain of its current contracts with
Indian tribes, the Company has negotiated, and intends to negotiate in any
future contracts
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with Indian tribes, the tribe's agreement to waive the rule requiring exhaustion
of tribal remedies.
THE INDIAN GAMING REGULATORY ACT OF 1988.
REGULATORY AUTHORITY. The terms and conditions of the contracts governing
the Company's Indian gaming ventures, as well as the operation of casinos and of
all gaming on Indian land, are subject to the Indian Gaming Regulatory Act of
1988, 25 U.S.C. 2701 ET SEQ. ("IGRA").
IGRA is administered by the National Indian Gaming Commission ("NIGC"), an
independent agency within the U.S. Department of Interior, exercising primary
federal regulatory responsibility over Indian gaming. The NIGC has exclusive
authority to issue regulations governing tribal gaming activities, approve
tribal ordinances for regulating Class II and Class III Gaming (as described
below), approve management agreements for gaming facilities, conduct
investigations, and generally monitor tribal gaming. Under IGRA, the Bureau of
Indian Affairs ("BIA") must approve the transfer of lands into trust status for
Indian gaming. The BIA also has responsibility to review and approve land
leases and other agreements relating to Indian lands. Statutory remedies enable
the federal courts to find agreements which violate these statutes to be void AB
INITIO.
Under IGRA, management contracts for Indian gaming facilities are subject
to approval by the NIGC and generally provide for a maximum management fee of
30% of net revenues and a maximum term of five years. These provisions may be
increased to a management fee of 40% of net revenues and a term of seven years
if the Chairman of the NIGC determines that the capital investment required and
the income projections for the facility merit such terms. The NIGC has the
power to require contract modifications under certain circumstances or to void a
contract if the management company fails to comply with applicable laws and
regulations. In addition, the Company, its directors, persons with management
responsibility, certain owners of the Company and certain persons with a
financial interest in the management agreement as determined by the NIGC and the
gaming commission of the Indian tribe must provide background information and be
investigated by the NIGC and the tribal gaming commission and be approved in
order for the management contract to be approved by the NIGC and for the Company
to be issued a license to operate a gaming facility by the tribal gaming
commission. Persons who acquire beneficial ownership of the Company's stock may
be subject to certain reporting and qualification procedures established by the
NIGC and the tribal gaming commission. Such limitations could affect or prevent
certain corporate transactions, including mergers or other business
combinations. Following approval, if obtained, of a management contract
involving the Company by the NIGC, and issuance to the Company of a management
contractor's license by the tribal gaming commission, the operation
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and management of tribal gaming facilities will be subject to the regulating
authority of the NIGC and the tribal gaming commission.
The regulations and guidelines that the NIGC and the BIA use to interpret
their respective responsibilities are incomplete and evolving. Federal statutes
including IGRA have been the subject of litigation and may be subject to further
judicial or legislative interpretation.
The NIGC is empowered to inspect and audit all Indian gaming facilities, to
conduct background checks on all persons associated with Indian gaming, to hold
hearings, issue subpoenas, take depositions, adopt regulations and assess fees
and impose civil penalties for violations of IGRA. IGRA also provides for
federal criminal penalties for illegal gaming on Indian land and for theft from
Indian gaming facilities.
In 1993, the NIGC published rules implementing certain provisions of IGRA.
These rules govern, among other things, the submission and approval of tribal
gaming ordinances or resolutions, and require an Indian tribe to have the sole
proprietary interest in and responsibility for the conduct of any gaming.
Tribes are required to issue gaming licenses only under articulated
standards, to conduct or commission financial audits of their gaming
enterprises, to perform or commission background investigations for primary
management officials and key employees, and to maintain facilities in a manner
that adequately protects the environment and the public health and safety. The
1993 rules also set out a review procedure for tribal licensing of all gaming
operation employees. Reporting requirements applicable to tribes are
articulated, requiring the reporting of specified information, including that
derived from background investigations, to the NIGC.
TRIBAL ORDINANCES. Under IGRA, except to the extent otherwise provided in
a tribal-state compact, Indian tribal governments have primary regulatory
authority over Class III Gaming on land within the tribe's jurisdiction.
Therefore, tribal gaming operations that may be managed by the Company, and
Company personnel engaged in gaming activities, will be subject to tribal
ordinances and regulations regarding gaming.
IGRA requires that the NIGC review tribal gaming ordinances, and authorizes
the NIGC to approve such ordinances only if they meet certain requirements
relating to (i) the ownership, security, personnel background, record keeping,
and auditing of a tribe's gaming enterprises; (ii) the use of the revenues from
such gaming; and (iii) the protection of the environment and the public health
and safety.
CLASSES OF GAMING. IGRA classifies games that may be conducted on Indian
lands into three categories. "Class I Gaming"
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includes social games solely for prizes of minimal value, or traditional forms
of Indian gaming engaged in by individuals a part of, or in connection with,
tribal ceremonies or celebrations. "Class II Gaming" includes bingo, pulltabs,
lotto, punch boards, tip jars, instant bingo, and certain other games similar to
bingo, if those games are played at the same location as bingo is played. "Class
III Gaming" includes all other forms of gaming, such as slot machines, video
casino games (e.g., video slots, video blackjack and video poker), so-called
"table games" (e.g., blackjack, craps, roulette), and other commercial gaming
(e.g., sports betting and parimutuel wagering).
Class I Gaming on Indian lands is within the exclusive jurisdiction of the
Indian tribes and is not subject to the provision of IGRA. Class II Gaming is
permitted on Indian lands if (i) the state in which the Indian lands lies
permits such gaming for any purpose by any person, organization or entity; (ii)
the gaming is not otherwise specifically prohibited on Indian lands by federal
law; (iii) the gaming is conducted in accordance with a tribal ordinance or
resolution which has been approved by the NIGC; (iv) an Indian tribe has sole
proprietary interest and responsibility for the conduct of gaming; (v) the
primary management officials and key employees are tribally licensed; and (vi)
several other requirements are met. Class III Gaming is permitted on Indian
lands if the conditions applicable to Class II Gaming are met and, in addition,
the gaming is conducted in conformance with the terms of a written agreement
between the tribal government and the government of the state within whose
boundaries the tribe's lands lie (a "Tribal-State Compact").
TRIBAL-STATE COMPACTS. IGRA requires states to negotiate in good faith
with Indian tribes that seek to enter into Tribal-State Compacts for the conduct
of Class III Gaming. Such Tribal-State Compacts may include provisions for the
allocation of criminal and civil jurisdiction between the state and the Indian
tribe necessary for the enforcement of such laws and regulations, taxation by
the Indian tribe of such activity in amounts comparable to those amounts
assessed by the state for comparable activities, remedies for breach, standards
for the operation of such activity and maintenance of the gaming facility,
including licensing, and any other subjects that are directly related to the
operation of gaming activities. The terms of Tribal-State Compacts vary from
state to state; however, Tribal-State Compacts within one state tend to be
substantially similar. Tribal-State Compacts usually specify the types of
permitted games, establish technical standards for video gaming machines, set
maximum and minimum machine payout percentages, entitle the state to inspect
casinos, require background investigations and licensing of casino employees,
and may require the tribe to pay a portion of the state's expenses for
establishing and maintaining regulatory agencies. Some Tribal-State Compacts
are for set terms, while others are for indefinite duration. In California,
where the Company has entered into an
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agreement to finance a tribal casino operation in San Diego County, the IGRA's
provisions relating to Tribal-State Compacts are currently the subject of
litigation. See "Risk Factors -- Highly Regulated Industry."
Tribal-State Compacts have been the subject of litigation in several
states, including California. Among the issues being litigated is the
constitutionality of the provision of IGRA that entitles tribes to sue in
federal court to force states to negotiate Tribal-State Compacts. On March
27, 1996, the United States Supreme Court upheld a federal appellate court
decision that the Eleventh Amendment to the United States Constitution
immunizes states from suit by Indian tribes in federal court unless the state
consents to such suit. The Supreme Court expressly did not consider a portion
of the lower court opinion that held that after the dismissal of a suit
against a state, Indian tribes may directly appeal to the Secretary of the
Interior to establish regulations governing the conduct of Class III gaming
on Indian lands, an issue that is also the subject of litigation.
There has also been litigation challenging the authority of governors,
under state law, to enter into Tribal-State Compacts. Federal courts have upheld
the authority of the governors of two states to enter into compacts, while the
highest state courts of two other states have held that the governor did not
have authority to enter into such compacts without the consent or authorization
of the state legislature.
In California, where the Company has a project with the Rincon Band in San
Diego County, numerous federally recognized Indian tribes currently engage in
various gaming activities on tribal lands. Several tribes have asked the State
of California to negotiate a compact authorizing certain gaming activities,
including the operation of electronic gaming machines. The State has refused,
asserting the proposed activities were illegal under California law. The State
and seven tribes subsequently agreed to seek judicial determination of whether
the State was obligated to negotiate with the tribes under the IGRA. A federal
circuit court of appeals has held that the State was not required to negotiate
with the tribes under the IGRA because California law prohibits the operation of
the gaming activities in question. However, the federal circuit court has
agreed to review its decision in light of a California state appellate court
decision that the operation of electronic gaming machines is not prohibited by
California law because the state lottery is authorized to operate such machines.
In a different case, the federal circuit court of appeals recently held that
California criminal statutes prohibiting gambling apply to Indian tribes in
California in the absence of a Tribal-State Compact under IGRA, and Indian
tribes and third-party operators of Indian gaming facilities are subject to
federal criminal prosecution. Until the issues currently the subject of
litigation have been resolved, including an opinion of the California Supreme
Court determining the status of gaming under state law, the
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parameters of Indian gaming in California will likely remain uncertain.
POSSIBLE CHANGES IN FEDERAL LAW. Several bills have been introduced in
Congress which would amend IGRA. To this date, no such bill has passed either
house of Congress. If IGRA were amended, the amendment could change the
governmental structure and requirements within which the Tribe could conduct
gaming.
CERTAIN CONSIDERATIONS
The following important factors should be considered carefully in
evaluating the Company and its business, and in particular its participation in
gaming ventures with Indian tribes. These factors, among others, in certain
cases have affected, and in the future could affect the Company's actual results
and could cause the Company's results for future periods to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company.
NEED FOR EXPERIENCED PERSONNEL. To the extent the Company's future gaming
projects become operational, the Company will be required to add and train
personnel, expand its management information systems and control expenses. None
of the Company's present management team has experience managing a casino
operation. The Company believes that it will be able to attract and train
qualified individuals to fill senior supervisory positions for any future casino
gaming operations.
NEW PROJECTS. Each of the Company's projects to finance, develop, and
operate gaming facilities will be subject to the many risks inherent in the
establishment of a new business enterprise, including unanticipated design,
construction, regulatory and operating problems, and the significant risks
commonly associated with implementing a marketing strategy in new markets.
There can be no assurance that any of these projects will become operational
within the estimated time frames and projected budgets at the time the Company
enters into a particular management agreement, or at all. There can be no
assurance that the significant expenditures required to develop a gaming project
will ultimately result in the establishment of profitable operations.
LIMITED RECOURSE AGAINST TRIBES AND TRIBAL ASSETS. In general, Indian
tribes do not make any equity investments in the construction, development or
equipment of the casinos. The Company's financing agreements provide for loans
to tribes for the development, construction or renovation, equipping and
operation of tribal casinos that may be managed by the Company, the tribe, or
another party. These loans are not conventional real estate and construction
loans subject to customary mortgages and encumbrances. If the casinos do not
generate sufficient cash flow to repay such indebtedness, the Company's loans
may not be repaid. The Company's
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principal recourse for collection of indebtedness from a tribe or money damages
for breach or wrongful termination of a loan or management contract is from
revenues, if any, from casino operations.
RELATIONSHIP WITH THE INDIAN TRIBES. Indian tribes are sovereign nations
with their own governmental systems. Tribal officials are subject to
replacement by appointment or election. The Company's relationship with a tribe
could improve or deteriorate under new administrations. Good relationships with
Indian tribes and their officials are critical to the Company's ability to
obtain, retain and renew management contracts. Although the Company believes
that its agreements with Indian tribes contain appropriate legal protections, a
deterioration in the relationship between the Company and a tribe could have a
material adverse effect on the Company. See "Government Regulation--Tribal Law
and Legal Systems."
POLITICAL UNCERTAINTIES. Historically, Congress and the states have
permitted, restricted and abolished gaming from time to time depending on
prevailing public attitudes. Congress and the states have the power to restrict
or eliminate gaming on Indian land, and Congress may amend or repeal IGRA at any
time. Any federal or state action to limit gaming on Indian land may have a
material adverse effect on the Company. In addition, legislation has recently
been proposed that would subject income earned by Indian tribes or tribal
agencies from certain gaming activities to federal income taxation. If enacted,
this proposal could significantly adversely affect the amount of net revenues
from tribal gaming operations in which the Company participates on a percentage
of net revenues basis.
ACQUISITION OF THE FRONTON
The Company acquired the Fronton from WJA Realty Limited Partnership ("WJA
Realty") pursuant to an agreement with WJA Realty dated October 6, 1993. On
February 1, 1994, the Company received approval from the DPMW to transfer the
pari-mutuel permit for the Fronton from WJA Realty to the Company and also
closed the purchase transaction with WJA Realty on that date. Consideration for
the acquisition consisted of 200,000 shares of Company Common Stock and
$1,500,000 paid in cash at the closing (including $100,000 previously deposited
in an escrow account) and $1,000,000 which was in the form of a ten-year 8%
mortgage.
Before the Company's acquisition of the Fronton and since its inception in
1976, the Company has engaged in several other lines of business, none of which
are currently now in operation.
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ITEM 2. DESCRIPTION OF PROPERTY.
The Fronton, completed in 1974, is located in St. Lucie County, Florida,
which is near Ft. Pierce, an Atlantic coast community approximately 110 miles
north of Miami. The Fronton is located approximately one mile from an on/off-
ramp to the Florida Turnpike and approximately 2 miles from an on/off-ramp to
Interstate 95. The Florida Turnpike provides transportation between south
Florida and Orlando, while Interstate 95 constitutes the main north-south artery
for the state, traveling the entire length of the state parallel to the eastern
coastline. The Fronton is also approximately five miles from U.S. 1, which
represents another significant north-south artery for the state.
The Fronton currently occupies approximately a 35-acre site and has seats
for 2,250 people. In addition, the Fronton has pari-mutuel windows, a
restaurant operating during the live jai-alai session, liquor bars, food stands
and parking for approximately 1,800 cars.
Although the facility has had periodic maintenance and redecorating since
its construction, such maintenance and redecorating had become less frequent in
the several years before the Company's acquisition of the facility. The Company
is therefore refurbishing and remodeling the Fronton facility. In addition to
capital expenditures to repair the facility's roof and air conditioning systems,
the Company is also updating the layout of the ITW areas, lobbies, restrooms,
parking, restaurant and other food or beverage service areas.
In January 1995, the Company acquired three parcels of land comprising
approximately 79 acres contiguous to the original Fronton property. The Company
currently owns in fee approximately 134 acres including the Fronton facility and
parking lot. The January 1995 additions, along with 20 acres acquired in Fall
1994, have increased the Company's frontage on Kings Highway, provided frontage
on Graham Road, and provided a border with the right of way to Interstate 95.
The Company's plans for this additional property held for future expansion are
still in the formative stages and could include the construction of a flea-
market and the expansion of ITW facilities. The possibilities of billboards
along the Interstate 95 right of way, a recreational vehicle park, and a golf
driving range have also been discussed.
ITEM 3. LEGAL PROCEEDINGS.
On May 13, 1994, American Jai-Alai, Inc. ("American Jai-Alai") filed suit
in the Circuit Court of the Fifteenth Circuit in Florida, Palm Beach County,
against the Company. American Jai-Alai alleges that in August 1993 the Company
entered into a contract with American Jai-Alai that American Jai-Alai would
manage the Fronton if the Company acquired it. American Jai-Alai alleges that
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the Company and American Jai-Alai agreed to enter into a five-year renewable
management contract pursuant to which American Jai-Alai would guarantee a
$480,000 annual payment to the Company, the $270,000 of the Fronton's net
operating income above $480,000 would be paid to the Company, with American Jai-
Alai receiving 25% of all net operating income above $750,000 annually. In
addition, American Jai-Alai alleges that it has a first right of refusal if the
Company desires to sell the Fronton at anytime during the alleged management
contract. American Jai-Alai also alleges that the Company granted it an option
to purchase 100,000 shares of Common Stock at $2.50 throughout the alleged
management contract, but not to exceed 1997. In addition, American Jai-Alai
alleges that the Company agreed to pay American Jai-Alai 25% of any profit
realized from the sale of the Fronton, if such sale was not to American Jai-Alai
pursuant to its alleged right of first refusal. In the Complaint, American Jai-
Alai alleges, among other claims, breaches of fiduciary duty, breach of contract
and fraud. On May 20, 1994, counsel for American Jai-Alai stated that American
Jai-Alai was exercising its alleged right to purchase the 100,000 shares of
Common Stock for $2.50. The Company has not issued any shares of Common Stock
pursuant to this demand. The Company filed an Answer to the Complaint and also
filed a motion to move the suit from Palm Beach County to St. Lucie County,
which motion was granted by the circuit court. An Amended Complaint was filed on
January 25, 1995, and the Company filed its responsive pleading on April 25,
1995, denying the allegations in the Amended Complaint. The Company filed a
Motion for Summary Judgment on February 20, 1996, in which the Company asserts
that, as a matter of law, no written management agreement exists between the
parties. The Company denies the allegations and believes that this proceeding
is not likely to result in an adverse judgment that is material to the results
of its operations and financial condition.
On December 16, 1994, General Realty and Finance Corp. ("General Realty")
filed suit in the Circuit Court of the Fifteenth Circuit in Florida, Palm Beach
County, against the Company. General Realty alleges that the Company owes it
damages, a commission of approximately $93,000, and litigation costs. The
Company filed a Motion to Transfer Venue on January 30, 1995, seeking to have
venue transferred to St. Lucie County. The Motion to Transfer Venue was denied.
On January 3, 1996, the Company filed a Motion for Partial Summary Judgment as
to the allegations that the Company breached a written commission agreement. On
January 29, 1996, the court issued an Order granting the Company's Motion for
Partial Judgment finding, as a matter of law, that there was no written
commission agreement between General Realty and the Company. General Realty
filed its Second Amended Complaint on February 13, 1996, adding allegations that
General Realty and the Company had an oral or implied commission agreement which
has been breached by the Company. The Company will file a responsive pleading
to the Amended Complaint. The Company denies the allegations and believes that
this proceeding is not likely to result in an adverse judgment
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that is material to the results of its operations and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock trades on the Nasdaq SmallCap Market under the symbols
"BETS". The following tables show the high and low bid prices for the Common
Stock for the years ended December 31, 1995 and December 31, 1994. The bid
prices reflect reported inter-dealer transactions and are not necessarily
representative of actual transactions which occurred. Further, the prices do
not include retail markup, markdown or commissions.
Year Ended December 31, 1994 High Low
-------------------------------- ---- ----
Quarter Ended December 31, 1994 $ 5 $2
Quarter Ended September 30, 1994 6 1/4 3 3/4
Quarter Ended June 30, 1994 10 1/2 4 1/2
Quarter Ended March 31, 1994 11 3/4 1 3/4
Year Ended December 31, 1995
-------------------------------
Quarter ended December 31, 1995 $ 14 1/2 $8 1/4
Quarter ended September 30, 1995 17 1/4 7 3/4
Quarter ended June 30, 1995 10 1/2 4
Quarter ended March 31, 1995 5 3/4 2
As of March 25, 1996, the Company had approximately 3,750 holders of record
of its Common Stock.
The market prices of securities of companies whose future operating results
are highly dependent on specific developments, such as passage or defeat of
relevant legislation, are often highly volatile. Announcements concerning
legislation approving or restricting pari-mutuel activities, other governmental
actions, developments in the pari-mutuel and gaming industry generally,
announcements by the Company or by competitors, results of the Company's
operations and stock market conditions generally may have a significant impact
on the market price of the Company's Common Stock. The Company's purchase of
the Fronton and the subsequent consideration and defeat of a proposed amendment
to the Florida Constitution to permit casino gaming at pari-mutuel facilities
may have had a significant impact on the market price for the Company's Common
Stock during 1994.
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Of the 3,271,033 shares of Common Stock outstanding as of March 25, 1996,
persons who may be deemed "affiliates" of the Company or who acquired the shares
in a transaction exempt from registration under the Securities Act hold
approximately 1,961,837 shares ("Restricted Shares"), which may only be sold in
the public market if such shares are registered under the Securities Act or sold
in accordance with Rule 144 promulgated under the Securities Act. Freedom, the
holder of 1,349,480 Restricted Shares, has demand registration rights for its
shares and other stockholders have certain piggyback registration rights with
respect to their 302,669 Restricted Shares. See also Item 1. "Business--
Potential Gaming Joint Ventures." Freedom has pledged a total of 620,000
Shares of Common Stock to secure loans to Freedom, including the pledge of
600,000 shares to one bank and the pledge of 20,000 shares to a director of the
Company. The Company has registered a total of 1,029,480 shares of Common Stock
for resale by and for the account of any bona fide pledgee of the Common Stock
by Freedom.
The Company has issued currently exercisable stock options to current or
former directors and officers for a total of 663,250 shares of Common Stock,
which shares have not been registered by the Company for sale in the public
market.
In addition, the Company has granted Freedom options to purchase up to
1,330,000 shares of Common Stock at an exercise price of $1.25 per share. The
1,330,000 shares issuable upon exercise of the options granted to Freedom are
subject to registration under the Securities Act upon the request of Freedom.
As of March 15, 1996, 3,800 shares of the Company's Series B Preferred
Stock ("Series B Shares") were issued and outstanding. Each Series B Share can
be converted into the number of shares of Common Stock equal to the sum of the
$1,000 purchase price per Series B Share plus 8% accrued and unpaid dividends
from the date of issuance through the date of conversion, divided by eighty
percent (80%) of the average of the closing bid prices for the Common Stock as
reported by NASDAQ for the five consecutive business days immediately preceding
the date of conversion. Assuming a $6.75 closing bid price for the Common
Stock, which was the closing bid price of the Common Stock on March 15, 1996,
the outstanding Series B Shares would be convertible into 713,859 shares of
Common Stock on April 4, 1996, the first date the Series B Shares will be fully
convertible. An additional 7,815 shares of Common Stock were issuable upon the
conversion of outstanding shares of the Company's Class A Preferred Stock as of
March 15, 1996.
Sales of substantial amounts of shares of Common Stock, including following
conversion of shares of the Company's preferred stock or pursuant to Rule 144 or
a registered offering, could adversely affect the market price of the Common
Stock and may make
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it more difficult for the Company to sell equity securities in the future at a
time and price that it deems appropriate.
The Company has never paid cash dividends on its Common Stock and currently
anticipates that any earnings will be retained for its use in operations. It
does not intend to pay any cash dividends on its Common Stock in the foreseeable
future. Any future determination as to cash dividends will depend on the
earnings and financial position of the Company at such time, as well as the
applicable legal restrictions and such other factors as the Board of Directors
may deem appropriate. If the Company is not contractually prohibited from
paying dividends, the holders of Common Stock would be entitled to receive
dividends only when and as declared by the Board of Directors of the Company,
subject to the prior rights and preferences, if any, of holders of preferred
stock. See Note B to the Audited Financial Statements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
The Company's principal place of business and principal executive offices
are located at Fort Pierce Jai-Alai, 1750 South Kings Highway, Fort Pierce,
Florida 34945-3099. The Company changed its name from Lexicon Corporation to
Florida Gaming Corporation on March 17, 1994. The Company was incorporated in
Delaware in 1976.
JAI-ALAI FRONTON
The Company currently owns and operates a jai-alai fronton and pari-mutuel
wagering facility located in Fort Pierce, Florida (the "Fronton"). Since its
inception and prior to its acquisition of the Fronton, the Company engaged in
several other lines of business, none of which are currently now in operation.
On March 31, 1993, the Company sold 603,000 shares of Common Stock to Freedom
Financial Corporation and the present management assumed control of the Company.
After considering various business alternatives, the Company entered into an
agreement to acquire the Fronton in October 1993. On February 1, 1994, the
Company received approval from the Florida Department of Business and Federal
Regulation, Division of Pari-Mutuel Wagering to transfer the pari-mutuel permit
for the Fronton to the Company and completed the acquisition of the Fronton on
that date.
The Company's business at the Fronton consists of, among other things, live
jai-alai, inter-track pari-mutuel wagering, and the sale of food and alcoholic
beverages.
At its annual shareholders' meeting March 16, 1994, the shareholders
approved a change in the Company's fiscal year end
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from August 31 to December 31. Also at that meeting, shareholder approval was
granted to change the name of the Company from Lexicon Corporation to Florida
Gaming Corporation. These changes were effected by the Company on March 17,
1994.
The jai-alai industry generally has declined in the last several years
due to an industry-wide strike by jai-alai players and the passage of
legislation authorizing a state-wide lottery in 1987. Average state-wide
handle per performance for the State of Florida fiscal years ended June 30,
1995 and 1994 was approximately $102,000 and $101,000, respectively. During
the State of Florida's 1995 fiscal year, handle per performance at the
Company' Fronton increased from $31,918 to $36,090, or 13.1%, compared to the
1994 fiscal year. There can be no assurance that the jai-alai industry will
improve significantly, if at all, in the future. Because the Company's
jai-alai business is tied directly to many if not all of the factors which
influence the jai-alai industry as a whole, another players strike or the
enactment of unfavorable legislation could have an adverse impact on the
Company's operations.
Inter-track wagering has grown significantly since its initiation in the
State of Florida in August 1990. The state-wide ITW handle for the State of
Florida's fiscal year ended June 30, 1991 was approximately $109 million. The
state-wide ITW handle for the State of Florida's fiscal years ended June 30,
1994 and 1995 increased to approximately $383 million and $443 million,
respectively. ITW handle at the Company's Fronton has demonstrated similar
growth in recent years, increasing from $17.2 million in the year ended December
31, 1994 to $20.4 million for the year ended December 31, 1995.
INDIAN GAMING
The Company is actively exploring other opportunities in the pari-mutuel
and gaming industry, including opportunities to develop, finance and operate
gaming projects with federally recognized Indiana tribes in accordance with
IGRA. See Item 1. Business--Government Regulation. According to the National
Indian Gaming Association, there are currently 557 federally recognized Indian
tribes in the United States, of which approximately 185 tribes conduct gaming
activities ranging from bingo to full scale casino gaming. In enacting IGRA,
Congress recognized that the operation of gaming by Indian tribes was a means of
promoting tribal economic development, self-sufficiency, and strong tribal
governments, which historically have been principal goals of federal Indian
policy. Based on gaming industry statistics indicating that Indian gaming is
one of the fastest growing segments of the gaming industry, the Company believes
Indian gaming presents promising business opportunities.
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The Company plans to focus on developing, either alone or through joint
ventures with other parties, small-to medium- sized gaming projects that have
the potential to generate $1,000,000 to $10,000,000 in annual profits. The
Company estimates that projects generating financial returns in this range will
usually require a capital investment from $5 million to $50 million. The
Company believes that major gaming companies are reluctant to consider a
management relationship with a tribe if the gaming project does not have the
potential to generate annual profits of at least $30,000,000. The Company
believes there are many tribes with the capability and interest to develop
gaming projects of the size targeted by the Company.
RESULTS OF OPERATIONS
FISCAL YEAR 1995 COMPARED WITH FISCAL YEAR 1994
During the twelve months ended December 31, 1995, the Company's operations
reflect the operation of the Fronton for twelve months compared to eleven months
in 1994, since the facility was acquired on February 1, 1994. The current live
jai-alai season began December 1, 1995 and will conclude April 27, 1996. The
results of operations for 1995 include the December 1995 performances and the
jai-alai performances conducted from January 6, 1995 through and including April
30, 1995. During the 1994 season, live jai-alai was conducted at the Fronton
from November 26, 1993 through April 30, 1994. Because the Company acquired the
Fronton on February 1, 1994, revenues and expenses related to the operation of
live jai-alai at the Fronton for the year ended December 31, 1994, include only
the periods from February 1, 1994 through April 30, 1994. The Fronton typically
remains open for inter-track wagering year round.
The Company's pari-mutuel handle for the year ended December 31, 1995, was
$25,344,674, consisting of $4,972,351 in live jai-alai wagering and $20,372,323
in inter-track wagering. These results compare to a total pari-mutuel handle for
the year ended December 31, 1994, of $19,232,481, consisting of $3,480,257 in
live jai-alai wagering and $15,752,224 in inter-track wagering. The increases in
pari-mutuel handles were 8.44% and 18.11%, respectively for jai-alai and ITW
adjusting for the month of January the Company did not own the Fronton in 1994.
The 18.11% increase in ITW handle follows a 25% increase from the prior year
and is indicative of the double digit growth in the Company's ITW operations.
The Company's pari-mutuel revenues net of state pari-mutuel taxes for the
twelve months ended December 31, 1995, were $3,138,404. Of the $3,138,404,
$2,047,335 was attributable to commissions on inter-track wagering and
$1,091,069 was attributable to live jai-alai. The Company's pari-mutuel revenues
net of state pari-mutuel taxes for the twelve months ended December 31, 1994,
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were $2,153,481. Of the $2,153,481, $1,447,205 was attributable to commissions
on inter-track wagering and $706,276 was attributable to live jai-alai. The
$600,130 (41.5%) increase in ITW commissions was primarily attributable to the
18.11% growth in handle, with $172,307 of the increase attributable to the extra
month of operation in 1995. The $384,793 increase in net pari-mutuel revenue
from live jai-alai is due to two additional months of jai-alai operation in 1995
and an 18.8% decrease in state pari-mutuel taxes and license fees. Pari-mutuel
taxes were reduced from 7.1% to 5% and daily license fees were reduced 50% to
$40 per game effective July 1, 1994. These tax changes, however, did not affect
the results of operations until the beginning of the 1995 jai-alai season.
Admissions income for the year ended December 31, 1995, was $151,438, net
of state taxes, compared to $122,032 for the year ended December 31, 1994.
Program revenue for the year ended December 31, 1995, increased $60,562 to
$215,132, up from $154,570 for the year ended December 31, 1994. This increase
along with the $29,406 increase in admissions is attributable to the extra month
of operation in 1995 and the expanded jai-alai season.
Food and beverage income increased $191,535 (56.25%) to $532,032 for the
year ended December 31, 1995, compared to $340,497 for the year ended December
31, 1994. Of the $191,535 increase, $48,594 was attributable to two additional
months of expanded restaurant operation in 1995, $48,514 in additional bar and
concession revenues due to the additional month of operation in 1995, $48,127 in
concession revenue growth excluding the extra month of operation in 1995,
$35,761 in restaurant revenue growth excluding the two additional months of
operation in 1995, with portions of the above increases and the balance of the
increase attributable to a per capita spending increase of 41% and an increase
of approximately 21,000 (10%) in attendance. Other income decreased for the
year ended December 31, 1995, to $49,020 compared to $52,692 for the year ended
December 31, 1994.
The Company's general and administrative expenses were $1,762,062 and
$987,807 for the twelve months ended December 31, 1995 and December 31, 1994,
respectively. The $774,255 increase was in large part due to increased
expenditures in other expense and legal/professional fee categories. Other
expense increased $253,172 to $614,979 for the year ended December 31, 1995,
compared to expenditures of $275,023 for the year ended December 31, 1994.
Legal and professional expenses increased $142,339 to $318,184, compared to
$175,845 for the twelve months ended December 31, 1994.
The 1995 expenditures in the other expense category included a charge of
$315,978 to write off predevelopment expenses and advances associated with the
Oklevueha Band of Seminole-Yamazee Indians project which was terminated during
1995. Also included in other expense for 1995 were approximately $86,000 in
pre-
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development expenses associated primarily with the Ponca project and to a lesser
degree the Apache project. Major components of other expense for the year ended
December 31, 1994, were $50,500 consisting of costs associated with the effort
to put a casino referendum on the November 1994 Florida Ballot, a $10,000
appraisal fee spent analyzing a business opportunity, and $78,886 in land option
and related costs associated with a gaming venture the Company determined not to
pursue. The $142,339 increase in legal/professional expenses is primarily
attributable to various Native American and other acquisition or business
expansion projects investigated during 1995.
Other components of the Company's general and administrative expenses for
the years ended December 31, 1995, and 1994 include the following. Officer
compensation increased $83,246 to $219,650, compared to $136,404 expensed for
the twelve months ended December 31, 1994. Of this increase, $64,250 is
attributable to the salary associated with a new assistant manager position.
Consulting expense decreased $41,265 to $11,712 due in large part to the new
assistant manager position. Advertising and promotions expense increased
$91,829 to $211,231 for the twelve months ended December 31, 1995, compared to
$119,402 expensed for the twelve months ended December 31, 1994. This increase
was due to the expanded live jai-alai schedule in 1995 and a general increase in
the marketing budget. Telephone and travel expenses increased $49,307 to
$126,024 for the year ended December 31, 1995, compared to $76,717 expensed in
the year ended December, 31, 1994. Of this increase, $34,663 is attributable to
business travel and lodging associated with various Native American and other
business expansion projects. Interest expense increased $87,146 to $167,206 for
the twelve months ended December 31, 1995. This compares to $80,060 for the year
ended December 31, 1994. The $87,146 increase in interest expense is the direct
result of land purchases of approximately 99 acres in November 1994 and January
1995, adjacent to the Fronton property (See Note J.) These purchases increased
mortgage indebtedness by over $700,000, net of a $100,000 decrease in the WJA
Realty mortgage. Property taxes increased $14,691 to $72,070, for the year
ended December 31, 1995, also the result of the land purchases.
The Company's operating expenses for the year ended December 31, 1995 were
$3,068,531, compared to $2,248,885 for the year ended December 31, 1994. The
$819,646 increase was the result of the following items. Depreciation expense
for the twelve month period ended December 31, 1995 was $194,682. This
represents an increase of $52,720 over the $141,962 in depreciation expense for
the year ended December 31, 1994, and is the result of equipment purchases and
capital improvements. Players costs, which include salaries, benefits, and
support staff, represent a significant portion of operational expenses. The
year ending December 31, 1995, included five months of live jai-alai and
associated player costs totaling $725,395. The year ending December 31, 1994,
included three months
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of live jai-alai and associated player costs totaling $408,192. The $317,203
increase in player costs for 1995 is attributable to the two additional months
of performances. Rental and service costs for totalizator wagering equipment
and satellite receiving/television equipment also represent a significant
portion of operating expenses. These expenses totaled $309,750 for the year
ended December 31, 1995, compared to $224,449 for the year ended December 31,
1994, representing an increase of $85,301. The $85,301 increase was due to two
additional months of live jai-alai in 1995, one additional month of ITW
operations, an expanded ITW schedule , and equipment upgrades. Utilities
expense totaled $141,913 and $120,191, respectively, for the years ended
December 31, 1995 and 1994. The $21,722 increase in utilities expense is the
result of the expanded operations as indicated above, but also includes the
effects conservation and equipment improvements in electrical and air
conditioning systems. Program costs totaled $135,988 and $108,128,
respectively, for the years ended December 31, 1995 and 1994. The $27,860
increase is the result of the expanded operations in 1995.
Operating payrolls and related costs totaled $973,214 and $803,166,
respectively, for the years ended December 31, 1995 and 1994, excluding player
costs and payroll costs included in the bar, restaurant and concessions areas.
Of the $170,048 increase in payroll costs for 1995, approximately $150,000 is
attributable to the extra month of operations and the expansion of the jai-alai
season. Food and beverage costs totaled $358,819 and $255,410, respectively,
for the years ended December 31, 1995 and 1994, representing an increase of
$103,409. Of this increase, $35,509 is attributable to the extra month of
operation in 1995, approximately $25,000 is attributable to restaurant and
concessions costs associated with an additional month of live jai-alai in
addition to the effects of the extra month of operation, with the balance
attributable to the increased business primarily in the concessions area
discussed above. Other operating expenses, including security, janitorial
expense, operating leases, and ITW phone lines, increased $10,027 to $144,044
for the year ended December 31, 1995, an increase from $133,977 for the year
ended December 31, 1994. Repairs and maintenance expense increased $31,356 to
$84,766 during 1995 compared to a total expense of $53,410 for the year ended
December 31, 1994. This increase is also attributable to the extra month of
operation in 1995, the expanded jai-alai season, as well as expenses related to
maintenance items that the previous owner of the facility had deferred.
The Company had net interest and dividend income of $77,674 and $37,090 for
the twelve months ended December 31, 1995 and 1994, respectively, an increase of
$40,584. The increase in interest and dividend income was due to additional
equity capital that was injected into the Company in the second half of 1994.
These funds have increased the Company's funds invested in cash equivalent
funds. The Company also recorded dividend income of approximately
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$26,250 received on a short term investment in bank holding company stock that
was sold in the first quarter of 1995.
For the twelve months ended December 31, 1995, the Company had no gain or
losses on the sale of assets. In connection with the sale of a former business,
the Company received a three-year promissory note. On April 4, 1994, the
Company sold the promissory note, with a remaining principal balance of
$109,000, to an unaffiliated third party for $95,000. As a result of the sale
of this note at a discount, the Company recorded a one-time charge of $14,669
against earnings in the year ended December 31, 1994.
The Company had a net realized gain on the sale of securities of $195,939
for the twelve months ended December 31, 1995. The $195,939 gain resulted from
the sale of bank holding company common stock which the Company had invested in
on a short-term basis for dividend yield. There were no gains on sale of
securities for the year ended December 31, 1994.
The Company had a net loss of $470,955 ($0.15 per common share) for the
twelve months ended December 31, 1995. This loss compares to a net loss of
$390,999 ($0.18 per common share) for the twelve months ended December 31, 1994.
The $79,956 decrease in net earnings occurred despite increased revenues due to
growth in ITW handle, the extra month of operation during peak season, pari-
mutuel tax relief, and many other positive factors listed in the discussions
above; a substantial amount of the loss was caused by the factors discussed
above concerning other expenses, legal, and travel costs. Among these were a
charge of $315,978 to write off predevelopment expenses and advances
associated with the Oklevueha Band of Seminole-Yamazee Indians project which was
terminated during 1995, approximately $90,000 in other pre-development costs,
$98,915 in legal costs paid in connection with litigation, and $34,663 in
increased business travel and lodging associated with various Native American
and other business expansion projects investigated during 1995. The security
gain of $195,939 realized in the first quarter of 1995 offset these expenditures
to some degree. In addition, pari-mutuel taxes on live jai-alai were reduced
effective July 1, 1994. This legislation reduced the pari-mutuel tax rate on
gross jai-alai handle from 7.1% to 5%, the first $30,000 of handle per
performance continues to be exempt from taxes, and the daily license fees paid
per game were cut in half to $40 from $80. These changes first affected the
Company's operation during the first quarter of 1995.
In January 1995, the Company acquired three parcels of land contiguous to
the original Fronton property comprising approximately 79 acres for $1,082,136.
The total acreage surrounding the facility is currently approximately 134 acres.
Plans for this additional property held for future expansion are still in the
formative stages and could include the construction of a flea-market and the
expansion of ITW facilities. The
- 37 -
<PAGE>
possibilities of billboards along the Interstate 95 right of way, a recreational
vehicle park, and golf driving range have also been discussed.
The Company plans to expend approximately $150,000 during 1996 to bring
city water to the Fronton and eliminate the need for an old and costly
purification system currently in use. Also in February 1996, the Company
terminated certain equipment leases on television monitors. The initial capital
outlay of approximately $65,000 will reduce expenses approximately $19,000 per
year. During the last three years the Company's Chairman and Chief Executive
Officer, Bennett Collett, has received no cash compensation from the Company.
Effective January 1, 1996, the outside members of the board of directors
approved an annual salary of $360,000.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
The balance of the Company's cash and cash equivalents at December 31, 1994
was $2,721,865. At December 31, 1995, the Company had working capital of
$2,496,976, an increase of $963,129 from $1,533,847 at December 31, 1994. The
increase was primarily the result of approximately $2.22 million in capital
raised via the issuance of preferred convertible stock, net of capital and
property expenditures totaling approximately $1.37 million. Also, at December
31, 1994, the Company had $1,618,250 invested in the publicly traded common
stock of a bank holding company on a temporary basis for dividend yield,
including approximately $1,080,000 of such common stock purchase financed
through the Company's margin account. This stock was sold during the first
quarter of 1995 for a net realized gain of $195,939.
During the twelve months ended December 31, 1994, net cash used in the
Company's operating activities was $270,988. The Company's continuing operating
expenses consisted principally of office expenses, general administrative
expenses, and operating expenses associated with Fronton operations. Principal
revenues were from net commissions on pari-mutuel wagering on live jai-alai and
ITW events. The Company expects net cash flows from the operation of current
business activities will be adequate to meet operational needs.
During the twelve months ended December 31, 1994, cash flow used by
investing activities was $237,208. This was the result of investing $1,366,658
in the purchase of land and other capital improvements, and net of the Company
also realizing funds of $1,814,189 on the sale of marketable securities as
described above. During the fourth quarter of 1995, the Company lent an
affiliated company (Freedom Financial) $350,000 on a short-term secured credit
line. The balance of this credit, which bears interest at the prime rate plus 2%
(10.25%), was $435,000 as of March 15, 1996.
- 38 -
<PAGE>
During the twelve months ended December 31, 1995, cash flow from financing
activities was $1,866,887. Cash flow from financing activities consisted
primarily of the $2,219,860 in funds generated from the sale of convertible
preferred stock in late December 1995 (See Note B to the Financial Statements),
$845,132 in long-term debt issued in connection with land purchases, and net of
$1,198,105 in debt repayments.
Subsequent to December 31, 1995, the Company raised $2.2 million in funds
via the sale of additional Class B Preferred Stock (See Note B to the Financial
Statements.) These funds along with those raised in December 1995 are available
for use in Rincon Project as well as other areas described below.
In the course of its business, the Company has had numerous discussions,
and continues to have discussions, regarding joint ventures and business
combinations related to the pari-mutuel and gaming industry, including the
acquisition of other jai-alai frontons and joint ventures with Native American
Tribes related to the operation of gaming facilities. No assurances can be
given about the likelihood or timing of any such transaction.
Also as set forth in its Report 8-K dated August 28, 1995, the Company
signed a Management Agreement with the Ponca Indian Tribe of Nebraska to build
and operate a casino in Douglas County (Omaha) for Class II and Class II gaming
as authorized by the Indian Gaming Regulatory Act. Under the agreement, the
Ponca Tribe will receive 70% of the net revenues from gaming, with the Company
receiving 30%. The Management Agreement has a 5 year term beginning upon the
commencement of gaming at the facility. The agreement is subject to approval by
the National Indian Gaming Commission, the acquisition of land that can be taken
in trust under the Indian Gaming Regulatory Act as the site for the facility,
the execution of definitive financing agreements, and certain other conditions.
Under the Indian Gaming Regulatory Act, certain gaming activities are also
subject to the negotiation of a compact between the Ponca Tribe and the State of
Nebraska.
The Company is currently reevaluating the feasibility of the proposed
gaming venture with the Ponca Tribe of Nebraska based on recent developments
that have adversely affected the prospects for Indian gaming in the state. On
February 6, 1996, the Nebraska legislature failed to pass legislation that would
have authorized a voter referendum on legalizing casino gaming in the state. In
addition, as a result of a November 1995 federal appeals court decision, the
Bureau of Indian Affairs has indefinitely suspended action on land-in-trust
applications from Indian tribes in Nebraska and certain other states. As of
February 29, 1996, the Company had provided ($92,498) for predevelopment
expenses of the project.
RINCON, SAN LUISENO BAND OF MISSION INDIANS. On September 11, 1995, the
Company entered into a Loan Agreement and related
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<PAGE>
agreements with the Rincon, San Luiseno Band of Mission Indians, which presently
owns and operates the River Oaks Casino, located approximately 40 miles north of
San Diego, California. The Loan Agreement will take effect when gaming machines
are in operation at the casino. Initially the Company has agreed to make up to
$5 million available to the Rincon band during the seven year term of the
agreement. In lieu of interest on the loan, the Company will receive a royalty
during the term of the loan agreement. The Company also agreed to advance short
term working capital funds, which will represent initial draws when the Loan
Agreement takes effect. $323,000 has been advanced through December 1995, and
$344,000 has been advanced through March 15, 1996.
The operation of gaming machines at the Rincon Casino is currently
prohibited by a preliminary injunction issued by the United States District
Court for Southern California. The injunction was sought by the United State
Attorney for Southern California, based upon federal circuit court decisions
that the operation of gaming machines by Native American tribes in California
was prohibited by the Indian Gaming Regulatory Act, because gaming machines were
prohibited by California law and to date, California Governor Wilson has refused
to enter into gaming compacts with California tribes. Since the date that the
preliminary injunction was imposed on the Rincon Band, the United States Court
of Appeals has agreed to review its prior decisions in light of a recent
California appellate court decision that California law permits the operation of
gaming machines by the California Lottery, contributing to the uncertain
parameters of Indian gaming in California.
The Rincon Band has requested a hearing to consider lifting of the
injunction based on its belief that it now complies with all conditions for the
operation of gaming machines under the Indian Gaming Regulatory Act. As part of
this effort, the Rincon Band has now assumed direct management of the casino,
and has entered the Loan Agreement with the Company. See also Item 1. Business--
Indian Gaming.
Management and financing agreements with Native American tribes will
necessitate funds for the construction of facilities and in some cases the
acquisition of lands to be put in trust for the tribes. These funds are
typically recovered from the tribes's share of gaming profits; initially,
however, the Company will be required to secure substantial capital for these
activities. The Company is currently evaluating sources of funding including
equity and debt financing.
The Company believes that its present financial condition provides adequate
capital reserves and liquidity for present operations. In addition, per the
stock purchase agreement between the Company and Freedom Financial Corporation,
Freedom Financial Corporation may provide additional capital investment in the
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<PAGE>
Company by exercising Freedom Financial Corporation's option to purchase
1,330,000 shares of common stock of the Company.
In January 1995, the Company acquired land contiguous to the Fronton
property, comprising approximately 79 acres, for $1,082,136. Of this amount,
$845,132 was financed through first mortgages on the real estate and $237,004
was from cash.
ITEM 7. FINANCIAL STATEMENTS.
LIST OF FINANCIAL STATEMENTS FILED. See accompanying Financial Statements:
Balance Sheets as of December 31, 1995 and 1994.
Statements of Operations for the years ended December 31, 1995 and
1994.
Statement of Stockholders' Equity for the two years ended December 31,
1995.
Statements of Cash Flows for the years ended December 31, 1995 and
1994.
Notes to Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
- 41 -
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of March 15, 1996:
<TABLE>
<CAPTION>
Director or Exe-
cutive Officer
Name Age Position With The Company Since
- ---- --- ------------------------- ----------------
<S> <C> <C> <C>
W. Bennett Collett 63 Chief Executive Officer 1993
and Chairman
Robert L. Hurd 56 President and Director 1993
W. Bennett Collett, 40 Executive Vice President, 1993
Jr. Secretary and Director
Timothy L. Hensley 40 Executive Vice President, 1993
Treasurer and Chief
Financial Officer
Gary E. Bowman 44 Director 1994
George W.
Galloway, Jr. 62 Director 1994
Roland M. Howell 80 Director 1995
</TABLE>
W. BENNETT COLLETT has served as Chairman of the Board, Chief Executive
Officer and a director of Freedom since its formation in 1985. In addition to
its interest in the Company, Freedom's interests include: (i) Interstate Capital
Corporation, a wholly owned subsidiary developing a residential real estate
development in Loganville, Georgia, and (ii) General Stone Corporation, a wholly
owned subsidiary formerly operating a stone sales facility in Tennessee and
currently engaged in brokering stone. Mr. Collett serves as chief executive
officer of each of Freedom's subsidiaries. Freedom was a bank holding company
until January 1988, at which point it sold its banking subsidiaries. Mr.
Collett has served as President and as a director of Freedom Holding, Inc.
("Holding") since its formation in December 1992. Holding's sole business
currently is to hold shares of Freedom. Mr. Collett has been involved in the
management of banking and financial service companies for over 25 years, having
been a principal of ten commercial banks. For 14 years, Mr. Collett was a
principal shareholder and chief executive officer of various banks and finance
companies
- 42 -
<PAGE>
in Alabama, Arkansas, Georgia, and Missouri ranging in asset size from
$1,000,000 to $250,000,000.
ROBERT L. HURD has served as President and a director of Freedom since July
1991. Since February 13, 1995 Mr. Hurd has served as President and Chairman of
General Health Care Corporation, a New Jersey based company in the health care
apparel business. Since March 1992, he has served as President and Chief
Executive Officer of International Barrier Corporation, a company formerly
engaged in the manufacture of metal highway barriers and currently the holder of
several highway barrier patents. From 1987 until 1991, Mr. Hurd was President
and Chairman of Pacific Press & Shear, Inc., a hydraulic press and shear
manufacturer.
W. BENNETT COLLETT, JR. served as President of Freedom from 1988 to 1989;
since August 1989, Mr. Collett has served Freedom as Executive Vice President.
He has been a director of Freedom since its formation in 1985. He presently
serves as Secretary and Treasurer of Holding, President and a director of
General Stone Corporation. Mr. Collett serves as the full-time general manager
of the Fronton. Mr. Collett was appointed to the Company's Board of Directors
on August 9, 1994. W. Bennett Collett, Jr. is the son of W. Bennett Collett.
TIMOTHY L. HENSLEY has served Freedom since its formation in 1985 in
various capacities, including as President, Executive Vice President and
Treasurer and a director; he has served as Executive Vice President since 1988.
He presently serves as Executive Vice President, Secretary and Treasurer of
General Stone Corporation.
GARY E. BOWMAN was appointed to the Board of Directors effective August 24,
1994. Since February 2, 1996, Mr. Bowman has served as a loan officer with
Jefferson Banking Company, Louisville, Kentucky. From 1990 until February 1,
1996, Mr. Bowman served as a loan officer in Louisville, Kentucky for PNC Bank.
From 1981 to 1990, Mr. Bowman served as a loan officer in Louisville, Kentucky,
for Liberty National Bank and Trust Company.
GEORGE W. GALLOWAY, JR. was appointed to the Board of Directors effective
August 24, 1994. Since 1958, Mr. Galloway has been a self-employed physician
and most recently has served as the medical director of the emergency room at
Kennestone Hospital in Marietta, Georgia.
ROLLAND M. HOWELL was appointed to the Board of Directors effective April
28, 1995. Mr. Howell served in hotel management for over thirty years, and was
an owner and operator of hotels in Florida for approximately twenty years before
his retirement in 1969. He is currently a private investor, with investments
primarily in municipal bonds, stocks, and real estate.
- 43 -
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's common stock, to file with the Securities and Exchange Commission
(the "SEC") initial reports of ownership and reports of changes in ownership of
common stock. Officers, directors and greater than 10 percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports and certain representations furnished to the Company, during the fiscal
year ended December 31, 1995, all Section 16(a) filing requirements applicable
to its officers, directors and greater than ten percent beneficial owners were
satisfied.
PRIOR CIVIL AND ADMINISTRATIVE PROCEEDINGS
On February 28, 1990, Freedom filed a registration statement with the
Securities and Exchange Commission (Commission File No. 33-33625) (the "Freedom
Registration Statement") to register shares of its Common Stock, Class A
Preference. On March 5, 1990, Freedom filed an application with the New Jersey
Bureau of Securities pursuant to the New Jersey state securities laws to
register certain of the shares to be offered. The New Jersey Bureau of
Securities indicated that the Freedom Registration Statement may have been
materially deficient because certain civil and administrative proceedings
involving Mr. Collett including an injunction prohibiting future violations of
federal securities laws were not disclosed. Without admitting or denying the
materiality of the omitted information, which information had been omitted
following consultation with legal counsel, on June 11, 1990, Freedom requested
withdrawal of the application for registration of securities in New Jersey. On
August 23, 1990, the State of New Jersey Bureau of Securities issued a Consent
Order IN THE MATTER OF: FREEDOM FINANCIAL CORPORATION (SR-5587). On November 5,
1990, the Securities and Exchange Commission issued an order consenting to the
withdrawal of the Freedom Registration Statement. The New Jersey Consent Order
granted the request for withdrawal of the application for registration and
denied the effectiveness of certain exemptions of the New Jersey state
securities laws for secondary trading in Freedom's securities. In addition,
Freedom agreed that it would not sell, give or otherwise distribute its
securities in or from New Jersey without first notifying and receiving written
authority to do so from the New Jersey Bureau of Securities.
The rules and regulations promulgated by the SEC pursuant to the Securities
Act and the Exchange Act generally require that
- 44 -
<PAGE>
proceedings involving management similar to the injunction be disclosed only for
events occurring during the past five years. The Company has included the
information above solely for informational purposes concerning the Company's
management team. These matters have not adversely affected the ability of the
Company to obtain any required gaming licenses, nor did they in the past
adversely affect the ability of Freedom to obtain state or federal approvals
required to operate as a bank holding company.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by the Company
for the fiscal years ended December 31, 1995, 1994 and 1993 to W. Bennett
Collett, the Company's chief executive officer on December 31, 1995. As set
forth in the table, Mr. Collett received no cash compensation from the Company
from the time he began service as an executive officer on March 31, 1993 through
December 31, 1995. Effective January 1, 1996, the Company will pay Mr. Collett
a salary at an annual rate of $360,000. The Company had no executive officer as
to whom the total cash and cash-equivalent remuneration from the Company
exceeded $100,000 during fiscal 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compens. Compens.
--------- -----------
Name and Principal Fiscal Options/ All Other
Position Year Salary SARS (#) Compensation
------------------- ------- -------- -------- ------------
<S> <C> <C> <C> <C>
W. Bennett Collett 1995 $ - 0 - 300,000 $ - 0 -
Chairman of the Board 1994 - 0 - 25,000 - 0 -
and Chief Executive 1993 - 0 - - 0 - - 0 -
Officer
</TABLE>
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL 1995
Number of % of Total
Securities Options Granted
Underlying to Employees Exercise
Options in 1995 Price Expiration
Name Granted ($/Sh) Date
---- ---------- ---------------- -------- ----------
<S> <C> <C> <C> <C>
W. Bennett 300,000(1) 94% $5.00 5/8/00
Collett
___________________________
</TABLE>
(1) Options granted on May 8, 1995; approved by stockholders on July 7,
1995; became exercisable on November 8, 1995.
- 45 -
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1995 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year at Fiscal Yr. End
End (#) ($)(1)
Name Shares Acquired Value Exercisable/ Exercisable/
on Exercise (#) Realized ($) Unexercisable Unexercisable
---- --------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
W. Bennett - 0 - - 0 - 325,000/-0- $1,618,750/$0.00
Collett
- --------------------------
</TABLE>
(1) Based on a per share closing price of $10.50 at December 31, 1995.
DIRECTOR COMPENSATION
The Company currently pays its non-management directors, Gary E. Bowman,
George W. Galloway, Jr., and Roland M. Howell a $500 monthly fee. W. Bennett
Collett, W. Bennett Collett, Jr., and Robert L. Hurd receive no directors fees.
On August 9, 1994, the Company adopted a Directors' Stock Option Plan
pursuant to which each current and future director of the Company will receive
an option to purchase 25,000 shares of Common Stock. During 1995, Roland M.
Howell received an option to purchase 25,000 Shares of Common Stock pursuant to
this plan.
INDEMNIFICATION
Under Section 145 of the Delaware General Corporation Law ("DGCL"), the
Company has the power to indemnify directors and officers under certain
prescribed circumstances and subject to certain limitations against certain
costs and expenses, including attorney's fees, actually and reasonably incurred
in connection with any action, suit or proceeding, whether civil, criminal,
administrative, or investigative, to which any of them is a party by reason of
his being a director or officer of the Company if it is determined that he acted
in accordance with the applicable standard of conduct set forth in such
statutory provisions. The Company's Bylaws provide that the Company shall
indemnify each person who may be indemnified pursuant to Section 145, as amended
from time to time (or any successor provision thereto), to the fullest extent
permitted by Section 145. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 25, 1996
concerning each stockholder known to the Company to own beneficially more than
five percent of the outstanding Common Stock of the Company, and information
regarding beneficial ownership of Common Stock and the Class B Common Stock of
Freedom and the Common Stock of Holding by each director and executive officer,
and all directors and executive officers as a group. Of the 1,349,480 shares of
the Company's Common Stock currently held of record by Freedom, 600,000 shares
have been pledged by Freedom to a bank to secure a $2,000,000 line of credit and
20,000 shares have been pledged by Freedom to a director of the Company to
secure a loan. Information is provided with respect to the ownership of stock
in Freedom and Holding because Freedom and Holding may each be deemed to be a
"parent" of the Company as such term is defined in the rules promulgated under
the Securities Exchange Act of 1934. Holding's sole business currently is to
hold shares of Freedom.
<TABLE>
<CAPTION>
THE COMPANY FREEDOM HOLDING
------------ ------- -------
Directors and Number of Percent of Number of Percent of Number of Percent of
Executive Officers Shares(1) Class(2) Shares(1) Class(3) Shares(1) Class(4)
- ------------------ --------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
W. B. Collett . . . . . . . . 3,004,480(5) 61.0% 1,000,372(6) 84.2% 397(7) 79.4%
Robert L. Hurd . . . . . . . 26,000(8) * 108,639 9.1% --- ---
W. B. Collett, Jr. . . . . . 65,000(9) 1.9% 40,000(10) 3.3% 88 17.6%
Timothy L. Hensley . . . . . 45,000(11) 1.4% 40,000(10) 3.3% 5 1.0%
Roland M. Howell . . . . . . 336,000(12) 10.2% --- --- --- ---
Gary E. Bowman . . . . . . . 25,500(13) * --- --- --- ---
George W. Galloway, Jr. . . . 25,000(13) * --- --- --- ---
All current directors and
officers as a group (7 3,526,980(14) 68.7% 1,189,011(15) 93.7% 490(7) 98%
persons).
5% Beneficial Owners
- --------------------
Freedom Financial
Corporation(16) . . . . . . 2,679,480(17) 58.2% N/A N/A N/A N/A
WJA Realty Limited 6.1% N/A N/A N/A N/A
Partnership . . . . . . . . . 200,000(18)
P.O. Box 1439
Tulsa, Oklahoma 74101
Roland M. and Dorothy V.
Howell . . . . . . . . . . 336,000(12) 10.2% N/A N/A N/A N/A
Plaza Venetia; Suite 22A-B
555 N.E. 15th Street
Miami, Florida 33132
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<PAGE>
Casino America, Inc. . . . . 315,746(19) 8.8% N/A N/A N/A N/A
711 Washington Loop
Biloxi, Mississippi 39530
Privatinvest Bank AG . . . . 205,534(20) 5.9% N/A N/A N/A N/A
Griesgasse 11
5020 Salzburg
Austria
___________________________
</TABLE>
* Represents less than 1% of class.
(1) Based upon information furnished to the Company by the named person, and
information contained in filings with the Securities and Exchange
Commission (the "Commission"). Under the rules of the Commission, a person
is deemed to beneficially own shares over which the person has or shares
voting or investment power or which the person has the right to acquire
beneficial ownership within 60 days. Unless otherwise indicated, the named
persons have sole voting and investment power with respect to shares shown
by them.
(2) Based on 3,271,033 shares outstanding as of March 25, 1996. Shares of
Common Stock subject to exercisable options or options exercisable within
60 days are deemed outstanding for computing the percentage of class of the
person holding such options but are not deemed outstanding for computing
the percentage of class for any other person.
(3) Based on 1,188,613 shares outstanding as of March 25, 1996. Class B Common
Stock is the only class of Freedom's capital stock issued and outstanding.
Shares of Freedom common stock subject to exercisable options or options
exercisable within 60 days are deemed outstanding for computing the
percentage of class of the person holding such options but are not deemed
outstanding for computing the percentage of class for any other person.
(4) Based on 500 shares outstanding as of March 25, 1996.
(5) Includes 2,679,480 shares beneficially owned by Freedom, including
1,330,000 shares which Freedom currently has the right to acquire. See
Note 16. Mr. Collett may be deemed to beneficially own the shares held by
Freedom, although he disclaims beneficial ownership of such shares.
Includes 325,000 shares that Mr. Collett may purchase pursuant to options.
(6) Includes 1,000,372 shares owned by Holding. Mr. Collett may be deemed to
beneficially own the shares held by Holding, although he disclaims
beneficial ownership of such shares.
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<PAGE>
(7) Includes 77 shares owned by Mr. Collett's former spouse for which he has
sole voting power, but no power of disposition.
(8) Includes 1,000 shares owned by the Hurd Family Partnership, L.P., of which
Mr. Hurd is general partner. Includes 25,000 shares that Mr. Hurd may
purchase pursuant to options.
(9) Includes 65,000 shares that may be purchased pursuant to options.
(10) Includes 40,000 shares that may be purchased pursuant to options under
Freedom's stock option plan.
(11) Includes 45,000 shares that may be purchased pursuant to options.
(12) Of the 336,000 shares, Mr. and Mrs. Howell own 156,000 shares as joint
tenants and share voting and investment power, Mr. Howell owns 35,000
shares individually (including options for 25,000 shares) and retains sole
voting and investment power with respect to these shares, and Mrs. Howell
owns 145,000 shares individually and retains sole voting and investment
power with respect to these shares.
(13) Includes 25,000 shares that may be purchased pursuant to options.
(14) Includes 1,865,000 shares which may be acquired by all directors and
officers as a group pursuant to options, including options for 1,330,000
shares owned by Freedom. See Note 5.
(15) Includes 80,000 shares which may be acquired upon the exercise of stock
options by all directors and officers as a group.
(16) The address of Freedom Financial Corporation is 2669 Charlestown Road, New
Albany, Indiana 47150. The business address of W. B. Collett is 1750 South
Kings Highway, Fort Pierce, Florida 34945-3099. The address of Freedom
Holding, Inc. is P.O. Box 216, Floyds Knobs, Indiana 47119.
(17) Includes 1,330,000 shares which Freedom currently has the right to acquire.
See also Note 16.
(18) Roger M. Wheeler, Jr. and E.H.P. Corporation (wholly owned by Pamela W.
Norberg) are the general partners of WJA Realty Limited Partnership. As
the general partners, each may be deemed to share with the other voting and
dispositive power with respect to the shares.
- 49 -
<PAGE>
(19) Casino America, Inc. owns 23,681 shares of Freedom's 7% Series AA
Mandatorily Redeemable Preferred Stock (the "Freedom Preferred Stock").
Until October 4, 1999, the Freedom Preferred Stock is convertible into
157,873 shares of the Company's Common Stock owned by Freedom if at the
time of conversion Florida law permits casino style gaming at the Fronton
and 315,746 shares if at the time of conversion Florida law does not permit
casino style gaming at the Fronton.
(20) Privatinvest Bank AG owns 1,100 shares of the Company's Series B Preferred
Stock convertible into 205,534 shares of the Company's common stock on
April 4, 1996, based on the closing bid price of the Common Stock on March
15, 1996. See Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships among the Company, its management and affiliates,
including Freedom Financial Corporation, create various potential and actual
conflicts of interest. In situations where there will be an ongoing
relationship with related parties, including the purchase of services or
products or the making of loans, it is the Company's policy that all such
material affiliated transactions and loans will be made or entered into on terms
that are no less favorable to the Company than those that can be obtained from
unaffiliated third parties. It is the Company's Policy that a majority of the
independent and disinterested directors will be required to approve continuation
or initiation of such a relationship and will periodically review such
transactions to assure that they meet the aforementioned standard.
Ronald P. Perella, a former director of the Company, served as a
consultant to the Company to assist the Company in identifying and reviewing
businesses to merge with or be acquired by the Company. Mr. Perella received a
total of $34,416.67 for his services during the year ended December 31, 1994.
The Company and Freedom have entered into a Credit Line Agreement dated
December 1, 1995, whereby the Company will lend Freedom up to $1,000,000 at an
annual interest rate of 2% above the prime rate, secured by Freedom's federal
tax refunds receivable totaling approximately $600,000 through and for the year
ended December 31, 1994, and certain real estate in Georgia. The maximum debt
outstanding under the Credit Line Agreement during 1995 was approximately
$350,000 and the debt outstanding at March 15, 1996 was approximately $435,000.
Principal and interest outstanding under the Credit Line Agreement are payable
upon demand by the Company; the agreement does not provide for periodic payments
of principal or interest.
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<PAGE>
Freedom and Holding may each be deemed to be a "parent" of the Company as
such term is defined in the rules promulgated under the Exchange Act. For
information with respect to the ownership of stock in Freedom and Holding, see
"Item 11. Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) LIST OF EXHIBITS FILED.
3.1 Restated Certificate of Incorporation. Incorporated by reference to
Exhibit 3.1 of Form SB-2 Registration Statement No. 33-79882.
3.2 Bylaws. Incorporated by reference to Exhibit 3.2 of Form SB-2
Registration Statement No. 33-79882.
3.3 Certificate of Designation for Series B Preferred Stock. Incorporated
by reference to Exhibit 3.3 of Form SB-2 Registration Statement No.
33-99380.
4.1 Restated Certificate of Incorporation. See Exhibit 3.1 hereto.
10.1 Stock Purchase Agreement dated July 26, 1991, between the Registrant
and Bristol Holdings, Inc. is hereby incorporated by reference to
Current Report on Form 8-K dated July 26, 1991.
10.2 Stock Purchase Agreement dated as of March 29, 1993, between Freedom
Financial Corporation and the Registrant is hereby incorporated by
reference to Current Report on Form 8-K dated March 31, 1993.
10.3 Term Note for $1,000,000 executed by the Registrant in favor of WJA
Realty Limited Partnership dated February 1, 1994 is hereby
incorporated by reference to Exhibit 10.3 of Form SB-2 Registration
Statement No. 33-79882.
10.4 Nonqualified Stock Option Plan dated April 21, 1994 is hereby
incorporated by reference to Exhibit 10.4 of Form SB-2 Registration
Statement No. 33-79882.
10.5 Totalizator Services Agreement dated September 11, 1991, between
Autotote Limited and the Registrant is hereby incorporated by
reference to Exhibit 10.5 of Form SB-2 Registration Statement No. 33-
79882.
10.6 Indemnification Agreement dated February 23, 1993, between Ronald P.
Perella and the Registrant is hereby
- 51 -
<PAGE>
incorporated by reference to Exhibit 10.6 of Form SB-2
Registration Statement No. 33-79882.
10.7 Directors' Stock Option Plan adopted August 9, 1994 is hereby
incorporated by reference to Exhibit 10.7 of Form SB-2
Registration Statement No. 33-79882.
10.8 Letter of Intent dated October 4, 1994, between the Registrant
and Casino America, Inc., and acknowledged by Freedom Financial
Corporation. Incorporated by reference to the Current Report on
Form 8-K dated October 4, 1994 [File No. 0-9099].
10.9 Centrum X Joint Venture Agreement dated June 21, 1995 is
incorporated by reference to the exhibit to the Form 8-K Current
Report of the Registrant dated June 21, 1995.
10.10 Ponca Indian Tribe of Nebraska Management Agreement dated August
21, 1995 is incorporated by reference to exhibit 10.1 to the Form
8-K Current Report of the Registrant dated August 28, 1995.
10.11 Rincon Loan Agreement dated September 11, 1995 is incorporated by
reference to Exhibit 10.1 to the Form 8-K Current Report of the
Registrant dated September 15, 1995.
10.12 Amendment to Rincon Loan Agreement dated November 1, 1995.
Incorporated by reference to Exhibit 10.11 of Form SB-2
Registration Statement No. 33-79882.
10.13 Copies of mortgages, deeds. Incorporated by reference to Exhibit
10.12 of Form SB-2 Registration Statement No. 33-79882.
10.14 Copy of 1995 Chief Executive Officer Stock Option Grant of May 8,
1995. Incorporated by reference to Exhibit 10.13 of Form SB-2
Registration Statement No. 33-79882.
10.15 Credit Line Agreement dated December 1, 1995 between Freedom
Financial Corporation and the Registrant.
23.1 Consent of King & Company, PSC.
27 Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
During the quarter ended December 31, 1995, the Company filed one Form
8-K Current Report dated December 22, 1995, under Item 5, OTHER EVENTS. No
financial statements were filed as a part of this report.
- 52 -
<PAGE>
Audited Financial Statements
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
AUDITED FINANCIAL STATEMENTS
- ----------------------------
Independent Auditors' Report...........................................1
Financial Statements
Balance Sheets.......................................................2
Statements of Operations.............................................4
Statement of Stockholders' Equity....................................5
Statements of Cash Flows.............................................6
Notes to Financial Statements........................................7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders
Florida Gaming Corporation
Ft. Pierce, Florida
We have audited the accompanying balance sheets of Florida Gaming Corporation
(a Delaware Corporation) as of December 31, 1995 and 1994 and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Florida Gaming Corporation
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ King & Company, PSC
Louisville, Kentucky
March 21, 1996
<PAGE>
BALANCE SHEETS
FLORIDA GAMING CORPORATION
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,721,865 $1,363,174
Investment securities--Note C -0- 1,618,250
Notes receivable--Note K 382,811 20,258
Inventory 33,582 22,123
Prepaid expense -0- 7,387
---------- ----------
3,138,258 3,031,192
PROPERTY, PLANT AND EQUIPMENT--Note J
Land 2,732,525 1,631,865
Buildings and improvements 1,898,151 1,799,962
Furniture, fixtures and equipment 590,405 422,596
---------- ----------
5,221,081 3,854,423
Less accumulated depreciation (336,644) (141,962)
---------- ----------
4,884,437 3,712,461
GAMING VENTURE INVESTMENTS--Notes H and L 323,000 -0-
OTHER ASSETS 29,986 30,800
---------- ----------
$8,375,681 $6,774,453
---------- ----------
---------- ----------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Unclaimed winnings $ 83,039 $ 49,742
Investment margin account--Note C -0- 1,084,541
Accounts payable 55,796 62,383
Accrued payroll and related
expenses 120,492 15,415
Accrued expenses 250,388 176,879
Current portion of long-term
debt--Note I 131,567 108,385
---------- ----------
641,282 1,497,345
LONG-TERM DEBT--Note I 1,822,447 1,114,061
STOCKHOLDERS' EQUITY--Notes B, D & H
Class A redeemable preferred stock,
convertible to common stock; 1,200,000
shares authorized; 34,735 and 43,664
shares issued and outstanding in 1995
and 1994, respectively; aggregate 1995
liquidation preference of $355,000 3,473 4,366
Series B preferred stock, convertible to
common stock; 5,000 shares authorized;
2,400 and -0- shares issued and outstanding
in 1995 and 1994, respectively; aggregate
1995 liquidation preference of $2,400,000 240 -0-
Common stock, $.10 par value;
15,000,000 shares authorized;
3,123,586 and 3,119,246 issued
and outstanding in 1995 and 1994,
respectively 312,359 311,924
Capital in excess of par value 27,278,152 25,026,362
Accumulated deficit (21,682,272) (21,179,605)
---------- ----------
5,911,952 4,163,047
COMMITMENTS AND CONTINGENCIES--Note H
---------- ----------
$ 8,375,681 $ 6,774,453
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements
3
<PAGE>
STATEMENTS OF OPERATIONS
FLORIDA GAMING CORPORATION
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ON SITE MUTUEL REVENUE $1,213,178 $ 850,665
Less parimutuel taxes to State of Florida (122,109) (144,389)
INTER TRACK MUTUEL COMMISSIONS 2,047,335 1,447,205
---------- ----------
Net parimutuel revenue 3,138,404 2,153,481
ADMISSION INCOME 151,438 122,032
PROGRAM REVENUE 215,132 154,570
FOOD AND BEVERAGE 532,032 340,497
OTHER 49,020 52,692
---------- ----------
TOTAL OPERATING REVENUE 4,086,026 2,823,272
OPERATING EXPENSES
Staff payroll and related costs 973,214 803,166
Player payroll and related costs 725,395 408,192
Food and beverage costs 358,819 255,410
Repairs and maintenance 84,766 53,410
Totalizator/teleview rent--Note H 309,750 224,449
Depreciation 194,682 141,962
Utilities 141,913 120,191
Programs 135,988 108,128
Other 144,004 133,977
---------- ----------
TOTAL OPERATING EXPENSES 3,068,531 2,248,885
SELLING, GENERAL AND ADMINISTRATIVE
Officers' compensation 219,650 136,404
Directors' fees--Note G 16,000 14,000
Management consulting--Note G 11,712 52,977
Advertising and promotions 211,231 119,402
Telephone and travel 126,024 76,717
Professional fees--Note H 318,184 175,845
Interest expense 167,206 80,060
Property taxes 77,076 57,379
Other--Notes H and L 614,979 275,023
---------- ----------
1,762,062 987,807
---------- ----------
(LOSS) FROM OPERATIONS (744,567) (413,420)
OTHER INCOME (EXPENSE):
Interest and dividend income 77,673 37,090
Realized gain on marketable securities 195,939 -0-
Loss on disposal of assets -0- (14,669)
---------- ----------
273,612 22,421
---------- ----------
NET LOSS $ (470,955) $ (390,999)
---------- ----------
---------- ----------
LOSS PER COMMON SHARE--Note F $ (.15) $ (.18)
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements
4
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY
FLORIDA GAMING CORPORATION
For the two years ended December 31, 1995
<TABLE>
<CAPTION>
Class A Series B
Preferred Stock Preferred Stock Common Stock
Par Value $.10 Par Value $.10 Par Value $.10 Capital in
-------------- -------------- ------------------ Excess of Accumulated
Shares Amount Shares Amount Shares Amount Par Value Deficit
------ ------ ------ ------ --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1994 45,464 $4,546 1,503,240 $150,324 $22,781,412 $(20,749,312)
Sales of stock--Note G 1,351,752 135,175 1,566,414
Conversion of Class A
preferred stock to
common stock--Note B (1,800) (180) 404 40 132
Dividend on Class A preferred
stock--$.90 per share (39,294)
Net loss for the year (390,999)
Payment of preferred stock
dividend--Note B 16,514 1,651 119,369
Stock issued for asset
acquisitions--Notes H and J 247,336 24,734 559,035
------ ------ ------ ------ --------- -------- ----------- -------------
BALANCES AT
DECEMBER 31, 1994 43,664 4,366 -0- -0- 3,119,246 311,924 25,026,362 (21,179,605)
Sales of stock--Note B 2,400 $240 2,219,760
Conversion of Class A
preferred stock to
common stock--Note B (8,929) (893) 2,008 202 681
Dividend on Class A preferred
stock--$.90 per share (31,712)
Net loss for the year (470,955)
Payment of preferred stock
dividend--Note B 2,337 234 31,395
Treasury stock purchase (5) (1) (46)
------ ------ ------ ------ --------- -------- ----------- -------------
BALANCES AT
DECEMBER 31, 1995 34,735 $3,473 2,400 $240 3,123,586 $312,359 $27,278,152 $(21,682,272)
------ ------ ------ ------ --------- -------- ----------- -------------
------ ------ ------ ------ --------- -------- ----------- -------------
</TABLE>
See notes to financial statements
5
<PAGE>
STATEMENTS OF CASH FLOWS
FLORIDA GAMING CORPORATION
For the years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (470,955) $ (390,999)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 194,682 141,962
Realized gain on marketable securities (195,939) -0-
Loss on sale of assets -0- 14,669
Decrease in prepaid expense and inventory (4,072) (28,185)
Increase in unclaimed winnings and
accounts payable 26,710 105,875
Increase in accrued expenses 178,586 192,294
---------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (270,988) 35,616
INVESTING ACTIVITIES
Proceeds from the sale of marketable
securities 1,814,189 -0-
Purchases of marketable securities -0- (1,618,250)
Purchases of property and equipment (1,366,658) (3,270,654)
Deposits and advances (30,850) 69,200
Investments in gaming ventures (323,000) -0-
Proceeds from payments on notes receivable 19,111 104,902
Loan to affiliated company (350,000) -0-
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (237,208) (4,714,802)
FINANCING ACTIVITIES
Long-term debt issued 845,132 1,222,446
Debt repayments (113,564) -0-
Proceeds from sale of stock 2,219,860 1,701,472
Borrowings (repayments) on margin account (1,084,541) 1,084,541
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,866,887 4,008,459
---------- ----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,358,691 (670,727)
Cash and cash equivalents at beginning
of period 1,363,174 2,033,901
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,721,865 $ 1,363,174
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES
Issuance of common stock pursuant to-
-Conversion of Class A preferred stock $ 893 $ 180
-Asset acquisitions -0- 583,769
Accrual of dividend on Class A preferred stock 31,712 39,293
Interest paid 167,206 80,060
Payment of dividend arrearage through
issuance of common stock -0- 81,835
</TABLE>
See notes to financial statements
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DISCLOSURE: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
COMPANY BACKGROUND: Florida Gaming Corporation (the Company) operates a live
Jai Alai fronton in Ft. Pierce, Florida. The Company also conducts
intertrack wagering (ITW) on jai alai, horse racing and dog racing in Florida.
On March 31, 1993 Florida Gaming entered into a Stock Purchase Agreement with
Freedom Financial Corporation (Freedom), a Company controlled by the current
Chairman of Florida Gaming whereby Freedom made an $874,350 equity infusion
into Florida Gaming. Florida Gaming issued 699,480 new shares (approximately
46.5% of the Company's outstanding common stock) to Freedom as a result of
this agreement.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVESTMENT SECURITIES: On January 1, 1994, Florida Gaming adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115), which specifies the
accounting for investments in securities that have readily determinable fair
values. Securities that management has both the positive intent and ability
to hold to maturity are classified as securities held to maturity and are
carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior to
maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment risk, or other
similar factors, are classified as securities available for sale and carried
at fair value with any adjustments to fair value, after tax, reported as a
separate component of stockholders' equity.
Interest and dividends on securities, including the amortization of premiums
and the accretion of discounts, are reported in interest and dividends on
securities using the interest method. Gains and losses on securities are
recorded on the trade date and are calculated based on the security with the
highest cost unless specific securities are identified.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is provided using the straight-line and accelerated
methods over the estimated useful life of the related assets.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
REAL ESTATE HELD FOR EXPANSION: The Company's investment in undeveloped land
($1,617,495 and $529,865 at December 31, 1995 and 1994, respectively) is
carried at cost and is included with land under property, plant and equipment
in the accompanying balance sheet.
INVENTORY: The Company's inventory, comprising food and beverage products
and souvenirs, is stated at the lower of cost or market.
PARIMUTUEL WAGERING: Revenue is derived from acceptance of wagers under a
parimutuel wagering system. The Company accepts wagers on both on-site and
ITW events. On-site wagers are accumulated in pools with a portion being
returned to winning bettors, a portion paid to the State of Florida and a
portion retained by the Company. ITW wagers are also accepted and forwarded
to the "host" facility after retention of the Company's commissions. The
Company's liability to host tracks for ITW collections totaled $55,796
and $62,383 and are included in accounts payable at December 31, 1995 and
1994, respectively. Unclaimed winnings totaled $83,039 and $49,742 at
December 31, 1995 and 1994, respectively.
INCOME TAXES: In February 1992, the Financial Accounting Standards Board
(FASB) adopted Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". SFAS No. 109 was required to be implemented
during the first quarter of fiscal year 1994. The Company adopted the
standard as a cumulative change in accounting principle during 1994. There
was no material impact on the Company's financial position or results of
operations related to the implementation of the new standard.
RECLASSIFICATION: Certain 1994 amounts have been reclassified to conform
with their 1995 presentation.
NOTE B--PREFERRED STOCK
The Company's Class A preferred stock provides annual dividends, at the rate
of $.90 per share payable in cash, property or common stock, which are
cumulative and have priority over dividends on the common stock. Accrued
Class A preferred stock dividends totaled $-0- at December 31, 1995 and
December 31, 1994, respectively. On September 5, 1995 the Board of Directors
declared a preferred dividend for 1995 to holders of record September 21,
1995. As of September 30, 1995, accrued dividends were $31,712. On October
6, 1995, these dividends were paid by the issuance of 2,337 common shares and
$83 cash in lieu of fractional shares.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE B--PREFERRED STOCK--CONTINUED
Each share of Class A preferred is convertible into .225 shares of common
stock at the holder's option. During the years ended December 31, 1995 and
1994, 8,929 shares and 1,800 shares of Class A preferred stock were converted
into 2,008 shares and 404 shares of common stock, respectively. The Class
A preferred is redeemable at the option to the Company at $10.60 per share.
In the event of dissolution, the holders of Class A preferred shall be
entitled to receive $10.00 per share, plus accrued dividends, prior to any
distribution to holders of common stock.
The Company's Series B convertible preferred stock provides annual cumulative
dividends at the rate of 8% of the consideration paid for the stock. Such
dividends are payable in shares of the Company's common stock. The
consideration to be received by the Company upon initial issuance of each
share of the Series B shares is $1,000. Holders of Series B shares may
convert all or any of such Series B shares to the Company's common stock
using a ratio based on the consideration paid for the stock and 80% of the
market value of the common stock. On December 15, 1995, the Board of
Directors reserved 600,000 shares of the Company's common stock for issuance
upon conversion of the Series B preferred stock. Upon liquidation, the
holders of Series B preferred shares shall be entitled to be paid $1,000 per
share plus 8% accrued dividends before any distribution to holders of common
stock. During the year ended December 31, 1995, 2,400 Series B preferred
shares were issued for $2,400,000 to three unrelated parties. Subsequent to
December 31, 1995, the Company issued an additional 2,300 Series B shares at
$1,000 per share and 900 Series B shares were converted to 134,926 shares of
common stock.
NOTE C--INVESTMENT SECURITIES
The Company's investment in debt and equity securities comprises the following
held as available for sale:
<TABLE>
<CAPTION>
December 31,
1995 1994
--------------- ----------------------
Market Book Market Book
Value Value Value Value
------ ----- ---------- ----------
<S> <C> <C> <C> <C>
75,000 Common Shares in
PNC Bank Corporation $-0- $-0- $1,618,250 $1,618,250
</TABLE>
The Company purchases certain of its securities through a brokerage in
Louisville, Kentucky, using a margin account arrangement. The margin account
allows the Company to borrow up to 50% of the purchase price of equity
securities and 60% of the purchase price of corporate and municipal debt
securities. The Margin Account Agreement provides the broker with the
unilateral authority to dispose of, or otherwise set off, the Company's
investments against its debts to the broker.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE C--INVESTMENT SECURITIES--CONTINUED
At December 31, 1995 and 1994, the Company owed $-0- and $1,084,541,
respectively, on its margin account comprising common stock with a relative
year-end market value of approximately $-0- and $1,618,250. The broker call
rate on the margin accounts is generally prime rate or less, and the account
is collateralized by Company investment securities purchased through such
accounts.
NOTE D--STOCK OPTIONS
The Company has various non-qualified and incentive stock option plans and
agreements which grant options with Board approval to employees, officers and
directors. Under each plan or agreement, the exercise price for each option
granted must be at least 100% of the fair market value of the Company's
common stock on the date the option is granted.
Under a Stock Purchase Agreement, dated March 31, 1993, Florida Gaming sold
699,380 shares of Common Stock to Freedom for total cash consideration of
$874,350 ($1.25 per share). In addition, Florida Gaming granted Freedom
options to purchase an additional 1,630,000 shares of Common Stock at an
exercise price of $1.25 per share, exercisable at any time prior to the fifth
anniversary of the closing.
Reference is made to Notes G and H for details of options exercised by
Freedom during 1994.
Under three separate agreements during fiscal 1993 the Company entered into
stock option agreements with an independent director and two former directors
of the Company whereby the Company granted to these individuals non-qualified
options to purchase an aggregate of 84,250 of the Company's common stock at
an exercise price of $2.50 per share. These options are currently
exercisable through December 31, 1997 and include certain registration rights
for all shares issued upon exercise (See Note H).
On April 21, 1994, the Company adopted a new Nonqualified Stock Option Plan,
which received shareholder approval on July 7, 1995, and which provides that
options up to an amount equal to 5% of the Company's issued and outstanding
shares of Common Stock can be issued to the Company's non-director employees.
Also on April 21, 1994, options for 50,000 shares of Common Stock were
granted to the Company's Executive Vice-President (prior to his becoming a
director) and options for 25,000 shares were granted to the Company's Chief
Financial Officer, each with an exercise price per share of $7.50.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE D--STOCK OPTIONS--CONTINUED
During August, 1994, the Company initiated a new stock option plan for
directors pursuant to which each current and future director will receive a
one-time grant of options of 25,000 Common Shares. Options for 25,000 shares
and 150,000 shares were granted under this plan in 1995 and 1994,
respectively. The option prices for these shares are the market value at the
respective dates of grant ($5.13 in 1995 and range of $5.50 to $5.75 in
1994). The options are not exercisable for a period of one year from grant
or in the case of directors, one year from their date of election to the
Board.
On November 7, 1994, the Board of Directors granted the Company's Chief
Financial Officer an option to purchase an additional 25,000 shares of common
stock at an exercise price of $5.50 per share, exercisable one year hence.
On April 28, 1995, the Company granted a former Director an option to
purchase 19,000 common shares at $5.19 per share. The option is exercisable
after October 29, 1995 and expires five years from date of grant. On the
same date the Company granted its Chairman an additional option to purchase
300,000 common shares at $5.00 per share. The option is exercisable after
November 8, 1995 and also expires five years from date of grant.
NOTE E--INCOME TAXES
At December 31, 1995, the Company had tax net operating loss (NOL)
carryforwards of approximately $11,242,000 available to offset future taxable
income. These NOL carryforwards expire fifteen years from the year in which
the losses were incurred or at various intervals through fiscal 2011.
However, virtually all of the Company's NOL carryforwards which can be
utilized to offset future taxable income are limited to approximately $95,000
per fiscal year under Section 382 of the IRC because Freedom's stock purchase
discussed in Note D was considered a change in ownership under the "deemed
exercise rule" of IRC Section 382. As a result, only the net operating
losses attributable to the period after the "change in ownership"
(approximately $862,000) are not subject to the Section 382 limitation.
The Company has approximately $1,361,000 in capital loss carryforwards which
expire in 1996 to offset future taxable capital gains. In addition, the
Company has unused general business tax credits of approximately $137,000.
These credits expire at various dates through the year 2001 to offset any
future tax liabilities of the Company.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE F--LOSS PER COMMON SHARE
The loss per common share was calculated based on the net loss, the amount of
the preferred stock dividend and the weighted average number of outstanding
common shares (3,120,674 and 2,184,949, for 1995 and 1994, respectively).
Options outstanding and the Bristol Warrant were not considered in the
computations of loss per common share as they were anti-dilutive.
NOTE G--RELATED PARTY TRANSACTIONS
Selling, general and administrative expenses include the following amounts
paid to members of the Board of Directors of the Company:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994
------- -------
<S> <C> <C>
Directors' fees $16,000 $14,000
Directors' expense reimbursements $ 1,542 $ 3,109
Management consulting $ -0- $34,416
</TABLE>
Included in 1994 amounts shown as management consulting are fees paid an
independent director for services rendered in connection with acquisition
investigations for the Company.
On August 26, 1994, Freedom Financial Corporation exercised its option in
part to purchase 400,000 shares of the Company's common stock at an exercise
price of $1.25 per share. (See Note D) On October 12, 1994, Freedom
exercised its option to acquire an additional 300,000 shares. These
purchases resulted in approximately $875,000 in additional equity capital for
the Company. Freedom retains an option to purchase 1,330,000 shares at an
exercise price of $1.25 per share.
Reference is made to Note K for details pertaining to the Company's credit
facility with Freedom Financial Corporation, a closely-held corporation owned
substantially by the Company's Chairman.
Subsequent to December 31, 1995, the Board of Directors established the
Chairman's annual salary at $360,000, payable monthly. The Chairman had
previously received no salary.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE H--COMMITMENTS AND CONTINGENCIES
LITIGATION: On March 22, 1994, Ronald W. Hayes filed suit in the Circuit Court
of the Fifteenth Judicial Circuit of Florida, Palm Beach County, against the
Company and W. Bennett Collett, the Company's Chairman and Chief Executive
Officer. Mr. Hayes alleged that the defendants owe him $118,500, plus
attorney's fees, as a finder's fee in connection with the Company's purchase of
the Fort Pierce Jai-Alai Fronton (See Note D). The plaintiff accepted a cash
payment of $29,551 from the Company in settlement of this case, which case was
dismissed with prejudice on December 15, 1994. However, a related case was
then filed on December 16, 1994, as described below.
On May 13, 1994, American Jai-Alai, Inc. ("American Jai-Alai") filed suit in
the Circuit Court of the Fifteenth Circuit in Florida, Palm Beach County,
against the Company. American Jai-Alai alleges that in August 1993 the
Company entered in to a contract with American Jai-Alai that American
Jai-Alai would manage the Fronton if the Company acquired it. American
Jai-Alai alleges that the Company and American Jai-Alai agreed to enter into
a five-year renewable management contract pursuant to which American Jai-Alai
would guarantee a $480,000 annual payment to the Company and $270,000 of the
Fronton's net operating income above $750,000 annually. In addition,
American Jai-Alai alleges that it has a first right of refusal if the Company
desires to sell the Fronton at any time during the alleged management
contract. American Jai-Alai also alleges that the Company granted it an
option to purchase 100,000 shares of Common Stock at $2.50 throughout the
alleged management contract, but not to exceed 1997. In addition, American
Jai-Alai alleges that the Company agreed to pay American Jai-Alai 25% of any
profit realized from the sale of the Fronton, if such sale was not to
American Jai-Alai pursuant to its alleged right of first refusal. In the
Complaint, American Jai-Alai alleges, among other claims, breaches of
fiduciary duty, breach of contract and fraud. On May 20, 1994, counsel for
American Jai-Alai stated that American Jai-Alai was exercising its alleged
right to purchase the 100,000 shares of Common Stock for $2.50. The Company
has not issued any shares of Common Stock pursuant to this demand. The
Company has filed an Answer to the Complaint and also filed a motion to move
the suit from Palm Beach County to St. Lucie County, which was granted by the
circuit court. An amended complaint was filed on January 25, 1995 and the
Company filed its responsive pleading on April 25, 1995. The Company filed a
motion for summary judgment on February 20, 1996 in which the Company asserts
that, as a matter of law, no written management agreement exists between the
parties. The Company denies the allegations and believes that this
proceeding is not likely to result in an adverse judgment that is material to
the results of its operations and financial condition.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
On December 16, 1994, General Realty and Finance Co. filed in Palm Beach
County, against the Company alleging a breach of a commission agreement for
the purchase of the Ft. Pierce Jai Alai fronton. The Complaint was filed on
December 16, 1994, and a Motion to Transfer Venue was filed January 30, 1995,
seeking to have venue transferred to St. Lucie County. The Company has
previously paid out a commission to Ronald Hayes and has attempted to pay the
principal of General Realty, for the commission; however, the payment was
rejected. On January 3, 1996, the Company filed a Motion for Partial Summary
Judgment as to the allegations that the Company breached a written commission
agreement. On January 29, 1996, the court issued an Order granting the
Company's Motion for Partial Summary Judgment finding, as a matter of law,
that there was no written commission agreement between General Realty and the
Company. General Realty filed its Second Amended Complaint on February 13,
1996, adding allegations that General Realty and the Company had an oral or
implied commission agreement which has been breached by the Company. The
Company will file a responsive pleading to the Amended Complaint. The
Company denies the allegations and believes the proceeding is not likely to
result in an adverse judgment that is material to the results of this
operation and financial condition.
CASINO AMERICA: On October 4, 1994, the Company entered into a letter of
intent dated October 4, 1994 (the "Letter of Intent") with Casino America,
Inc. ("Casino America") to form a joint venture (the "Joint Venture") to
build and operate a casino at the Fronton. Casino America owns and operates
three riverboat and dockside casinos located in Mississippi and Louisiana.
If the Joint Venture is formed before passage of an amendment to the Florida
Constitution to permit casino gaming at the Company's Fronton in Fort Pierce,
Florida, the Company will contribute its interest in the Fronton to the Joint
Venture with a credit to its joint venture capital account of $5,000,000.
Casino America will contribute up to $2,500,000, as needed, to construct a
100,000 square foot indoor facility suitable for a casino or flea market. If
casino gaming is not permitted in Florida within the next six years, Casino
America has a continuing option to convert the money contributed to the Joint
Venture to a promissory note from the Joint Venture payable in equal payments
over a ten year period with interest at 8% per annum. If casino gaming is
permitted at the Fronton within six years, the value of the assets
contributed by the Company to the Joint Venture will be adjusted to increase
the Company's capital account up to $22,500,000.
Casino America would fund its capital account on an as needed basis up to
$22,500,000. All profits and losses of the Joint Venture will be allocated
between the partners based upon capital accounts. The Company incurred
lobbying expenses of $50,000 during 1994 in connection with efforts to amend
the Florida Constitution to allow casino gaming in the State. Such costs are
included in Other Expenses in the 1994 Statement of Operations.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
The Letter of Intent provides that Casino America will be the manager of the
casino and all casino-related improvements. The Company will manage the
operation of the jai-alai fronton, intertrack wagering and all other
non-casino related activities. Each corporation will receive a management
fee based on costs. The Letter of Intent provides that Casino America has
the exclusive right to enter into a Joint Venture with the Company for six
years and Casino America has a right of first refusal to enter into other
potential gaming opportunities in Florida with the Company for such period
and during the term of the Joint Venture. The formation of the Joint Venture
is subject to certain conditions, including the satisfactory completion of
due diligence by Casino America, the receipt of all required regulatory
approvals, the approval of each partner's board of directors, the execution
of a definitive joint venture agreement, and the approval of the Company's
stockholders, if required by law. Either party may terminate discussions in
connection with the Joint Venture and neither party shall have any liability
to the other, except as otherwise specified in the Letter of Intent.
Freedom Financial Corporation ("Freedom") has informed the Company that
Casino America has purchased 22,500 shares of Freedom's 7% Series AA
Mandatorily Redeemable Preferred Stock (the "Freedom Preferred Stock"). The
Freedom Preferred Stock is convertible into shares of the Company's Common
Stock owned by Freedom at prices ranging from $7.50 per share of Common Stock
to $15.00 per share of Common Stock, depending upon the timing of the
conversion and possible passage of an amendment to the Florida Constitution
permitting casino gaming at the Fronton. The Freedom Preferred Stock is
convertible into a minimum of 150,000 shares and a maximum of 300,000 shares
of the Common Stock. Casino America is the sole holder of Freedom Preferred
Stock. On October 12, 1994, Freedom purchased 300,000 shares of Common Stock
from the Company by partial exercise of its option to purchase up to
1,630,000 shares (at that date) of the Company's Common Stock at an exercise
price of $1.25 per share. In addition to its remaining option to purchase
1,330,000 shares of the Company's Common Stock, Freedom now owns directly
1,399,480 shares of the Company's 3,123,586 shares of issued and outstanding
Common Stock. (See Notes D and G)
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
REGISTRATION RIGHTS: The Company has committed upon certain terms and
conditions, to include certain shares held by other parties, in a future
registration statement it files on its own behalf, allowing those shares to be
publicly traded. Reference is made to Notes D and J for details of those
transactions involving these registration rights. A summary of such shares is
as follows:
Shares issued in 1994 to acquire
the Ft. Pierce fronton 200,000
Shares issued in 1994 to acquire
St. Lucie County real estate 47,336
Shares under option to a former
officer and director 84,250
-------
331,586
=======
LEASES: The Company rents totalizator (autotote) and other equipment under
leases which expire at various dates through 1998. The totalizator leases
require a minimum annual rental plus contingent rentals based on a percentage
of the handle in excess of the minimum annual rental. Total totalizator and
other equipment rental expense under operating leases for the year ended
December 31, 1995 and 1994 was approximately $310,000 and $224,000,
respectively. The remaining minimum lease commitments under all operating
leases at December 31, 1995, are as follows:
Minimum
Year Annual Rental
---- -------------
1996 $137,676
1997 7,676
1998 6,397
_______
$151,749
=======
STOCK APPRECIATION GUARANTEES: In connection with the purchase of certain
real estate described in Note J, the Company issued 47,336 shares of its $.10
par value stock having a quoted market value of $3.10 on the date of issue.
The real estate purchase agreement included the Company's guarantee of the
appreciation in value of such stock as follows:
* If the seller holds the stock for at least three years from the date
of closing, (the "$10.00 Guaranty Date") the market value of the stock
at the end of the three year period will be at least $10.00 per share.
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
* If the Company or its successors or assigns or any entity in which the
Company has an interest is approved as a casino permit holder within
three years from the date of closing this transaction, and in fact does
open a casino, then in that event the Company guarantees that the market
value of the stock will be at least $20.00 per share, two years from the
date that the Company or its successors or assigns or any entity in which
the Company has an interest actually opens and is operating a casino,
(the "$20.00 Guaranty Date".)
* For the purpose of the agreement, the price per share on the $10.00
Guaranty Date and the $20.00 Guaranty Date shall be the over the counter
bid price, ("Market Value"). On the $10.00 and $20.00 Guaranty Date,
Seller shall request in writing to the Company to reimburse Seller for
the difference between the market value of the shares and the guaranteed
price. Seller shall remit with said request evidence that Seller is still
in ownership and possession of said stock. The Company shall pay the
difference to Seller within ninety (90) days from receipt of Seller's
request.
In addition to the Company's guarantee, Freedom Financial Corporation
provided a similar guarantee as a further inducement to the seller of the
real estate. Based on the December 31, 1995 closing value of the Company's
common stock, no payment would be due under the $10 guarantee and a payment
of $449,692, the equivalent of 42,828 shares would have had to be made at
that date to satisfy the terms of the $20 guarantees.
OTHER COMMITMENTS: Reference is made to Note L for details of the Company's
commitments arising from the pursuit of additional gaming ventures.
LITIGATION COSTS: In addition to legal fees incurred in the normal course of
the Company's business activities, during 1995 and 1994 the Company paid
approximately $99,000 and $111,000, respectively for settlement costs and
legal fees associated with the defense of the various lawsuits described
above. Such costs are included in Other Expenses in the Statement of
Operations.
COLLECTIVE BARGAINING AGREEMENT: The Company is a party to a collective
bargaining agreement with the International Jai Alai Players Association
U.A.W. Local 8868, AFL-CIO. The agreement allows the Company to negotiate
individual contracts with players and provides for minimum salaries and
bonuses based on parimutuel handle, certain cesta allowances and retirement
benefits. The agreement continues from year to year unless timely notice of
termination is given by either party to the agreement.
CONCENTRATION OF CREDIT: The Company maintains significant cash balances
with financial institutions in excess of the insurance provided by the
Federal Deposit Insurance Corporation (FDIC).
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE I--LONG-TERM DEBT
The Company's notes payable and long-term debt comprise the following at
December 31, 1995:
<TABLE>
<CAPTION>
Current Long-Term
------- ---------
<S> <C> <C>
Mortgage note dated September 30, 1994 secured
by 18.584 acres in St. Lucie County, Florida
(Graham Road); payable in monthly installments
of $2,042 including interest at 10% per annum
through August 30, 1997 with a balloon payment
of $172,888, including interest, due on
September 30, 1997. $ 6,524 $ 176,184
Note payable dated February 1, 1994 secured by
a Trustee's deed for the St. Lucie County real
estate on which the Fronton is located; interest
is payable in quarterly installments at 8%
per annum with the principal payable in annual
installments of $100,000 through
January 31, 2004. 100,000 800,000
Mortgage note dated June 17, 1994 secured by real
estate located in St. Lucie County; payable in
monthly installments of $425 including interest
at 8% per annum through June 17, 2004. 2,686 28,667
Mortgage noted dated January 3, 1995 secured
by real estate located in St. Lucie county;
payable in monthly installments of $1,980
including interest at 9.5% per annum through
December 3, 1999 with a balloon payment of
$226,774, plus interest, due on January 3,
2000. 1,583 232,531
Mortgage note dated January 3, 1995 secured
by real estate located in St. Lucie county;
payable in monthly installments of $2,079
including interest at 9.5% per annum
through December 3, 1999 with a balloon
payment of $238,113, plus interest due
on January 3, 2000. 1,663 244,157
</TABLE>
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE I--LONG-TERM DEBT--CONTINUED
<TABLE>
<CAPTION>
Current Long-Term
------- ---------
<S> <C> <C>
Mortgage noted dated January 31, 1995
secured by real estate located in St. Lucie
county; payable as follows: $2,655 monthly
at 8% per annum through February 1, 1996;
$4,548 monthly at 9% per annum from March 1,
1996 through February 1, 1998; $4,017 monthly
at 9.5% or prime rate plus 2% (whichever is
greater) per annum from March 1, 1998 through
February 1, 2000; a balloon payment of
approximately $277,958, plus interest, due on
February 1, 2000. $ 19,111 $ 340,908
-------- ----------
$131,567 $1,822,447
-------- ----------
-------- ----------
</TABLE>
The approximate maturities of the Company's long-term debt for the five years
subsequent to December 31, 1995 are as follows: 1996--$131,567;
1997--$307,561; 1998--$122,772; 1999--$128,272; 2000--$848,342;
thereafter--$415,500.
NOTE J--PROPERTY, PLANT AND EQUIPMENT
Plant and equipment comprise the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
<S> <C> <C>
Land (undeveloped) $1,617,495 $ 529,865
Land (improved) 1,115,030 1,102,000
Buildings and improvements 1,898,151 1,799,962
Equipment 495,579 374,838
Furniture and fixtures 47,811 43,177
Vehicles 47,015 4,581
Less accumulated depreciation (336,644) (141,962)
---------- ----------
$4,884,437 $3,712,461
---------- ----------
---------- ----------
</TABLE>
The Company made three purchases of undeveloped land during 1994. The three
purchases comprised approximately 20 acres, including two separate lots, all of
which are adjacent to the Jai Alai property. The amounts paid for this property
totaled $529,864 including debt assumptions of $190,000, cash payments of
$185,000 and the issuance of 47,336 shares of the Company's common stock.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
December 31, 1995 and 1994
NOTE J--PROPERTY, PLANT AND EQUIPMENT--CONTINUED
Reference is made to Note H for information pertaining to guarantees of the
value of such stock at various futures dates and certain registration rights
granted with respect to the shares issued.
During 1995, the Company acquired an additional 80 acres of undeveloped land
adjacent to its other properties in Florida at a cost of $1,088,000 through
cash payments of $243,000 and the issuance of long-term debt of $845,000.
The Company has no definitive plans for the property acquired; however due to
its proximity to the Jai Alai facilities, it is expected to be used in
similar or supporting activities.
NOTE K--NOTES RECEIVABLE
Included in notes receivable in the accompanying 1995 balance sheet is a note
comprising a $350,000 line of credit granted to Freedom Financial Corporation
on December 15, 1995. The credit facility, which is secured by refundable
income taxes and other assets owned by Freedom, is due on demand and bears
interest at 2% above prime. Freedom Financial is owned substantially by the
Company's Chairman.
NOTE L--GAMING VENTURE INVESTMENTS
During 1995, the Company entered into several arrangements with different
Native American Tribes to explore possible opportunities for gaming ventures.
The arrangements generally provide the Company the right to receive
compensation from the Tribe's share of the potential gaming profits for
supplying the management services and/or financing necessary for the
construction and operation of the gaming facilities. The Company's
commitment to provide construction financing and working capital is
contingent upon the Tribes' procurement of judicial or regulatory approval to
operate a gaming venture. At December 31, 1995, the Company's contingent
commitment to provide financing to potential gaming ventures totaled
$5,000,000. Management expects the funds necessary to meet this commitment
to be obtained through the issuance of additional debt or equity instruments.
The Company expended $729,437 and $78,886 during 1995 and 1994, respectively
related to these gaming venture arrangements of which $406,347 and $78,886
are included in Other Expense in the accompanying 1995 and 1994 Statements of
Operations, respectively. $323,000 of the funds expended in 1995 were made
to one Tribe as working capital loans and are carried as an Investment on the
accompanying 1995 Balance Sheet based on the Company's financing ("loan")
agreement with the recipient Tribe. Recovery of these funds under the "loan"
agreement is contingent upon such agreement becoming effective after the
Tribe receives judicial approval to establish the intended gaming operation.
Management believes such judicial approval is likely during 1996.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused the report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FLORIDA GAMING CORPORATION
Date: March 29, 1996 By /s/ W. Bennett Collett
--------------------------------
W. Bennett Collett
Chairman and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
/s/ W. Bennett Collett Chairman of the Board March 29, 1996
- --------------------------- of Directors and
W. Bennett Collett Chief Executive Officer
/s/ Timothy L. Hensley Executive Vice President, March 29, 1996
- --------------------------- Treasurer and Chief
Timothy L. Hensley Financial Officer
/s/ Robert L. Hurd President and Director March 29, 1996
- ---------------------------
Robert L. Hurd
/s/ W. Bennett Collett, Jr. Director, Executive March 29, 1996
- --------------------------- Vice President and
W. Bennett Collett, Jr. Secretary
/s/ Gary E. Bowman Director March 29, 1996
- ---------------------------
Gary E. Bowman
/s/ George W. Galloway, Jr. Director March 29, 1996
- ---------------------------
George W. Galloway, Jr.
/s/ Roland M. Howell Director March 29, 1996
- ---------------------------
Roland M Howell
<PAGE>
Exhibit 10.15
CREDIT LINE AGREEMENT
Date: 12/1/95
ON or before DEMAND I (we), FREEDOM FINANCIAL CORPORATION, promise to pay to the
order of Florida Gaming Corporation, at its office in New Albany, Indiana or at
such other place as is designated by the holder hereof up to $1,000,000 advanced
under this agreement for value received with interest from date at the rate of
TWO per cent (2%) above prime rate as published in The Wall Street Journal per
annum until paid, and all costs of collection, including fifteen per cent
attorneys fees if collected by law or through an attorney at law.
Maker hereby waives demand, protest and notice of demand, protest and
nonpayment.
This note is ( ) Unsecured
(X) Secured by: A FIRST LIEN ON FREEDOM
FINANCIAL CORPORATION'S FEDERAL TAX REFUNDS RECEIVABLE TOTALING APPROXIMATELY
$600,000 THROUGH AND FOR THE YEAR ENDED 12/31/94 AND A SECURITY INTEREST IN 26
ACRES OF COMMERCIAL PROPERTY OWNED BY FREEDOM IN WALTON COUNTY, GEORGIA.
It is expressly agreed that time is of the essence of this agreement. Given
under the hand and seal of each party hereto:
FREEDOM FINANCIAL CORPORATION
/s/ Timothy L. Hensley By: /s/ W. B. Collett
- ------------------------------ ------------------------
Witness W. B. Collett, Chairman
<PAGE>
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our reports included in the Form 10-KSB into
the Company's previously filed Registration Statement File No. 33-99380.
/s/ King & Company, PSC
King & Company, PSC
Louisville, Kentucky
March 28, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2722
<SECURITIES> 0
<RECEIVABLES> 34
<ALLOWANCES> 383
<INVENTORY> 34
<CURRENT-ASSETS> 3138
<PP&E> 5221
<DEPRECIATION> 337
<TOTAL-ASSETS> 8376
<CURRENT-LIABILITIES> 641
<BONDS> 1822
3
0
<COMMON> 312
<OTHER-SE> 5596
<TOTAL-LIABILITY-AND-EQUITY> 8376
<SALES> 0
<TOTAL-REVENUES> 4086
<CGS> 0
<TOTAL-COSTS> 4831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 167
<INCOME-PRETAX> (471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (471)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
