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U.S. 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, 1996
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: $4,951,920.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 24, 1997
Common stock, par value of $.10 per share -- $12,783,670.
The number of shares of the registrant's common stock outstanding as of
March 24, 1997 - 4,588,524 shares.
Transitional Small Business Disclosure Format
Yes ______ No X
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
four jai-alai fronton and inter-track pari-mutuel wagering facilities (each,
a "Fronton," and collectively, the "Frontons") located in South and Central
Florida. The Company's business at this time consists primarily of its
operations at the Frontons, which include, among other things, live jai-alai,
inter-track pari-mutuel wagering ("ITW") on jai-alai, horse racing (both
thoroughbred and harness) and dog racing, and the sale of food and alcoholic
beverages. The Fort Pierce, Tampa and Ocala locations provide audio, video
and wagering on inter-track and interstate simulcasting of horse racing and
dog racing from various tracks in the United States and jai-alai from within
the State of Florida. The Miami location offers limited ITW simulcasting,
but simulcasts its jai-alai performances to other gaming facilities in the
United States and Mexico.
The term "pari-mutuel wagering" refers to the betting by members of the
public against each other, and as used in this report, includes wagering on
both live performances and ITW.
Since its inception and before the acquisition of the Fort Pierce,
Fronton in February 1994, 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 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 was incorporated in Delaware in 1976 as
Lexicon Corporation. The Company changed its name to Florida Gaming
Corporation on March 17, 1994.
ACQUISITION OF FRONTONS/DEVELOPMENT OF CARDROOMS
ACQUISITION OF THE FT. PIERCE FRONTON. The Company acquired the
Ft. Pierce Fronton from WJA Realty Limited Partnership ("WJA") pursuant to an
agreement with WJA dated October 6, 1993. On February 1, 1994, the Company
received approval from the Florida Department of Business and Professional
Regulation, Division of Pari-Mutuel Wagering (the "DPMW") to transfer the
pari-mutuel permit for the Ft. Pierce Fronton from WJA to the Company and
also closed the purchase transaction with WJA on that date. Consideration
for the acquisition consisted of 200,000 shares of
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Company Common Stock, $1,500,000 paid in cash at closing and a ten-year 8%
mortgage for $1,000,000.
ACQUISITION OF THE MIAMI, TAMPA AND OCALA FRONTONS. On September 12,
1996, the Company acquired notes (the "WJA Notes") of WJA, with balances
aggregating about $20,000,000 from the Bank of Oklahoma, N.A., Tulsa,
Oklahoma. The WJA Notes were secured by real estate and improvements
consisting of three jai-alai and ITW facilities located in Miami, Tampa and
Ocala, Florida (the "WJA Frontons") and other collateral. Consideration for
the WJA Notes was a combination of $2,000,000 in cash, a $6,000,000
promissory note bearing interest at the prime rate, 703,297 shares of the
Company's Common Stock and a $1,000,000 non-interest bearing note.
On November 25, 1996, the Company entered into an agreement with WJA and
Florida Gaming Centers, Inc. ("Centers"), a wholly-owned subsidiary of the
Company, pursuant to which Centers agreed to acquire the WJA Frontons. The
acquisition was consummated as of January 1, 1997. The WJA Frontons acquired
have been combined with the Fort Pierce Fronton into Centers.
The consideration for the acquisition included (i) the cancellation of
WJA Notes and related obligations acquired by the Company from the Bank of
Oklahoma, NA, (ii) the retention by WJA of 200,000 shares of the Company's
common stock owned by WJA, and (iii) a profit sharing arrangement described
in detail below. The Company assumed all liabilities of WJA arising in the
ordinary course of the business, subject to certain limitations and
exceptions. The Company also assumed the principal amount outstanding under
a $500,000 promissory note owed to Wheeler-Phoenix, Inc., with the terms
amended to provide for repayment of principal over a ten year period
following the closing in equal annual installments and an annual interest
rate of 6%.
The profit sharing arrangement is based on Centers' net profits, as
defined, before income taxes. The Company will pay WJA 20% of the cumulative
net profits of Centers for each of the ten full calendar years 1997 through
2006, subject to a cumulative $1,000,000 per year cap described below. The
cumulative $1,000,000 cap is equal to the product of $1,000,000 multiplied by
the completed number of years in the ten-year period, minus the sum of all
amounts previously paid under the 20% profit sharing arrangement. In
addition, if Centers has net profits in any calendar year during the ten-year
period in excess of $5,000,000, but has not paid WJA a 20% payment on the
entire amount because of the cumulative $1,000,000 per year cap, Centers will
pay WJA 5% of the portion of the net profits on which the 20% payment is not
made. No net profit payments will be due for any year after the ten year
period. If during the ten year period, Centers disposes of any of its
significant assets or operations, then WJA would be entitled to receive an
amount equal to ten percent of Centers gain, if any, on the disposition.
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Two principals of WJA, Roger M. Wheeler, Jr. and Richard P. Donovan,
have entered into consulting arrangements with Centers. Mr. Wheeler has
entered into a ten-year consulting agreement with Centers, with annual
compensation of $100,000 during the first five years of the agreement and
annual compensation of $50,000 during the second five years of the agreement.
Mr. Donovan has entered into a five-year consulting agreement with Centers,
with annual compensation of $240,000, plus certain benefits.
CARDROOM DEVELOPMENT. Florida House Bill No. 337 (now known as section
849.086 of the Florida Statutes) became effective July 1, 1996. This
legislation authorized card rooms at licensed parimutuel facilities starting
January 1997. The card rooms will be administered and regulated by the DPMW.
Games will be limited to non-banked poker games. Card room operation is also
subject to approval by the county commission in which the pari-mutuel
facility is located. This same bill also authorized full-card simulcasting
of races from out of state tracks such as Belmont, Meadowlands, Philadelphia
Park and Monmouth. The Frontons in Fort Pierce, Tampa and Ocala are
currently carrying several of these race simulcast signals. This legislation
also temporarily reduced the pari-mutuel tax on handle from 5% to 4.25% at
the Tampa, Fort Pierce and Ocala Frontons for the period July 1, 1996 through
June 30, 1998. The pari-mutuel tax rate is temporarily reduced at Miami from
5% to 3.85% for the period July 1, 1996 through June 30, 1998.
In late 1996, the county governments of Dade County and Hillsborough
County, Florida, passed legislation permitting poker rooms to be operated by
all pari-mutuel facilities located in those counties. As a result, the
Company now plans to open poker rooms in Miami (with 60 tables initially) and
Tampa (with 40 tables initially) during the second quarter of 1997. License
applications have been filed, and the Company is in the initial phases of
construction and employee training. The Miami and Tampa facilities will
conduct low stakes ($10 per hand) poker at these facilities two hours prior
to, during and two hours following live jai-alai performances. A rake of
$.25 per hand per person will be the pari-mutuel's revenue from each hand
dealt. State taxes will be paid at 10% of the rake and 4% of the rake must
be paid as commission payable to the jai-alai players.
THE SPORT OF JAI-ALAI; FORM OF JAI-ALAI PLAYED AT THE FRONTONS
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.
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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 Frontons employ a combined round robin and elimination system of
play. Games are played among eight teams or individuals, 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 each of the Frontons, the
players' manager and judges appointed by each of the Frontons. 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 FRONTONS
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 each of the Frontons 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. 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").
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Wagers are placed by purchasing tickets in the Fronton at wagering areas
equipped with ticket issuing machines. The Fronton 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
Pursuant to the permit granted to it under Florida law, each Fronton, in
order to conduct ITW, must offer a "full schedule" of jai-alai performances
of at least 100 live evening and/or matinee performances per year. In
addition, the Fronton may offer ITW year-round so long as a pari-mutuel
facility in Florida is providing live pari-mutuel activities at the same
time. Each Fronton has received a permit from the DPMW to conduct live
jai-alai performances during 1997 and has applied for permits to conduct live
jai-alai performances during 1998. The Miami and Tampa Frontons conduct live
jai-alai year round. Fort Pierce and Ocala operate four-month seasons. All
of the Frontons, with the exception of Miami, typically remain open for ITW
when live jai-alai performances are not being conducted.
In 1980, WJA and three other parimutuel permit holders formed Summer
Jai-Alai ("SJA"), a Florida general partnership, to conduct parimutuel
jai-alai operations at the Miami Fronton during the summer months ("Summer
Operations"). Following the acquisition of the WJA Frontons, the Company is
currently a party to the partnership. Under the terms of the partnership
agreement, certain of the Company's costs and expenses will be allocated to
Summer Operations based upon specific formulas set forth in the agreement.
In addition, pursuant to a lease agreement which expires in 2004, SJA rents
the Miami Fronton for the time in which the summer jai-alai season is
conducted. The rental is based upon 1% of handle, plus applicable Florida
sales tax. The Company has a 21% interest in SJA which is accounted for
under the equity method.
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.
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. The Company competes with
other entertainment providers for its customers. With the
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exception of the one seasonal fronton operated in Dania (described further
below), the Company does not consider itself to be in direct competition with
any other fronton facility. Florida's pari-mutuel legislation does not permit
the construct of any jai-alai facility within a geographic radius of 50 miles
or to any other jai-alai facility.
There are currently 41 permits issued by the State of Florida to operate
pari-mutuel facilities in the state; 33 of those permits are now active. Of
the 33 active permit holders, only ten are held by jai-alai operators; others
engage in horse racing, harness racing and dog racing. Aside from the
Company's Frontons, the only other operating jai-alai frontons are in Dania
and Orlando.
The Miami area offers a wide range of pari-mutuel and other
entertainment activities that compete with the Company for spectators'
leisure-time and wagering patronage. Within a 35-mile radius of the
Company's Miami Fronton, there is another jai-alai fronton whose season
competes with the Miami Fronton, three horse racing tracks that operate
during part of the Miami Fronton's season (although not at the same time and
not at night), and three dog racing tracks, one of which operates during
substantial portions of the Miami Fronton's season. The Summer jai-alai
operation competes directly with two dog racing tracks (owned and operated by
two of the Company's partners in the summer jai-alai operation) and another
jai-alai fronton which operates during the summer season. In addition to
these pari-mutuel activities, the Company's Miami Fronton competes with
numerous other sporting and entertainment activities, including professional
sports teams, especially numerous Miami Beach night clubs, Indian Gaming
facilities, cruise and cruise/gaming ships, and gaming activities in the
Bahamas, which are readily accessible from the Miami area. The primary
market for the Miami Fronton includes approximately 3.5 million adults within
50 miles of the fronton.
The Tampa Fronton competes with dog racing (there are three tracks
located within a 55-mile radius that operate during the Tampa Fronton's
season, but only one at a time) and with a horse racing track situated
approximately 20 miles northwest of the Tampa Fronton which operates for 74
days (but no evenings) during the winter season. The Tampa Fronton also
competes with other alternative entertainment activities similar to those in
Miami. The primary market for the Tampa Fronton includes approximately 1.75
million adults within 50 miles of the fronton.
The pari-mutuel operation closest to the Ocala Fronton is 75 miles away.
The Ocala Fronton does, however, compete with the Ocala Breeders Sales
Company, which offers ITW wagering. There are not substantial competing
evening entertainment activities in Ocala. The primary market for the Ocala
Fronton includes approximately 350,000 adults within 30 miles of the facility.
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The primary market area for the Fort Pierce Fronton includes
approximately 500,000 adults within 35 miles of the facility. The major
population centers in the vicinity of this fronton include Fort Pierce, Port
St. Lucie, and Vero Beach, Florida. The Company does not, however, consider
itself to be in direct competition with any other fronton or other
pari-mutuel facility permitted to operate in Florida in its market area at
this time. The closest pari-mutuel facilities 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. The Fort Pierce
Fronton competes to a certain extent with the St. Lucie Civic Center which
features sporting events and entertainment activities.
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 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 Ft. Pierce Fronton. If the Joint Venture is formed before
passage of an amendment to the Florida Constitution to permit casino gaming
at the Ft. Pierce Fronton, the Company will contribute its interest in the
Ft. Pierce 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 Ft. Pierce 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 Ft. Pierce jai-alai fronton, inter-track wagering and all
other non-casino related
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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 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. Although no definitive
Joint Venture agreement has yet been executed and the parties are not
actively negotiating, neither party has formally terminated discussions.
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.
EMPLOYEES
The Company had 120 jai-alai players under contract as of March 20, 1997.
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
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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 20, 1997, in addition to jai-alai players, the Company
employed approximately 40 part-time employees and 742 full-time employees,
none of which are unionized. 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.
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 Frontons
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
Frontons 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. 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 inception in the
State of Florida in August 1990. The ITW handle for the State of Florida's
fiscal year ended June 30, 1991 was approximately $109 million. The ITW
handle for the State of Florida's fiscal years ended June 30, 1995 and 1996
increased to approximately $443 million and $480 million, respectively. ITW
handle reported at the Company's Frontons (including operations at
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the Miami, Tampa and Ocala facilities before acquisition by the Company) have
demonstrated similar growth in recent years, increasing from $46.8 million in
the year ended December 31, 1995 to $50.3 million for the year ended
December 31, 1996.
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 offered.
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.
Each of the Frontons, 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.
Each of the Frontons 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, each of the Frontons is authorized to receive admissions and
program revenue when conducting ITW.
INDIAN GAMING
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 at that time operated the River
Oaks Casino, located approximately 40 miles north of San Diego, California.
Although the Rincon Band continues to own the River Oaks Casino, all gaming
operations have been suspended. The Rincon Band, which operated bingo and
other activities classified as Class II gaming, is seeking to operate
electronic gaming machines, a Class III gaming
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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
if and 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. Subject to applicable law
governing Indian gaming activities, 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. As of March 15,
1996, the Company had made short term working capital advances of $344,000 to
the Rincon Band, which will become repayable under the terms of the Loan
Agreement if and when the Loan Agreement takes effect; the Company has made
no subsequent working capital advances to the Rincon Band. The Loan
Agreement can be terminated by the Company since it did 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.
On October 5, 1995, the Rincon Band filed a motion to modify the
injunction. This motion was denied. Due to adverse decisions in other
courts in related cases in California, the opinion of the U.S. Supreme Court
related to the Seminole tribe and continuing delays in the opening of the
River Oaks Casino with gaming machines, the Company and the Rincon Band have
requested arbitration relative to the Loan Agreement and each party's rights
thereunder. The Company cannot predict the outcome of these discussions, and
there can be no assurance that the injunction against the Rincon Band will be
lifted or that the Loan Agreement will take effect.
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GOVERNMENT REGULATION
GENERAL.
The Company is actively exploring opportunities in the pari-mutuel and
gaming industry. Gaming ventures are regulated by federal and state laws and
regulations applicable to the gaming industry generally and to the
distribution of gaming equipment. 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.
The Company will need to secure regulatory approvals from state and
local authorities for each of its prospective gaming ventures from time to
time. 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, if any, for
gaming ventures will require expenditures for land acquisition and
construction costs before regulatory approvals are obtained, it is
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. In 1996, the
legislature enacted statutes permitting interstate simulcasts and temporarily
reduced the tax on jai-alai performances as discussed below. The new
pari-mutuel statute, as amended, is referred to herein as the "Pari-Mutuel
Law."
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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, 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.
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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 at each of its Frontons.
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 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
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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 Ft. Pierce Fronton for each
jai-alai game conducted at the Ft. Pierce 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 Frontons, the fee would return to $80 per jai-alai game; no such
amendment has been passed. 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 Ft. Pierce 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. Effective July 1,
1996, for the two-year period ending June 30, 1998, the pari-mutuel
tax rate is reduced from 5% to 4.25% at the Tampa, Ft. Pierce, and
Ocala Frontons and from 5% to 3.85% at the Miami Fronton. However,
the Pari-Mutuel Law also provides that, should casino gaming be
conducted at a jai-alai 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
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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 Frontons 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 Frontons, the
fee would return to $80 per jai-alai game; no such amendment has been
passed.
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.
CERTAIN CONSIDERATIONS
CERTAIN STATEMENTS AND INFORMATION IN THIS ITEM 1 AND ELSEWHERE IN THIS
FORM 10-KSB CONSTITUTE FORWARD-LOOKING STATEMENTS AS THAT TERM IS DEFINED IN
THE SECURITIES ACT. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS OR
PERFORMANCE OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS
OR PERFORMANCE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
SUCH RISKS AND FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED BELOW
AND ELSEWHERE IN THIS FORM 10-KSB. THE FOLLOWING FACTORS SHOULD BE
CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS.
GAMING COMPETITION. The gaming industry is highly competitive. Other
gaming companies have substantially greater
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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 video poker gaming in non-casino
facilities, charitable gaming, pari-mutuel wagering and state lotteries.
Further expansion of gaming opportunities 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 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.
POTENTIAL DILUTION AND MARKET IMPACT FROM OUTSTANDING CAPITAL STOCK AND
OPTIONS. As of March 20, 1997, the Company had 4,588,524 shares of Common
Stock issued and outstanding. In addition, as of that date, 2,533,250 shares
of Common Stock were issuable upon the exercise of outstanding options, 7,748
shares of Common Stock were issuable upon the conversion of outstanding
shares of Class A preferred stock, and additional shares of Common Stock were
issuable upon the conversion of outstanding shares of preferred stock at a
conversion price based on the market price of the Common Stock at conversion.
The voting power of each holder of Common Stock would be diluted by the
issuance of additional shares of Common Stock. Moreover, the prevailing
market price for the Common Stock may be materially and adversely affected by
the addition of a substantial number of shares of Common Stock into the
market or by the registration under the Securities Act for the sale of the
shares offered thereby.
Of the approximately 4,588,524 shares of Common Stock issued and
outstanding as of March 20, 1997, persons who may be deemed "affiliates" (as
that term is defined under the Securities Act) of the Company or who acquired
the shares in a transaction exempt from registration under the Securities Act
hold approximately 2,548,896 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.
For additional information with respect to the Restricted Shares, see "Item
5. Market for Common Equity and Related Stockholder Matters."
POTENTIALLY VOLATILE STOCK PRICE. The price of the Common Stock on the
NASDAQ SmallCap Market in the past years has shown significant volatility.
During 1994 the price of the Common Stock ranged between $2.00 and $17.25;
during 1995 the price of the Common Stock ranged between $2.50 and $17.25;
and during 1996 the price of the Common Stock ranged between $2.50 and
$10.00. Factors such as the Company's operating results or other
announcements by
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the Company or its competitors may have a significant impact on the market
price of the Company's securities. The price of the Common Stock may be
highly volatile and may decline at an equal or greater rate than the rate at
which it has risen over the last three years.
UNCERTAINTIES IN INTEGRATING OPERATIONS AND ACHIEVING COST SAVINGS. The
Company recently purchased the WJA Frontons. The success of any business
combination, including the acquisition of the WJA Frontons, is in part
dependent on the ability following such transactions to consolidate
operations, integrate departments, systems and procedures and thereby obtain
business efficiencies, economies of scale and related cost savings. The
consolidation of operations, the integration of departments, systems and
procedures and the relocation of staff present significant management
challenges. There can be no assurance that future consolidated results will
improve as a result of the acquisition of the WJA Frontons, or as to the
timing or extent to which cost savings and efficiencies will be achieved.
RISKS ASSOCIATED WITH ACQUISITIONS. There may be liabilities which the
Company fails or is unable to discover in the course of performing due
diligence investigations on any company or business it seeks to acquire or
has acquired, including liabilities arising from non-compliance with certain
federal, state or local laws by prior owners, and for which the Company, as a
successor owner, may be responsible. The Company has sought to minimize its
exposure to such liabilities by obtaining indemnification from former owners,
which may be supported by deferring payment of a portion of the purchase
price. However, there is no assurance that such indemnifications, even if
obtainable, enforceable and collectible (as to which there also is no
assurance), will be sufficient in amount, scope or duration to fully offset
the possible liabilities arising from the acquisitions. The success of the
Company's aggressive development plans in the gaming industry is dependent on
a number of factors including, but not limited to, economic conditions,
competitive environment, adequate capital, accurate site selection,
construction schedules, and supply of trained personnel. There can be no
assurance that the Company will be successful in the fronton and gaming
industry or in any related industries which it enters.
COST OF PLANNED EXPANSION; MANAGEMENT OF GROWTH. Since the change in
management of the Company in March 1993, the Company has expanded its
operations rapidly, and it plans to continue to further expand its operations
through participation in other gaming ventures as opportunities arise. The
Company's operating results will be adversely affected if net revenues do not
increase sufficiently to compensate for the increase in operating expenses
caused by such an expansion. In addition, the Company's planned expansion of
operations may exceed the Company's present management, technical, financial
and other resources. To manage its growth effectively, the Company must
continue to increase its
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management information systems and must attract, train and motivate qualified
managers and employees. There can be no assurance, however, that the Company
will successfully be able to achieve these goals. If the Company is unable
to manage growth effectively, its operating results may be adversely affected.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent,
in part, on its key management personnel. In particular, the Company is
highly dependent upon W. Bennett Collett, W. Bennett Collett, Jr., and
Timothy L. Hensley. The loss of their services could have a material adverse
effect on the Company. There is no assurance that the Company will be able
to hire qualified individuals to replace any of these persons if necessary.
The Company does not have any employment contracts with these executives, nor
does the Company have any key man life insurance policies on their lives.
CONTROL OF THE COMPANY. As of March 25, 1997, W. Bennett Collett,
Chairman and chief executive officer of the Company, beneficially owned an
aggregate of 3,004,480 shares of the Company's Common Stock (including shares
beneficially owned by Freedom, with respect to which Mr. Collett disclaims
beneficial ownership), or an aggregate of approximately 49.33% of the issued
and outstanding shares of the Company's Common Stock. Mr. Collett is and
will be able to exert considerable influence over the election of the
Company's directors and the outcome of corporate actions requiring
stockholder approval.
POSSIBLE DEPRESSING EFFECT OF FUTURE SALES OF THE COMPANY'S COMMON
STOCK. Future sales of the Common Stock, or the perception that such sales
could occur, could adversely affect the market price of the Company's Common
Stock. There can be no assurance as to when, and how many of, the shares
will be sold and the effect such sales may have on the market price of the
Company's Common Stock. Such securities may be subject to resale restrictions
in accordance with the Securities Act and the regulations promulgated
thereunder. As such restrictions lapse or if such shares are registered for
sale to the public, such securities may be sold to the public. In the event
of the issuance and subsequent resale of a substantial number of shares of
the Company's Common Stock, or a perception that such sales could occur,
there could be a material adverse effect on the prevailing market price of
the Company's Common Stock.
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ABSENCE OF DIVIDENDS ON COMMON STOCK. The Company has not paid any
dividends on its Common Stock in the past and does not anticipate paying
dividends on its Common Stock in the foreseeable future. In the event 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.
ANTITAKEOVER EFFECTS OF CERTAIN INSTRUMENTS, AGREEMENTS OF THE COMPANY,
AND LAWS. The Company's certificate of incorporation and bylaws, certain
contracts to which the Company is a party, the Delaware General Corporation
Law and Florida gaming laws contain provisions that could delay or prevent a
transaction that results in a change of control of the Company or discourage
a tender offer or other plan to restructure the Company favored by a
significant portion of the Company's stockholders. For example, the Florida
laws require that before any person or entity acquires a 5% or greater equity
interest in the Company, such person or entity must receive the approval of
the DPMW.
POTENTIAL CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS. Certain
relationships among the Company, its management and affiliates create various
potential and actual conflicts of interest. As of March 25, 1997, pursuant
to a $2 million line of credit, Freedom had borrowed approximately $1.8
million from the Corporation. It is the Company's policy that all 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. All future material affiliated transactions and
loans must be approved by a majority of the independent directors who do not
have an interest in the transactions.
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 agreement, or at all. The Company plans to
reduce the financial significance of individual projects by focusing on
small- to medium-sized projects that can be accomplished with a smaller
capital investment and will allow a significant portion of any financing of
any subsequent expansions to be paid from operating funds whenever possible.
In addition, the Company intends to develop projects as joint ventures when
possible, to reduce its financial commitment to individual projects. There
can be no assurance that the significant
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expenditures required to develop a gaming project will ultimately result in
the establishment of profitable operations.
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. If the Company does not
successfully address the Company's increased management needs or the Company
otherwise is unable to manage its growth effectively, the Company's operating
results could be materially adversely affected.
GOVERNMENTAL REGULATION. The Company will need to secure regulatory
approvals from state and local 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.
In addition to a variety of generally applicable state and federal laws
governing business operations, the Company's gaming ventures are regulated by
federal and state laws and regulations applicable to the gaming industry
generally and to the distribution of gaming equipment. 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
gaming ventures.
CONSTRUCTION RISKS. The Company anticipates that its prospective gaming
ventures may often include the construction of additional facilities. The
Company's cost estimates and projected completion dates for construction of
facilities may change significantly as the projects progress. In addition,
the Company's development projects will entail significant construction
risks, including shortages of materials or skilled labor, unforeseen
environmental or engineering problems, work stoppages, weather interferences
and unanticipated cost increases, any of which could have a material adverse
effect on the projects and could delay their scheduled openings.
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ITEM 2. DESCRIPTION OF PROPERTY.
Set forth below is a brief description of the Frontons:
Size of Number
Number Building of Gaming
Location of Acres Sq. Ft. Seats*
Fort Pierce 137.00 80,000 2,150
Miami 25.50 165,000 4,389
Tampa 34.21 114,000 3,500
Ocala 47.98 63,000 1,774
------ ------- ------
Totals 244.69 422,000 11,813*
*These figures do not include future gaming positions anticipated from
the addition of poker tables in connection with the establishment of
cardrooms.
The Company's Miami Fronton, adjacent to Miami International Airport,
was built in 1925 and remodeled most recently in 1982. In addition to its
jai-alai auditorium, the fronton has a restaurant overlooking the court, a
banquet room, one large television lounge and four smaller television
lounges. Parking facilities at the Miami Fronton (including on-street
parking) accommodate approximately 4,000 cars.
The Company's Tampa Fronton was built in 1953 and remodeled most
recently in 1985. In addition to its jai-alai auditorium, the Fronton has a
restaurant overlooking the court and parking for approximately 3,300 cars.
The Company's Ocala Fronton, completed in 1973, is situated on a
36-acre site midway between Ocala and Gainesville in north-central Florida.
It has seating for 1,774 people, a total capacity for spectators of
approximately 3,800, and parking for approximately 1,100 cars.
Fort Pierce is a coastal community in St. Lucie County, about 110 miles
north of Miami. The Fort Pierce Fronton, completed in 1974, is located
approximately one-mile from a Florida Turnpike exit. The Turnpike is the
primary route between South Florida and Orlando, approximately two miles from
an exit on Interstate 95, the north-south highway that travels the entire
Atlantic coast, and approximately five miles from U.S. 1, another significant
north-south artery in the state. The Fort Pierce Fronton, sits on a 35-acre
site and has parking for approximately 2,000 cars.
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In addition to the facilities and restaurants described, all of the
Frontons have mutuel windows, liquor bars and food stands.
Substantially all of the Company's real estate associated with the
Frontons (excluding the 79 acres contiguous to the Ft. Pierce Fronton
discussed below) provides collateral for the $6,000,000 promissory note
issued September 12, 1996 in connection with the Company's acquisition of the
WJA Frontons. See "Item 1. Description of Business--Acquisition of
Frontons/Development of Cardrooms" and Note I to the Company's accompanying
financial statements.
In January 1995 the Company acquired three parcels of land of
encompassing approximately 79 acres contiguous to the Fort Pierce Fronton.
For a description of long-term debt secured by this property, see Note I to
the Company's accompanying financial statements. This acquisition gave the
Company approximately 134 acres with increased exposure to major
thoroughfares and improved access to I-95. The Company's uses for the
additional property are still being planned. The Company also owns
approximately 11 acres adjacent to the Ocala Fronton and a total of 18 acres
in parcels near the Miami Fronton; some of these holdings are available as
extra parking space.
After the enactment of Florida Statutes section 849.086, the Company has
begun converting the television lounge and standing areas at the Miami and
Tampa Frontons into low-stakes cardrooms. The Company expects both cardrooms
to be open by April 1997. The 12,000 square foot cardroom in Miami is
expected to open with 60 tables; the 10,000 square foot cardroom in Tampa is
expected to open with 40 tables, and each will have the capacity to hold
almost twice as many tables.
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 alleged that in August 1993
the Company entered into a contract with American Jai-Alai that American
Jai-Alai would manage the Ft. Pierce Fronton if the Company acquired it.
American Jai-Alai alleged 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,
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
alleged that it had a first right of refusal if the Company desired to sell
the Ft. Pierce Fronton at anytime during the alleged management contract.
American Jai-Alai also alleged that the Company granted it an option to
purchase 100,000 shares of Common Stock at $2.50 throughout the alleged
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management contract, but not to exceed 1997. In addition, American Jai-Alai
alleged 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 alleged, 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 did not issue 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. On March 21, 1997, American Jai-Alai and the Company settled the
litigation. The Company has agreed to issue American Jai-Alai 15,000 shares
of Common Stock and granted American Jai-Alai a 6-month option to acquire the
Company's Ocala Fronton for $2,000,000.
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. 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 filed a responsive pleading to the Amended Complaint.
The Company and General Reality have reached a tentative settlement in
mediation, but no settlement documents have yet been executed. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's 1996 Annual Meeting of Shareholders held on October 10,
1996, the following actions were taken:
The following Directors were elected for terms of office expiring in
1997:
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Votes for Votes Absten- Broker
Withheld tions* Non-
Votes*
W. Bennett Collett 2,921,377 4,703 N/A N/A
Robert L. Hurd 2,921,489 5,591 N/A N/A
W. Bennett Collett, Jr. 2,921,462 4,618 N/A N/A
Gary E. Bowman 2,921,401 4,679 N/A N/A
George W. Galloway, Jr. 2,920,834 5,246 N/A N/A
Roland M. Howell 2,921,411 4,669 N/A N/A
* Pursuant to the terms of the Proxy Statement, proxies received were
voted, unless authority was withheld, in favor of the election of the
six nominees named.
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, 1996 and December 31, 1995. 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, 1996 HIGH LOW
Quarter Ended December 31, 1996 $ 7 3/8 $5 1/8
Quarter Ended September 30, 1996 10 5 1/4
Quarter Ended June 30, 1996 9 3/4 2 1/2
Quarter Ended March 31, 1996 11 8
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 1/8 2
As of March 20, 1997, the Company had approximately 3,600 holders of
record of its Common Stock.
Of the 4,588,524 shares of Common Stock outstanding as of March 20,
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 2,548,896 shares ("Restricted Shares"), which may only be
sold in the public
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market if such shares are registered under the Securities Act or sold in
accordance with Rule 144 promulgated under the Securities Act. Of these
Restricted Shares, the resale of 703,297 shares of Common Stock are covered
by a registration statement filed under the Securities Act. Freedom, the
holder of 1,349,480 Restricted Shares, has demand registration rights for its
shares. Freedom has pledged a total of 1,075,000 Shares of Common Stock to
secure loans to Freedom, including the pledge of 1,000,000 shares to one bank
and the pledge of 75,000 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. In
addition, 2,537,563 Restricted Shares are available for sale in the public
market, subject to the volume and other limitations of Rule 144.
In general, under Rule 144 (as amended effective April 30, 1997), a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year, including a person who may be deemed
an affiliate of the Company, is entitled to sell within any three-month
period a number of shares of Common Stock that does not exceed the greater of
1% of the then-outstanding shares of Common Stock (approximately 45,885
shares) or the average weekly trading volume of the Common Stock on the
Nasdaq Stock Market during the four calendar weeks preceding such sale. Sale
under Rule 144 are subject to certain restrictions relating to manner of
sale, notice and the availability of current public information about the
Company. A person who has not been an affiliate of the Company at any time
during the 90 days preceding a sale and who has beneficially owned shares for
at least two years would be entitled to sell such shares without regard to
the volume limitations, manner of sale provisions and other requirements of
Rule 144.
The Company has issued currently exercisable stock options to current or
former directors and officers for a total of 1,103,250 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 20, 1997, 612.5 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
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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 $6.00 closing bid price for the Common Stock,
which was the closing bid price of the Common Stock on March 19, 1997, the
outstanding Series B Shares would be convertible into 137,633 shares of
Common Stock.
As of March 20, 1997, 550 shares of the Company's Series C Preferred
Stock ("Series C Shares") were issued and outstanding. Each Series C Share
can be converted into the number of shares of Common Stock equal to the sum
of the $1,000 purchase price per Series C 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 $6.00 closing bid
price for the Common Stock, which was the closing bid price of the Common
Stock on March 19, 1997, the outstanding Series C Shares would be convertible
into 75,005 shares of Common Stock.
On December 13, 1996, the Company issued 550 Series C Shares at a price
per share of $1,000. The Company did not engage an underwriter in connection
with the issuance of the Series C Shares. Orez Ltd. purchased 150 shares of
the Series C Shares and Selfridge Limited Partnership purchased 400 shares of
the Series C Shares. The Company issued the Series C Shares for cash
consideration. The Company is obligated to pay First Capital Partners, Inc.,
a finders fee in the amount of 8% of the gross proceeds, plus warrants to
purchase the Company's Common Stock having a market value equal to 5% of the
gross proceeds, with an exercise price equal to the market price per share of
Common Stock at the closing. The Series C Shares were issued in accordance
with the provisions of Regulation S under the Securities Act in an Offshore
Transaction to non-U.S. Persons, as such terms are defined in Regulation S.
As of March 20, 1997, 1,175 shares of the Company's Series D Preferred
Stock ("Series D Shares") were issued and outstanding. Each Series D Share
can be converted into the number of shares of Common Stock equal to the sum
of the $1,000 purchase price per Series D 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 $6.00 closing bid
price for the Common Stock, which was the closing bid price of the Common
Stock on March 19, 1997, the outstanding Series D Shares would be convertible
into 198,917 shares of Common Stock. The resales of shares of Common Stock
into
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which the Series D Shares are convertible are covered by a registration
statement filed under the Securities Act.
On January 16, 1997, the Company concluded a private placement of its
Series D Shares. The Company issued a total of 1,175 Series D Shares at a
price per share of $1,000, with 650 shares issued on December 31, 1996, and
525 shares issued on January 16, 1997. The Company did not engage an
underwriter in connection with the issuance of the Series D Shares. The
Series D Shares were issued to a total of 12 "accredited investors," as
defined in Rule 501 under the Securities Act. The Company issued the Series
D Shares for cash consideration. The Company is obligated to pay First
Capital Partners, Inc., a finders fee in the amount of 8% of the gross
proceeds, plus warrants to purchase the Company's Common Stock having a
market value equal to 5% of the gross proceeds, with an exercise price equal
to the market price per share of Common Stock at each of the closings. The
Series D Shares were issued in accordance with the provisions of Regulation D
under the Securities Act in a private placement solely to accredited
investors.
An additional 7,748 shares of Common Stock were issuable upon the
conversion of 34,435 shares of the Company's Class A Preferred Stock
outstanding as of March 20, 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 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
Florida Gaming Corporation (the "Company") currently owns and operates
four jai-alai fronton and inter-track pari-mutuel wagering
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facilities (the "Frontons") located in South and Central Florida. The
Company's business at this time consists primarily of its operations at the
Frontons, which include, among other things, live jai-alai, inter-track
pari-mutuel wagering ("ITW") on jai-alai, horse racing (both thoroughbred and
harness), and dog racing, and the sale of food and alcoholic beverages. The
Fort Pierce, Tampa and Ocala locations provide audio, video and wagering on
inter-track and interstate simulcasting of horse racing and dog racing from
various tracks in the United States and jai-alai from within the State of
Florida. The Miami location offers limited ITW simulcasts, but simulcasts
its jai-alai performances to other gaming facilities in the United States and
Mexico.
Since its inception and before the acquisition of the Fort Pierce,
Fronton in February, 1994, 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.
ACQUISITION OF FRONTONS/DEVELOPMENT OF CARDROOMS
ACQUISITION OF THE FT. PIERCE FRONTON. The Company acquired the Ft.
Pierce Fronton from WJA Realty Limited Partnership ("WJA") pursuant to an
agreement with WJA dated October 6, 1993. On February 1, 1994, the Company
received approval from the Florida Department of Business and Professional
Regulation, Division of Pari-Mutuel Wagering (the "DPMW") to transfer the
pari-mutuel permit for the Ft. Pierce Fronton from WJA to the Company and
also closed the purchase transaction with WJA on that date. Consideration
for the acquisition consisted of 200,000 shares of Company Common Stock,
$1,500,000 paid in cash at closing and a ten-year 8% mortgage for $1,000,000.
ACQUISITION OF THE MIAMI, TAMPA AND OCALA FRONTONS. On September 12,
1996, the Company acquired notes (the "WJA Notes") of WJA, with balances
aggregating about $20,000,000 from the Bank of Oklahoma, N.A., Tulsa,
Oklahoma. The WJA Notes were secured by real estate and improvements
consisting of three jai-alai and ITW facilities located in Miami, Tampa and
Ocala, Florida (the "WJA Frontons") and other collateral. Consideration for
the WJA Notes was a combination of $2,000,000 in cash, a $6,000,000
promissory note bearing interest at the prime rate, 703,297 shares of the
Company's Common Stock and a $1,000,000 non-interest bearing note.
On November 25, 1996, the Company entered into an agreement with WJA and
Florida Gaming Centers, Inc. ("Centers"), a wholly-owned subsidiary of the
Company, pursuant to which Centers agreed to acquire the WJA Frontons. The
acquisition was consummated as of January 1, 1997. The WJA Frontons acquired
have been combined with the Fort Pierce Fronton into Centers.
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The consideration for the acquisition included (i) the cancellation of
WJA Notes and related obligations acquired by the Company from the Bank of
Oklahoma, NA, (ii) the retention by WJA of 200,000 shares of the Company's
common stock owned by WJA, and (iii) a profit sharing arrangement described
in detail below. The Company assumed all liabilities of WJA arising in the
ordinary course of the business, subject to certain limitations and
exceptions. The Company also assumed the principal amount outstanding under
a $500,000 promissory note owed to Wheeler-Phoenix, Inc., with the terms
amended to provide for repayment of principal over a ten year period
following the closing in equal annual installments and an annual interest
rate of 6%.
The profit sharing arrangement is based on Centers' net profits, as
defined, before income taxes. The Company will pay WJA 20% of the cumulative
net profits of Centers for each of the ten full calendar years 1997 through
2006, subject to a cumulative $1,000,000 per year cap described below. The
cumulative $1,000,000 cap is equal to the product of $1,000,000 multiplied by
the completed number of years in the ten-year period, minus the sum of all
amounts previously paid under the 20% profit sharing arrangement. In
addition, if Centers has net profits in any calendar year during the ten-year
period in excess of $5,000,000, but has not paid WJA a 20% payment on the
entire amount because of the cumulative $1,000,000 per year cap, Centers will
pay WJA 5% of the portion of the net profits on which the 20% payment is not
made. No net profit payments will be due for any year after the ten year
period. If during the ten year period, Centers disposes of any of its
significant assets or operations, then WJA would be entitled to receive an
amount equal to ten percent of Centers gain, if any, on the disposition.
Two principals of WJA, Roger M. Wheeler, Jr. and Richard P. Donovan,
have entered into consulting arrangements with Centers. Mr. Wheeler has
entered into a ten-year consulting agreement with Centers, with annual
compensation of $100,000 during the first five years of the agreement and
annual compensation of $50,000 during the second five years of the agreement.
Mr. Donovan has entered into a five-year consulting agreement with Centers,
with annual compensation of $240,000, plus certain benefits.
In 1980, WJA and three other pari-mutuel permit holders formed Summer
Jai-Alai ("SJA"), a Florida general partnership, to conduct pari-mutuel
jai-alai operations at the Miami Fronton during the summer months ("Summer
Operations"). Following the acquisition of the WJA Frontons, the Company is
currently a party to the partnership. Under the terms of the partnership
agreement, certain of the Company's costs and expenses will be allocated to
Summer Operations based upon specific formulas set forth in the agreement.
In addition, pursuant to a lease agreement which expires in 2004, SJA rents
the Miami Fronton for the time in which the summer jai-alai season is
conducted. The rental is based upon 1% of handle,
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plus applicable Florida sales tax. The Company has a 21% interest in SJA
which is accounted for under the equity method.
CARDROOM DEVELOPMENT. Florida House Bill No. 337 (now known as section
849.086 of the Florida Statutes) became effective July 1, 1996. This
legislation authorized card rooms at licensed parimutuel facilities starting
January 1997. The card rooms will be administered and regulated by the DPMW.
Games will be limited to non-banked poker games. Card room operation is also
subject to approval by the county commission in which the pari-mutuel
facility is located. This same bill also authorized full-card simulcasting
of races from out of state tracks such as Belmont, Meadowlands, Philadelphia
Park and Monmouth. The Frontons in Fort Pierce, Tampa and Ocala are
currently carrying several of these race simulcast signals. This legislation
also temporarily reduced the pari-mutuel tax on handle from 5% to 4.25% at
the Tampa, Fort Pierce and Ocala Frontons for the period July 1, 1996 through
June 30, 1998. The pari-mutuel tax rate is temporarily reduced at Miami from
5% to 3.85% for the period July 1, 1996 through June 30, 1998.
In late 1996, the county governments of Dade County and Hillsborough
County, Florida, passed legislation permitting poker rooms to be operated by
all pari-mutuel facilities located in those counties. As a result, the
Company now plans to open poker rooms in Miami (with 60 tables initially) and
Tampa (with 40 tables initially) during the second quarter of 1997. License
applications have been filed, and the Company is in the initial phases of
construction and employee training. The Miami and Tampa facilities will
conduct low stakes ($10 per hand) poker at these facilities two hours prior
to, during and two hours following live jai-alai performances. A rake of
$.25 per hand per person will be the pari-mutuel's revenue from each hand
dealt. State taxes will be paid at 10% of the rake and 4% of the rake must
be paid as commission payable to the jai-alai players.
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
handle per jai-alai performance for the State of Florida fiscal years ended
June 30, 1996 and 1995 was approximately $79,004 and $87,512, respectively.
Total handle for the fiscal year ended June 30, 1996 decreased approximately
$10 million or 5%. 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.
ITW has grown significantly since its inception in the State of Florida
in August, 1990. The ITW handle for the State of
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Florida's fiscal year ended June 30, 1991 was approximately $109 million.
The ITW handle for the State of Florida's fiscal years ended June 30, 1995
and 1996 increased to approximately $443 million and $480 million,
respectively. ITW handle at the Company's Frontons (including operations at
the Miami, Tampa and Ocala facilities before acquisition by the Company) have
demonstrated similar growth in recent years, increasing from $46.8 million in
the year ended December 31, 1995 to approximately $50.3 million for the year
ended December 31, 1996.
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED WITH FISCAL YEAR 1995
During the twelve months ended December 31, 1996, and 1995, the
Company's operations reflect only the operation of the Ft. Pierce Fronton for
twelve months. The operations of the Miami, Tampa and Ocala Frontons acquired
as of the close of business on December 31, 1996, are not presented in this
analysis. The results of operations for 1996 includes four months of jai-alai
operation at Ft. Pierce (January thru April) and twelve months of inter-track
wagering. Jai-alai performances were conducted for five months including
January through April 30, 1995, and December, 1995. Actual jai-alai
performances totaled 118 and 147, respectively for the years ended 1996 and
1995. The Miami and Tampa Frontons offer live jai-alai year round, while
Ocala operates on a seasonal basis similar to Ft. Pierce. All four Frontons
conduct ITW year round.
The Company's pari-mutuel handle for the year ended December 31, 1996,
was $25,658,425, consisting of $3,665,582 in live jai-alai wagering and
$21,992,843 in inter-track wagering. These results compare to a total
pari-mutuel handle for the year ended December 31, 1995, of $25,349,747,
consisting of $4,972,351 in live jai-alai wagering and $20,377,396 in
inter-track wagering. The decrease in live jai-alai handle is attributable
to one less month of jai-alai performances during 1996 as compared to 1995
(29 fewer performances). The increase in pari-mutuel handle for ITW of
$1,615,447 (approximately 8%) follows a 18.14% increase from the prior year
and is indicative of the growth in the Company's ITW handle.
The Company's pari-mutuel revenues net of state pari-mutuel taxes for
the twelve months ended December 31, 1996, were $2,934,088. Of the
$2,934,088, $2,126,283 was attributable to commissions on inter-track
wagering and $807,805 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, 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 $78,948 increase in ITW commissions was
attributable to the growth in handle. The $283,264 decrease in 1996
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in net pari-mutuel revenue from live jai-alai is due primarily to one
additional month (December) of jai-alai operation in 1995.
Admissions income for the year ended December 31, 1996, was $134,464,
net of state taxes, compared to $151,438 for the year ended December 31,
1995. Program revenue for the year ended December 31, 1996, decreased $10,174
to $204,958, down from $215,132 for the year ended December 31, 1995. This
decrease along with the $16,974 decrease in admissions revenue is primarily
attributable to the one less month of jai-alai performances in 1996 compared
to 1995.
Food and beverage income decreased $81,928 (15%) to $450,104 for the
year ended December 31, 1996, compared to $532,032 for the year ended
December 31, 1995. Of the $81,928 decrease, approximately $25,000 was
attributable to the additional month of restaurant operation in 1995, and
approximately $57,000 in bar and concession revenue decreases were due to the
10% drop in attendance associated with one less month of jai-alai
performances being conducted during 1996. Other income for the year ended
December 31, 1996, also decreased to $48,920 compared to $49,020 for the year
ended December 31, 1995.
The Company's general and administrative expenses were $2,443,085 and
$1,762,062 for the twelve months ended December 31, 1996 and December 31,
1995, respectively. The $681,023 increase was in large part due to increased
expenditures in officer compensation, interest expense, and the
travel/business entertainment categories.
Officers compensation increased $466,406, the bulk of which ($390,000)
is attributable to the Company's Chairman and Chief Executive Officer, who
worked full time but drew no salary in 1995 and approximately $16,000 in
cardroom related salaries. Interest expense increased $160,280 to $327,486
for the twelve months ended December 31, 1996. This compares to $167,206 for
the year ended December 31, 1995. The increase in interest expense is largely
attributable to the new $6,000,000 debt to the Bank of Oklahoma issued when
the Company purchased the WJA loan from the bank (see Acquisition of
Frontons). Telephone and travel expenses increased $96,818 to $222,842 for
the year ended December 31, 1996, compared to $126,024 expensed in the year
ended December, 31, 1995. The increases in these categories are directly
related to the expansion efforts and the WJA acquisition described above and
in the notes to the financial statements.
Other components of the Company's general and administrative expenses
for the years ended December 31, 1996, and 1995 are described below.
Consulting expense increased $27,195 to $38,907 also due in large part to
business expansion efforts that occurred in 1996. Advertising and promotions
expense increased $39,338 to $250,569 for the twelve months ended December
31, 1996, compared to
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$211,231 for the twelve months ended December 31, 1995. This increase was
due to a general increase in the marketing budget. Property taxes for the
year ended December 31, 1996, were $72,079 compared to $77,076 for 1995.
Other expense decreased $76,878 to $538,101 for the year ended December 31,
1996, compared to expenditures of $614,979 for the year ended December 31,
1995. Major components of other expense for the year ended December 31, 1996
included $61,000 in attorneys fees associated with the terminated Ponca
project, $47,293 in shareholder relations costs, $40,334 in annual meeting
costs, $17,622 in transfer agent costs, and $24,623 in cost associated with
securities filings. Major components of other expense for the year ended
December 31, 1995 included a one time charge of $315,978 to write off
predevelopment expenses and advances associated with the Oklevueha Band of
Seminole-Yamazee Indians project which was terminated and approximately
$86,000 in pre-development expenses associated primarily with the Ponca
project and to a lesser degree the Apache project. Legal and professional
expenses decreased $29,139 to $289,045, compared to $318,184 for the twelve
months ended December 31, 1995. Included in these expenses were
approximately $107,000 and $99,000 in legal fees associated with the defense
of various lawsuits, as described in the notes to the financial statements,
for the years ended December 31, 1996 and 1995, respectively.
The Company's operating expenses for the year ended December 31, 1996,
decreased $74,182 to $2,994,349, from $3,068,531 for the year ended December
31, 1995. The components of these expenses and the net decrease are
described in the following items. Depreciation expense for the twelve month
period ended December 31, 1996 was $193,205, compared to $194,682 for the
twelve month period ended December 31, 1995. Players costs, which include
salaries, benefits, and support staff, represent a significant portion of
operational expenses. The year ending December 31, 1996, included four
months of live jai-alai and associated player costs totaling $665,401. The
year ending December 31, 1995, included five months of live jai-alai and
associated player costs totaling $725,395. The $59,994 decrease in player
costs for 1996 is attributable to the additional month of performances in
1995 and roster improvements made for the 1996 season. Rental and service
costs for totalizator wagering equipment and satellite receiving/television
equipment also represent a significant portion of operating expenses. These
expenses totaled $294,309 for the year ended December 31, 1996, compared to
$309,750 for the year ended December 31, 1995, representing a decrease of
$15,441. The $15,441 decrease was due to the additional month of live
jai-alai in 1995, contract improvements and equipment upgrades. Utilities
expense totaled $115,941 and $141,913, respectively, for the years ended
December 31, 1996 and 1995. The $25,972 decrease in utilities expense
indicates the effects of conservation, equipment improvements in electrical
and air conditioning systems, and a decrease in usage as the result of fewer
live jai-alai performances
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during 1996. Program costs totaled $131,389 and $135,988, respectively, for
the years ended December 31, 1996 and 1995.
Operating payrolls and related costs totaled $1,006,673 and $973,214,
respectively, for the years ended December 31, 1996 and 1995, excluding
player costs and payroll costs included in the bar, restaurant and
concessions areas. Of the $33,459 increase in payroll costs for 1996,
approximately $12,000 is attributable to additional staff for cardroom
preparation and planning. Food and beverage costs totaled $321,641 and
$358,819, respectively, for the years ended December 31, 1996 and 1995,
representing a decrease of $37,178. Of this decrease, approximately $25,000
is attributable to restaurant and concessions costs savings associated with
one less month of live jai-alai performances in 1996. Other operating
expenses, including security, janitorial expense, and operating leases,
increased $11,985 to $155,989 for the year ended December 31, 1996, from
$144,004 for the year ended December 31, 1995. Repairs and maintenance
expense increased $25,035 to $109,801 during 1996 compared to total expense
of $84,766 for the year ended December 31, 1995. This increase is
attributable to the continued upgrading of the Ft. Pierce Fronton related to
maintenance items that the previous owner of the facility had deferred.
The Company had net interest and dividend income of $1,179,386 and
$77,673 for the twelve months ended December 31, 1996 and 1995, respectively,
an increase of $1,101,713. Of the $1,101,713, approximately $1,101,000 was
attributable to interest income on the WJA Notes acquired from the Bank of
Oklahoma (See Notes C and K to the accompanying Financial Statements.)
For the twelve months ended December 31, 1996, the Company had a $414
gain on the sale of assets. For the twelve months ended December 31, 1995,
the Company had no gain or losses on the sale of assets. There were no gains
on sale of securities for the year ended December 31, 1996. 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.
The Company had a net loss of $519,100 ($0.15 per common share) for the
twelve months ended December 31, 1996. This loss compares to a net loss of
$470,955 ($0.15 per common share) for the twelve months ended December 31,
1995. The $48,145 decrease in net earnings occurred despite revenue and
handle growth in the ITW segment, the additional interest income on the WJA
Notes, and other positive factors listed above. A substantial amount of the
loss was caused by the factors discussed previously concerning other
expenses, legal, executive compensation and travel costs. Among these were
approximately $107,000 in legal fees associated with the defense of various
lawsuits, an interest expense increase of $160,280, to $327,486 for the
twelve months ended December 31,
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<PAGE>
1996, which is largely attributable to the $6,000,000 debt to the Bank of
Oklahoma the Company issued when it purchased the WJA Notes, a $34,000
reserve on the Rincon note, and $61,000 in attorneys fees associated with the
terminated Ponca project. Also telephone and travel expenses increased
$96,818 to $222,842. This increase is related to the expansion efforts and
business combination described above. The 1995 net loss also included
several large items. 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.
LIQUIDITY AND CAPITAL RESOURCES
The balance of the Company's cash and cash equivalents at December 31,
1996 was $907,527. At December 31, 1996, the Company had a decrease in
working capital of approximately $5,048,000 from December 31, 1995. The
decrease was primarily the result of the $2,000,00 in cash paid for the WJA
Notes to the Bank of Oklahoma and the assumption of approximately $3.58
million in liabilities as part of the acquisition of the World Jai-Alai
assets (see Note C to the Financial Statements - Acquisition of WJA Assets).
During the twelve months ended December 31, 1996, net cash used in the
Company's operating activities was $328,678. The Company's continuing
operating expenses consisted principally of office expenses, general and
administrative expenses, and costs associated with Fronton operations.
Principal revenues were from net pari-mutuel wagering commissions on live
jai-alai and ITW events. The Company expects that net cash flows from the
operation of current business activities will be adequate to meet operational
needs.
During the twelve months ended December 31, 1996, cash flow used by
investing activities was $19,567,413. This was the result of investing
$17,552,533 in property, plant and equipment, the bulk of which was
attributable to the purchase of the World Jai-Alai assets. During the fourth
quarter of 1995, the Company lent an affiliated company (Freedom Financial)
funds on a demand secured credit line. The balance of this credit, which
bears interest at the prime rate plus 2% (10.25%), was $1,796,860 as of
December 31, 1996. Funds advanced during 1996 under this agreement were
$1.45 million.
During the twelve months ended December 31, 1996, cash flow from
financing activities was $18,081,753. Cash flow from
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<PAGE>
financing activities consisted of $3.2 million in funds generated from the
sale of convertible preferred stock (See Note B to the Financial Statements),
$6.5 million in long-term debt issued in connection with the WJA Note
purchase and assets acquisition, $3.6 million in liabilities assumed in
connection with the World Jai-Alai assets acquisition, and approximately $4.7
million in common stock issued to the Bank of Oklahoma as part of the
consideration for the purchase of the WJA Notes (See Note C to the Financial
Statements). Subsequent to December 31, 1996, the Company raised $483,000 in
funds via the sale of additional Series D Preferred Stock.
On December 31, 1996, as described above and in the Company's Current
Report on Form 8-K dated December 31, 1996, as amended, the Company purchased
all the tangible and intangible properties of WJA. These assets consisted of
three pari-mutuel facilities having an aggregate of 342,000 sq. ft. of inside
gaming space located on an aggregate of 108 acres in downtown Miami, Tampa,
and suburban Ocala, Florida. The acquired WJA assets were combined with the
Ft. Pierce Fronton already owned by the Company into Centers.
The Company has terminated discussions relative to gaming ventures with
all Native American tribes except for the Rincon Luiseno Band of the Mission
Indians in San Diego County, California. Due to adverse judicial decisions
in other unrelated cases in California, the opinion issued by the U.S.
Supreme Court in the Seminole case, and continuing delays in the opening of
the Rincon Casino with gaming machines, both Florida Gaming and the Rincon
tribe have requested arbitration relative to the Company's Loan Agreement.
The purchase of the WJA Notes from the Bank of Oklahoma required
substantial capital. The current expansion of facilities to accommodate the
newly authorized card rooms at Miami, Tampa, and potentially Ft. Pierce,
will require additional capital. Cardroom license applications have been
filed for the Miami and Tampa locations with anticipated openings in April,
1997. On December 13, 1996, and December 31, 1996, the Company raised new
capital of $506,000 and $590,000, respectively, net of related offering
expenses, via Regulation S and Regulation D preferred stock offerings.
Subsequent to year end, on January 16, 1997, the Company raised $483,000 of
new capital (net of related expenses) in connection with the Regulation D
offering. Construction and improvements related to the initial opening of
cardrooms are estimated to be about $1,000,000. The Company has
approximately $1,337,703 in scheduled mortgage repayments due in 1997.
Included in these payments is $1,166,667 of scheduled payments due under the
$6,000,000 promissory note to the Bank of Oklahoma in connection with the
acquisition of the WJA Notes.
The Company is currently evaluating sources of funding including equity
and debt financing. These include mortgage debt
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<PAGE>
utilizing the values of the existing and recently acquired real estate (see
Note C to the Financial Statements - Acquisition of WJA Assets). Also
Freedom Financial (the Company's largest shareholder) is currently evaluating
sources of funding with the possibility of injecting funds into the Company
via the exercise of its options and/or repayment of credit line advances.
The Company believes that its current financial condition provides adequate
capital reserves and liquidity for present operations.
ITEM 7. FINANCIAL STATEMENTS.
LIST OF FINANCIAL STATEMENTS FILED. See accompanying Financial
Statements:
Balance Sheets as of December 31, 1996 and 1995.
Statements of Operations for the years ended December 31, 1996 and
1995.
Statement of Stockholders' Equity for the two years ended December 31,
1996.
Statements of Cash Flows for the years ended December 31, 1996 and
1995.
Notes to Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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 24, 1997:
DIRECTOR OR EXE-
CUTIVE OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
W. Bennett Collett 64 Chief Executive Officer 1993
and Chairman
Robert L. Hurd 57 President and Director 1993
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<PAGE>
W. Bennett Collett, 41 Executive Vice President, 1993
Jr. Secretary and Director
Timothy L. Hensley 41 Executive Vice President, 1993
Treasurer, Chief Financial
Officer and Director
Gary E. Bowman 45 Director 1994
George W.
Galloway, Jr. 63 Director 1994
Roland M. Howell 81 Director 1995
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 Interstate
Capital Corporation, a wholly owned subsidiary developing a residential real
estate development in Loganville, Georgia. 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 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. Mr. Collett is
responsible for supervision of the Company's pari-mutuel activities (live
jai-alai and ITW). 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.
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<PAGE>
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. Mr. Hensley was appointed to the Company's Board of Directors on
February 27, 1997.
GARY E. BOWMAN has served since July 15, 1996, as Vice President of
Operations and Finance of Park Development Company, Murfreesboro, Tennessee,
a residential and commercial real estate development company. From February
2, 1996 until July 11, 1996, Mr. Bowman 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. has been a self-employed physician since 1958
and most recently has served as the medical director of the emergency room at
Kennestone Hospital in Marietta, Georgia.
ROLAND M. 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.
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, 1996, 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
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<PAGE>
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 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, 1996, 1995, and 1994 to W. Bennett
Collett, the Company's chief executive officer on December 31, 1996. 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. The Company had no other executive officer
as to whom the total cash and cash-equivalent remuneration from the Company
exceeded $100,000 during fiscal 1996.
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<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM
COMPENS. COMPENS.
NAME AND PRINCIPAL FISCAL OPTIONS. ALL OTHER
POSITION YEAR SALARY SARS (#) COMPENSATION
W. Bennett Collett 1996 $390,000 - 0 - $ - 0 -
Chairman of the Board 1995 - 0 - 300,000 - 0 -
and Chief Executive 1994 - 0 - 25,000 - 0 -
Officer 1996
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT FISCAL YEAR
END (#) (1)
NAME SHARES ACQUIRED VALUE EXERCISABLE/
ON EXERCISE (#) REALIZED ($) UNEXERCISABLE
W. Bennett - 0 - - 0 - 325,000/-0-
Collett
- ---------------
(1) Based on a per share closing price of $5.3125 at December 31, 1996,
none of these options were in-the-money.
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., Timothy L. Hensley, 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.
On February 26, 1997, the Company adopted an additional Directors' Stock
Option Plan that provides that every director will be granted an option to
purchase 10,000 share of Common Stock for each full or partial year that such
director served as such before January 1, 1997 and for each full year as a
director after December 31, 1996.
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
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<PAGE>
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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 25, 1997
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, 1,000,000 shares have been pledged by Freedom to a bank to secure
a $2,000,000 line of credit and 75,000 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 . . . . . . . . . . 3,169,480(5) 49.5% 1,000,372(6) 85.7% 397(7) 79.4%
Robert L. Hurd . . . . . . . . . 66,000(8) 1.4% 108,639 9.3% --- ---
W. B. Collett, Jr. . . . . . . . 215,000(9) 4.5% 40,000(10) 3.3% 88 17.6%
Timothy L. Hensley . . . . . . . 50,000(11) 1.1% 40,000(10) 3.3% 5 1.0%
Roland M. Howell . . . . . . . . 356,000(12) 7.7% --- --- --- ---
Gary E. Bowman . . . . . . . . . 55,500(13) 1.2% --- --- --- ---
George W. Galloway, Jr. . . . . . 55,000(13) 1.2% --- --- --- ---
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<PAGE>
All current directors and officers
as a group (7 persons). 3,966,980(14) 57.6% 1,189,011(15) 95.3% 490(7) 98%
5% BENEFICIAL OWNERS
Freedom Financial
Corporation(16). . . . . . . . . 2,679,480(17) 45.3% N/A N/A N/A N/A
Roland M. and Dorothy V.
Howell . . . . . . . . . . . . 356,000(12) 7.7% N/A N/A N/A N/A
Plaza Venetia; Suite 22A-B
555 N.E. 15th Street
Miami, Florida 33132
Casino America, Inc. . . . . . . 315,746(18) 6.9% N/A N/A N/A N/A
711 Washington Loop
Biloxi, Mississippi 39530
Bank of Oklahoma, N.A. . . . . . 703,297 15.3% N/A N/A N/A N/A
B0K DPC Asset Holding Corp.
P.O. Box 2300
Tulsa, Oklahoma
</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 4,588,524 shares outstanding as of March 25, 1997. 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 1,167,943 shares outstanding as of March 25, 1997. 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, 1997.
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<PAGE>
(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 490,000 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.
(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 65,000 shares that Mr. Hurd may
purchase pursuant to options.
(9) Includes 215,000 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 50,000 shares that may be purchased pursuant to options.
(12) Of the 356,000 shares, Mr. and Mrs. Howell own 156,000 shares as joint
tenants and share voting and investment power, Mr. Howell owns 55,000
shares individually (including options for 45,000 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 55,000 shares that may be purchased pursuant to options.
(14) Includes 2,305,000 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.
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<PAGE>
(17) Includes 1,330,000 shares which Freedom currently has the right to
acquire. See also Note 16.
(18) 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.
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.
The Company and Freedom have entered into a Credit Line Agreement dated
October 1, 1996, whereby the Company will lend Freedom up to $2,000,000 at an
annual interest rate of 2% above the prime rate, partially 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. This line of credit supersedes a $1,000,000 line of credit
established on December 1, 1995. The maximum debt outstanding under the
Credit Line Agreement during 1996 was approximately $1,796,860 in principal,
with $119,348 in accrued interest, and the debt outstanding at February 28,
1997 was approximately $1,906,859 in principal, with $150,554 in accrued
interest. 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.
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."
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<PAGE>
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 Certificate of Designations for Series B Preferred Stock is hereby
incorporated by reference to Exhibit 3.3 of Form S-3 Registration
Statement No. 33-99380.
3.3. Certificate of Amendment to Certificates of Designations of
Series B Preferred Stock and Series 9% AA Preferred Stock is
incorporated by reference to Exhibit 3.3 of Form S-3 Registration
Statement 333-10535.
3.4 Bylaws are hereby incorporated by reference to Exhibit 3.2 of
Form SB-2 Registration Statement No. 33-79882.
4.1 Restated Certificate of Incorporation is hereby incorporated by
reference to Exhibit 3.1 of Form SB-2 Registration Statement No.
33-79882.
4.2 Certificate of Amendment to Certificates of Designations of Series C
8% Cumulative Convertible Preferred Stock is hereby incorporated by
reference to Exhibits 3.1 and 4.1 Current Report on Form 8-K dated
December 13, 1996.
4.3 Form of Regulation S Subscription Agreement is hereby incorporated
by reference to Exhibit 4.2 Current Report on Form 8-K dated
December 13, 1996.
4.4 Certificate of Amendment to Certificates of Designations of Series D
8% Cumulative and Convertible Preferred Stock is hereby incorporated
by reference to Exhibits 3.1 and 4.1 Current Report on Form 8-K dated
January 16, 1997.
4.5 Form of Regulation D Subscription Agreement is hereby incorporated by
reference to Exhibit 4.2 Current Report on Form 8-K dated January 16,
1997.
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.
- 49 -
<PAGE>
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 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].
10.11 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 Assets Purchase Agreement dated as of November 20, 1996 between
the Registrant, Florida Gaming Centers, Inc., and WJA Realty
Limited Partnership (World Jai-Alai), as incorporated by
reference to Exhibit 10.1 of the Registrant's Current Report on
Form 8-K dated November 25, 1996.
- 50 -
<PAGE>
10.16 Totalisator Services Agreement dated November 11, 1993 between
Autotote Systems, Inc. and WJA Realty Limited Partnership, D.B.A.
Miami Jai Alai. Incorporated by reference to Exhibit 10.1 to the
Form 8-K Current Report of the Registrant dated December 31,
1996, as amended.
10.17 Consulting and Noncompetition Agreement dated December 31, 1996
by and among Florida Gaming Centers, Inc. and Richard P. Donovan.
Incorporated by reference to Exhibit 10.2 to the Form 8-K Current
Report of the Registrant dated December 31, 1996, as amended.
10.18 Consulting and Noncompetition Agreement dated December 31, 1996
by and among Florida Gaming Centers, and Roger M. Wheeler, Jr.
Incorporated by reference to Exhibit 10.3 to the Form 8-K Current
Report of the Registrant dated December 31, 1996, as amended.
10.19 Credit Line Agreement dated October 1, 1996 from Freedom
Financial Corporation to Florida Gaming Corporation.
10.20 Mortgage dated December 31, 1996 by Florida Gaming Corporation
and Florida Gaming Centers, Inc. to Bank of Oklahoma, N.A.
Incorporated by reference to Exhibit 10.5 to the Form 8-K Current
Report of the Registrant dated December 31, 1996, as amended.
10.21 Promissory Note dated September 12, 1996 from Florida Gaming
Corporation to Bank of Oklahoma, N.A. Incorporated by reference
to Exhibit 10.6 to the Form 8-K Current Report of the Registrant
dated December 31, 1996, as amended.
10.22 Promissory Note dated October 1, 1990 from WJA Realty Limited
Partnership to Wheeler-Phoenix, Inc. Incorporated by reference
to Exhibit 10.7 to the Form 8-K Current Report of the Registrant
dated December 31, 1996, as amended.
10.23 Deed to Secure Debt by Indenture dated March 19, 1997 between
Freedom Financial Corporation and Florida Gaming Corporation.
23.1 Consent of King & Company, PSC.
- 51 -
<PAGE>
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K.
During the quarter ended December 31, 1996, the Company filed the
following Current Reports on Form 8-K: (i) Form 8-K dated October 9, 1996,
Item 5. Other Events (reporting an agreement in principle to acquire the
properties and assets of WJA Realty Limited Partnership ("WJA")); (ii) Form
8-K dated November 25, 1996, Item 5. Other Events (reporting execution of an
assets purchase agreement to acquire the properties and assets of WJA);
(iii) Form 8-K dated December 13, 1996, Item 9. Sale of Equity Securities
Pursuant to Regulation S (reporting issuance of 550 shares of Series C 8%
Cumulative Convertible Preferred Stock); and (iv) Form 8-K dated December 31,
1996, as amended, Item 2. Acquisition or Disposition of Assets (reporting
the acquisition of three jai-alai and ITW facilities). Except for the
Current Report on Form 8-K dated December 31, 1996, as amended, no financial
statements were filed as part of these reports. The following financial
statements were filed in the Current Report on Form 8-K dated December 31,
1996, as amended:
(a) The following financial statements of the Registrant:
Report of Independent Auditors.
Balance Sheets as of December 31, 1996 and 1995.
Statements of Operations for the years ended December 31, 1996 and
1995.
Statements of Stockholders' Equity for the two years ended
December 31, 1996.
Statements of Cash Flows for the years ended December 31, 1996 and
1995.
Notes to Financial Statements.
(b) The following financial statements of WJA Realty Limited
Partnership:
Report of Independent Auditors.
WJA Realty Limited Partnership
Balance Sheet as of December 31, 1996 and 1995.
WJA Realty Limited Partnership
Statements of Operations for the years ended
December 31, 1996 and 1995.
- 52 -
<PAGE>
WJA Realty Limited Partnership
Statements of Partners' Deficit for the years ended
December 31, 1996 and 1995.
WJA Realty Limited Partnership
Statements of Cash Flows for the years ended December 31, 1996
and 1995.
WJA Realty Limited Partnership
Notes to Financial Statements as of December 31, 1996 and 1995.
(c) The following pro forma financial information:
Florida Gaming Corporation Pro Forma Consolidating Balance Sheet as
of December 31, 1996 (unaudited).
Florida Gaming Corporation Pro Forma Consolidating Statements
of Operations for the years ended December 31, 1996 and 1995
(unaudited).
Florida Gaming Corporation
Notes to Pro Forma Consolidating Financial Statement
(unaudited).
- 53 -
<PAGE>
Audited Consolidated Financial Statements
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1996 and 1995
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------
Independent Auditors' Report...........................................1
Consolidated Financial Statements
Balance Sheets.......................................................2
Statements of Operations.............................................4
Statement of Changes in Stockholders' Equity.........................5
Statements of Cash Flows.............................................6
Notes to Financial Statements........................................7
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
and Shareholders
Florida Gaming Corporation
Ft. Pierce, Florida
We have audited the accompanying consolidated balance sheets of Florida Gaming
Corporation and Subsidiary (a Delaware Corporation) as of December 31, 1996 and
1995 and the related consolidated statements of operations, changes in
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Florida Gaming
Corporation as of December 31, 1996 and 1995, 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
KING & COMPANY, PSC
Louisville, Kentucky
February 25, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31,
1996 1995
---------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 907,527 $2,721,865
Note receivable from related
party--Notes G and K 1,796,860 350,000
Other notes receivable 184,051 30,596
Inventory 169,419 33,582
Interest receivable from related
party--Notes G and K 119,348 2,215
---------- ---------
3,177,205 3,138,258
PROPERTY, PLANT AND EQUIPMENT--Notes C and J
Land 11,457,495 2,732,525
Buildings and improvements 9,747,978 1,898,151
Furniture, fixtures and equipment 1,717,520 590,405
---------- ---------
22,922,993 5,221,081
Less accumulated depreciation (528,700) (336,644)
---------- ---------
22,394,293 4,884,437
GAMING VENTURE INVESTMENTS--Notes H and L 310,000 323,000
OTHER ASSETS--Note C 423,551 29,986
---------- ---------
$26,305,049 $8,375,681
---------- ---------
---------- ---------
2
<PAGE>
December 31,
1996 1995
---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Unclaimed winnings--Note C $ 930,017 $ 83,039
ITW Liability 40,647 55,796
Accrued payroll and related
expenses 203,338 120,492
Accounts payable and accrued
expenses--Note C 3,130,547 250,388
Current portion of long-term
debt--Note I 1,423,703 131,567
--------- ---------
5,728,252 641,282
LONG-TERM DEBT (less current portion)--NOTE I 7,095,289 1,822,447
STOCKHOLDERS' EQUITY--Notes B, D and H
Class A convertible preferred stock,
convertible to common stock; 1,200,000
shares authorized; 34,435 and 34,735
shares issued and outstanding in 1996
and 1995, respectively; aggregate 1996
liquidation preference of $375,341 3,443 3,473
Series B convertible preferred stock;
5,000 shares authorized; 1,990 and 2,400
shares issued and outstanding in 1996 and
1995, respectively; aggregate 1996
liquidation preference of $2,154,930 199 240
Series C 8% cumulative convertible preferred
stock, 5,000 shares authorized; 550 shares
issued and outstanding in 1996; aggregate
1996 liquidation preference of $552,893 55 -0-
Series D 8% cumulative convertible preferred
stock, 5,000 shares authorized; 650 shares
issued and outstanding in 1996; aggregate
1996 liquidation preference of $654,913 65 -0-
Common stock, $.10 par value; 15,000,000
shares authorized; 4,340,626 and 3,123,586
issued and outstanding in 1996 and 1995,
respectively 434,063 312,359
Capital in excess of par value 35,276,095 27,278,152
Accumulated deficit (22,232,412) (21,682,272)
---------- ----------
13,481,508 5,911,952
COMMITMENTS AND CONTINGENCIES--Note H ---------- ----------
$ 26,305,049 $ 8,375,681
---------- ----------
---------- ----------
See notes to financial statements
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the years ended December 31, 1996 and 1995
1996 1995
---------- ---------
ON SITE MUTUEL REVENUE $ 893,464 $1,213,178
Less parimutuel taxes to State of Florida (85,659) (122,109)
INTER TRACK MUTUEL COMMISSIONS 2,126,283 2,047,335
---------- ---------
Net parimutuel revenue 2,934,088 3,138,404
ADMISSION INCOME 134,464 151,438
PROGRAM REVENUE 204,958 215,132
FOOD AND BEVERAGE 450,104 532,032
OTHER 48,920 49,020
---------- ---------
TOTAL OPERATING REVENUE 3,772,534 4,086,026
OPERATING EXPENSES
Staff payroll and related costs 1,006,673 973,214
Player payroll and related costs 665,401 725,395
Food and beverage costs 321,641 358,819
Repairs and maintenance 109,801 84,766
Totalizator/teleview rent--Note H 294,309 309,750
Depreciation 193,205 194,682
Utilities 115,941 141,913
Programs 131,389 135,988
Other 155,989 144,004
---------- ---------
TOTAL OPERATING EXPENSES 2,994,349 3,068,531
GENERAL AND ADMINISTRATIVE
Officers' compensation 686,056 219,650
Directors' fees--Note G 18,000 16,000
Management consulting 38,907 11,712
Advertising and promotions 250,569 211,231
Telephone and travel 222,842 126,024
Professional fees--Note H 289,045 318,184
Interest expense 327,486 167,206
Property taxes 72,079 77,076
Other--Notes H and L 538,101 614,979
---------- ---------
2,443,085 1,762,062
---------- ---------
(LOSS) FROM OPERATIONS (1,664,900) (744,567)
OTHER INCOME (EXPENSE):
Interest and dividend income--Notes C and K 1,179,386 77,673
Realized gain on marketable securities -0- 195,939
Gain on disposal of assets 414 -0-
Provision for loss on gaming venture
investment--Note L (34,000) -0-
---------- ---------
1,145,800 273,612
---------- ---------
NET LOSS $ (519,100) $ (470,955)
---------- ---------
---------- ---------
LOSS PER COMMON SHARE--Note F $ (.15) $ (.15)
---------- ---------
---------- ---------
See notes to financial statements
4
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the two years ended December 31, 1996
<TABLE>
<CAPTION>
Class A Series B Series C Series D
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Par Value $.10 Par Value $.10 Par Value $.10 Par Value $.10
---------------- ---------------- ---------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------- ------- ------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
January 1, 1995 43,664 $4,366 -0- -0- -0- $-0- -0- $-0-
Sales of stock--Note B 2,400.0 $ 240
Conversion of Class A
preferred stock to
common stock--Note B (8,929) (893)
Dividend on Class A preferred
stock--$.90 per share--Note B
Net loss for the year
Treasury stock purchase
------- ------- ------- ------- ------- ------ ------- ------
BALANCES AT
DECEMBER 31, 1995 34,735 3,473 2,400.0 240 -0- -0- -0- -0-
Sales of stock--Notes B and C 2,300.0 230 550 55 650 650
Conversion of preferred stock
to common stock--Note B (300) (30) (2,707.5) (271)
Dividend on Class A preferred
stock--$.90 per share
Net loss for the year
Stock options granted--
Note C and D
------- ------- ------- ------- ------- ------ ------- ------
BALANCES AT
DECEMBER 31, 1996 34,435 $3,443 1,992.5 $ 199 550 $ 55 650 $ 65
------- ------- ------- ------- ------- ------ ------- ------
------- ------- ------- ------- ------- ------ ------- ------
<CAPTION>
Common Stock Capital in
Par Value $.10 Excess of Accumulated
-------------------
Shares Amount Par Value Deficit
------ ------ --------- -------
<S> <C> <C> <C> <C>
Balances at
January 1, 1995 3,119,246 $311,924 $25,026,362 $(21,179,605)
Sales of stock--Note B 2,219,760
Conversion of Class A
preferred stock to
common stock--Note B 2,008 202 681
Dividend on Class A preferred
stock--$.90 per share--Note B 2,337 234 31,395 (31,712)
Net loss for the year (470,955)
Treasury stock purchase (5) (1) (46)
--------- ------- ---------- -----------
BALANCES AT
DECEMBER 31, 1995 3,123,586 312,359 27,278,152 (21,682,272)
Sales of stock--Notes B and C 738,221 73,822 7,939,260
Conversion of preferred stock
to common stock--Note B 473,655 47,366 (46,814)
Dividend on Class A preferred
stock--$.90 per share 5,164 516 30,475 (31,040)
Net loss for the year (519,100)
Stock options granted--
Note C and D 150,528
--------- ------- ---------- -----------
BALANCES AT
DECEMBER 31, 1996 4,340,626 $434,063 $35,276,095 $(22,232,412)
--------- ------- ---------- -----------
--------- ------- ---------- -----------
</TABLE>
See notes to financial statements
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the years ended December 31, 1996 and 1995
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net loss $ (519,100) $ (470,955)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 193,205 194,682
Realized gain on marketable securities -0- (192,939)
Increase in interest receivable (117,133) -0-
Provisions for loss on gaming venture 34,000 -0-
Increase in inventory (135,837) (4,072)
Increase in unclaimed winnings (4,185) 26,710
Increase in accounts payable and
accrued expenses 220,732 178,586
----------- -----------
NET CASH (USED IN) OPERATING ACTIVITIES (328,678) (270,988)
INVESTING ACTIVITIES
Proceeds from the sale of marketable
securities -0- 1,814,189
Purchases of marketable securities -0-
Purchases of property and equipment (17,552,533) (1,366,658)
Increase in other assets (393,565) (30,850)
Investments in gaming ventures (21,000) (323,000)
(Increase) decrease in notes receivable (153,455) 19,111
Loan to affiliated company (1,446,860) (350,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (19,567,413) (237,208)
FINANCING ACTIVITIES
Long-term debt issued net of repayments 6,564,978 763,280
Proceeds from sale of stock 7,969,168 2,219,860
Repayments on margin account -0- (1,084,541)
Dividend on preferred stock (31,040) (31,712)
Liabilities assumed in asset purchase 3,578,647 -0-
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,081,753 1,866,887
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (1,814,338) 1,358,691
Cash and cash equivalents at beginning
of period 2,721,865 1,363,174
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 907,527 $ 2,721,865
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES
Issuance of common stock pursuant to-
-Conversion of preferred stock $ 552 $ 893
-Asset acquisitions 4,747,255 -0-
Interest paid 327,486 167,206
Payment of dividend through issuance
of common stock 31,040 31,712
See notes to financial statements
6
<PAGE>
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 December
31, 1996, the Company acquired additional live Jai Alai frontons in Miami, Tampa
and Ocala, Florida.
Approximately 49% of the Company's common stock is controlled by the Company's
Chairman either directly or beneficially through his ownership of Freedom
Financial Corporation (Freedom) a closely held corporation.
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.
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.
REAL ESTATE HELD FOR EXPANSION: The Company's investment in undeveloped land
($1,617,495 at December 31, 1996 and 1995, 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 $40,646 and $55,796 at
December 31, 1996 and 1995, respectively. Unclaimed winnings totaled $930,017
and $83,039 at December 31, 1996 and 1995, respectively, including $851,163
assumed in connection with the Company's purchase of 3 Jai Alai facilities on
December 31, 1996 (See Note C).
7
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
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.
STOCK OPTIONS: The Company accounts for stock-based employee compensation
arrangements using the intrinsic value method provided in APB 25. Under this
method, the cost of compensation is measured by the excess of the quoted market
price of the stock over the option price on the grant date (measurement date).
The Company's stock option plans require the issuance of all options at a price
equal to the market price of the stock on the grant date. Stock options issued
for non-compensation purposes are accounted for at fair value pursuant to FASB
123.
RECLASSIFICATION: Certain 1995 amounts have been reclassified to conform with
their 1996 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. Class A preferred stock
dividends totaled $31,040 and $31,712 during 1996 and 1995 respectively. These
dividends were paid by the issuance of 5,164 common shares and $49 cash in lieu
of fractional shares in 1996 and 2,337 common shares and $83 cash in lieu of
fractional shares in 1995.
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, 1996 and 1995, 300
shares and 8,929 shares of Class A preferred stock were converted into 67 shares
and 2,008 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.
8
<PAGE>
NOTE B--PREFERRED STOCK--CONTINUED
The Company's Series B convertible preferred stock provides annual cumulative
dividends at the rate of 8% to 10% 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% to 10% 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. During 1996, the Company issued an additional 2,300
Series B shares at $925 per share and 2,707.5 Series B shares were converted to
473,588 shares of common stock.
The Company is authorized to issue 5,000 shares of Series C 8% Cumulative
Convertible Preferred Stock, $.10 par value (the "Series C Preferred Stock"),
which provides annual dividends at the rate of 8% of the share's Stated Value.
The Stated Value per share equals $1,000 (as adjusted for any stock dividends,
combination or split). At the discretion of the Company's Board of Directors,
such dividends may be paid in shares of the Series C Preferred Stock.
Holders of Series C Preferred Stock may convert all or any of such shares to the
Company's Common Stock (the "Series C Conversion Shares") beginning 90 days
after the issuance of the Series C Preferred Stock. If not converted earlier by
the holder, the Series C Preferred Stock shall be converted automatically on
December 31, 1998. In general, the number of Series C Conversion Shares
issuable on conversion of each share of Series C Preferred Stock shall equal the
consideration paid for such share together with accrued and unpaid dividends on
such share, if any, divided by the lesser of (i) $7.50 or (ii) 80% of the
closing bid price of the Common Stock on the five trading days before
conversion. A holder of Series C Conversion Shares may not sell more than 33%
of such shares between 90 and 120 days of his purchase of Series C Preferred
Stock converted into such shares and 67% of such shares between 121 and 150 days
of his purchase; a holder may generally sell all of his Series C Conversion
Shares 151 days after his purchase.
9
<PAGE>
NOTE B--PREFERRED STOCK--CONTINUED
All shares of Series C Preferred Stock have been sold pursuant to offshore
transactions exempt from registration pursuant to Regulation S promulgated under
the Securities Act. The Series C Conversion Shares must be resold in
transactions exempt under Regulation S or another applicable exemption under the
Securities Act, or (if the exemption under Regulation S becomes unavailable at
any time before the third anniversary of the purchase of the Series D Preferred
Stock) pursuant to the registration of the Series C Conversion Shares by the
Company.
Upon liquidation, the holders of Series C Preferred Shares shall be entitled to
be paid $1,000 per share plus 8% accrued dividends before any distribution to
holders of Common Stock. The Company has the right to redeem the shares of
Series C Preferred Stock if a holder of such shares exercise his right of
conversion at a time when the conversion price is below $5.00. The redemption
price to be paid by the Company is 125% of the Stated Value of such shares
together with all accrued and unpaid dividends thereon.
During 1996, the Company issued 550 Series C shares at $1,000 per share.
The Company is also authorized to issue up to 5,000 shares of Series D 8%
Cumulative Convertible Preferred Stock (the "Series D Preferred Stock"), which
provides annual dividends at the rate of 8% of the shares's Stated Value. The
Stated Value per share equals $1,000 (as adjusted for any stock dividends,
combination or split). At the discretion of the Company's Board of Directors,
such dividends may be paid in shares of the Series D Preferred Stock.
Holders of Series D Preferred Stock may convert all or any of such shares to the
Company's Common Stock beginning 90 days after the issuance of the Series D
Preferred Stock. If not converted earlier by the holder, the SEries D Preferred
Stock shall be converted automatically on December 31, 1998. The Company is
obligated to file a registration statement (the "Series D Registration
Statement") covering the shares of Common Stock issuable on conversion of the
Series D Preferred Stock (the "Series D Conversion Shares") and to use its best
efforts to cause the Series D Registration Statement to become effective. In
general, the number of Series D Conversion Shares issuable on conversion of each
share of Series D Preferred Stock shall equal the Stated Value together with
accrued and unpaid dividends on such shares, if any, divided by the Conversion
Price, which is defined as the lesser of (i) $7.50 or (ii) 80% of the closing
bid price of the Common Stock on the five trading days before conversion. If
the Series D Registration Statement has not been declared effective within 120
days from December 31, 1996 (the "Initial Issuance Date"), the Conversion Price
shall be reduced by an amount between 3% and 20% (resulting in the issuance of a
larger number of Series D Conversion Shares) based on the extent of such delay.
No Series D Conversion Shares may be sold before
10
<PAGE>
NOTE B--PREFERRED STOCK--CONTINUED
the earlier of March 13, 1997 or the date on which the Series D Registration
Statement becomes effective. Notwithstanding the effectiveness of the Series D
Registration Statement, generally a holder of Series D Conversion Shares may not
sell more than 33% of such shares between March 13, 1997 and April 12, 1997, and
67% of such shares between April 13, 1997 and May 22, 1997, a holder may
generally sell all of the Series D Conversion Shares after May 13, 1997.
If the Series D Registration Statement has not been declared effective within
365 days of the Initial Issuance Date, a holder of Series D Preferred Stock
shall receive a preferential dividend equal to 10% of the Stated Value on the
Stated Value on the 366the day after the Initial Issuance Date and preferential
dividends of either 3% or 10% of the Stated Value every 30 days thereafter until
the 726th day after the Initial Issuance Date.
Upon liquidation, the holders of Series D Preferred Shares shall be entitled to
be paid $1,000 per share plus 8% accrued dividends before any distribution to
holders of Common Stock. The Company has the right to redeem the shares of
Series D Preferred Stock if a holder of such shares exercise his right of
conversion at a time when the Conversion Price is below $5.00 or if the Series D
Registration Statement has not become effective within 120 days of the Initial
Issuance Date. The redemption price to be paid by the Company is determined
using a ratio based on the trading price of the Company's Common Stock and the
Stated Value.
During 1996, the Company issued 650 Series D shares at $1,000 per share.
The Class A Convertible Preferred Stock, the Series B Preferred Stock, the
Series C Preferred Stock and the Series D Preferred Stock are all equal in rank
with respect to the payment of dividends and the distribution of assets upon
liquidation of the Company.
NOTE C--ACQUISITION OF WJA ASSETS
On September 12, 1996, the Company acquired notes (the "WJA Notes") of WJA
Realty Limited Partnership ("WJA"), with balances aggregating about $20,000,000
from the Bank of Oklahoma, N.A., Tulsa, Oklahoma. The WJA Notes were secured
by, among other collateral, real estate and improvements consisting of three
jai-alai and ITW facilities located in Miami, Tampa and Ocala, Florida (the "WJA
Frontons"). Consideration for the WJA Notes was a combination of $2,000,000 in
cash, a $6,000,000 promissory note bearing interest at the prime rate, 703,297
shares of the Company's Common Stock and a $1,000,000 non-interest bearing note.
11
<PAGE>
NOTE C--ACQUISITION OF WJA ASSETS--CONTINUED
On November 25, 1996, the Company entered into an agreement with WJA and Florida
Gaming Centers, Inc. a wholly-owned subsidiary of the Company (the
"Subsidiary"), pursuant to which the Subsidiary agreed to acquire the WJA
Frontons. The acquisition was consummated as of December 31, 1996 for
accounting purposes. The WJA Frontons acquired have been combined with the Fort
Pierce Fronton into a new Subsidiary.
The consideration for the acquisition included (i) the cancellation of WJA Notes
and related obligations acquired by the Company from the Bank of Oklahoma, NA,
(ii) the retention by WJA of 200,000 shares of the Company's common stock owned
by WJA, and (iii) a profit sharing arrangement described in more detail below.
The Company also assumed the principal amount outstanding under a $500,000
promissory note owed to Wheeler-Phoenix, Inc., with the terms amended to provide
for repayment of principal over a ten year period following the closing in equal
annual installments and an annual interest rate of 6% (See Note I).
The profit sharing arrangement is based on the Subsidiary's net profits from Jai
Alai operations as defined, before income taxes. The Company will pay WJA 20%
of the defined cumulative net profits of the Subsidiary for each of the ten full
calendar years 1997 through 2006, subject to a cumulative $1,000,000 per year
cap described below. The cumulative $1,000,000 cap is equal to the product of
$1,000,000 multiplied by the number of years in the ten-year period completed,
minus the sum of all amounts previously paid under the 20% profit sharing
arrangement. In addition, if the Subsidiary has net profits in any calendar
year during the ten-year period in excess of $5,000,000, but does not receive a
20% payment on the entire amount because of the cumulative $1,000,000 per year
cap, the Subsidiary shall pay WJA 5% of the portion of the net profits on which
the 20% payment is not made. No net profit payments will be due for any year
after the ten year period. If during the ten year period, the Subsidiary
disposes of any of its significant assets or operations, then WJA would be
entitled to receive an amount equal to ten percent of the Subsidiary's gain, if
any, on the disposition.
Two principals of WJA, also entered into consulting arrangements with the
Subsidiary. One principal entered into a ten-year consulting agreement with the
Subsidiary, with annual compensation of $100,000 during the first five years of
the agreement and annual compensation of $50,000 during the second five years of
the agreement. The other principal entered into a five-year consulting
agreement with the Subsidiary, with annual compensation of $240,000, plus
certain benefits. These two individuals were also granted stock options on the
Company's stock with a fair value of $150,298, (See Note D).
12
<PAGE>
NOTE C--ACQUISITION OF WJA ASSETS--CONTINUED
A summary of the WJA assets acquired and consideration therefor is as follows:
Allocated
Assets Acquired Amount
--------------- -----------
Jai Alai Frontons in Miami, Tampa,
and Ocala, Florida $17,428,059
Cash 381,997
Notes receivable 167,934
Inventory 134,974
Other assets 308,279
------------
$18,421,243
------------
------------
Management allocated the purchase price to the basis of the assets acquired
based on available appraisals or other fair value information.
Consideration Paid Amount
------------------ ----------
Cancellation of notes and interest
receivable from WJA at Company
carrying value $14,692,298
Accounts payable and other accrued
expenses assumed 3,078,647
Assumption of Wheeler-Phoenix note 500,000
Fair value of stock options issued 150,298
-----------
$18,421,243
-----------
-----------
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.
13
<PAGE>
NOTE D--STOCK OPTIONS--CONTINUED
Under a Stock Purchase Agreement, dated March 31, 1993 Florida Gaming granted
Freedom options to purchase 2,030,000 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 Note H for details of certain options
exercised by Freedom during 1994. Freedom has options for 1,330,000 shares at
$1.25 per share at December 31, 1996 and 1995.
The Company has separate 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).
The Company has a 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. Any options issued pursuant to
this plan expire five years from date of grant.
The Company also has a 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 were granted under this plan in 1995.
The option price for these shares is the market value at the date of grant. 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. The options
expire five years from date of grant.
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 was 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 was exercisable after November 8, 1995
and also expires five years from date of grant.
A summary of the Company's current stock-based employee compensation
arrangements is as follows:
At January 1, 1995
-------------------------------
Number Weighted Average
of Options Exercise Price
1993 Plans 84,250 $2.50
1994 Plans 250,000 $6.20
14
<PAGE>
NOTE D--STOCK OPTIONS--CONTINUED
At December 31, 1995
-------------------------------
Number Weighted Average
of Options Exercise Price
1993 Plans 84,250 $2.50
1994 Plans 250,000 $6.20
1995 Plans 344,000 $5.46
At December 31, 1996
-------------------------------
Number Weighted Average
of Options Exercise Price
1993 Plans 84,250 $2.50
1994 Plans 250,000 $6.20
1995 Plans 344,000 $5.46
1996 Plans 100,000 $6.31
Expiration Weighted Average
Year Grant Date Fair Value
---------- ---------------------
1993 Plans 1997 $0.83
1994 Plans 1999 $2.34
1995 Plans 2000 $2.06
1996 Plans 2001 $2.38
No options from the above plans were exercised or forfeited in either 1996 or
1995. The fair value of the options was determined using the Black-Scholes
option pricing model. The assumptions used during 1996 to value the Company's
stock options were as follows:
Risk-free rate of return 6.000%
Expected forfeitures None
Expected volatility 30.00%
Expected dividends None
No compensation cost was recognized during 1996 or 1995 for stock options issued
to employees and directors. Had the Company accounted for stock options issued
using the fair value method (FASB 123), the Company's compensation expense would
have been increased by $238,362 and $709,892, respectively. The fair value of
stock options granted in connection with the Company's acquisition of the Jai
Alai facilities described in Note C was $150,298. Such amount is included in
the basis of the assets acquired and in capital in excess of par value in the
accompanying 1996 balance sheet.
15
<PAGE>
NOTE E--INCOME TAXES
At December 31, 1996, the Company had tax net operating loss (NOL) carryforwards
of approximately $11,752,000 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 $1,381,000 are not subject to the Section
382 limitation).
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.
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 (3,598,905 and 3,120,674, for 1996 and 1995, respectively).
Options outstanding were not considered in the computations of loss per common
share as they were anti-dilutive.
NOTE G--RELATED PARTY TRANSACTIONS
General and administrative expenses include the following amounts paid to
members of the Board of Directors of the Company:
Years ended December 31,
1996 1995
----------- -----------
Directors' fees $18,000 $16,000
Directors' expense reimbursements -0- $ 1,542
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.
During 1996, the Board of Directors established the Chairman's annual salary at
$360,000, payable monthly. The Chairman had previously received no salary.
16
<PAGE>
NOTE H--COMMITMENTS AND CONTINGENCIES
LITIGATION: On May 13, 1994, American Jai-Alai, Inc. ("American") filed suit in
the Circuit Court of the Fifteenth Circuit in Florida, Palm Beach County,
against the Company. American alleges that in August 1993, the Company entered
into a contract with American that American would manage the Fronton if the
Company acquired it. American alleges that the Company and American agreed to
enter into a five-year renewable management contract pursuant to which American
would guarantee a $480,000 annual payment to the Company. An additional sum of
the Fronton's net operating income above $480,000 would be paid to the Company,
with American receiving 25% of all net operating income above $750,000 annually.
In addition, American 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 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 alleges that the Company agreed to pay American 25% of any
profit realized from the sale of the Fronton, if such sale was not to American
pursuant to its alleged right of first refusal.
In the Complaint, American alleges, among other claims, breaches of fiduciary
duty, breach of contract and fraud. On May 20, 1994, counsel for American
stated that American 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 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.
On or about October 22, 1996, authorized representatives of the Company and
American entered into a letter agreement of settlement in this matter, which is
referred to as the "Memorandum of Understanding" or "MOU". Since that date, the
parties have been attempting to memorialize the MOU in final settlement
documents and the Company has filed a motion to compel settlement. If that
motion is successful, the case should be settled and, therefore, dismissed. 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.
17
<PAGE>
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
Subsequent to December 31, 1996, as part of an agreement to settle this
litigation, the Company negotiated an option agreement with the principal of
American providing American with a 6 month option to acquire the Company's Ocala
Jai Alai for $2,000,000 and the right to receive 15,000 shares of the Company's
common stock. Any such shares issued would carry "piggyback" registration
rights.
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. A Motion to Transfer Venue was filed
January 30, 1995, seeking to have venue transferred to St. Lucie County. The
Company has previously paid a commission to a party to the suit 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 filed a responsive pleading to the Amended Complaint, and again moved
from, and was granted, a summary judgment finding, as a matter of law, that
there was no oral commission agreement between General Realty and the Company.
That summary judgment left only equitable theories of recovery available to
General Realty. On or about December 12, 1996, the parties reached a settlement
in mediation. Since that date, the parties have been attempting to memorialize
the settlement reached and have exchanged several drafts of settlement. The
Company believes this matter will ultimately be settled or that this case will
be dismissed.
CASINO AMERICA: On October 4, 1994, the Company entered into a letter of intent
(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 by 2000,
Casino America has a continuing option to convert the money contributed to the
Joint Venture to a promissory
18
<PAGE>
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
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 by
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 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 1,349,480 shares of the Company's 4,340,626 shares of
issued and outstanding Common Stock. (See Note D.)
19
<PAGE>
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 1999. 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,
1996 and 1995 was approximately $294,000 and $310,000, respectively. The
remaining minimum lease commitments under all operating leases at December 31,
1996, including those obligations assumed in connection with the Company's
acquisition of certain WJA assets (see Note C), are as follows:
Minimum
Year Annual Rental
---- -------------
1997 $1,150,000
1998 1,050,000
1999 400,000
----------
$2,600,000
----------
----------
20
<PAGE>
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
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.
* 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, 1996 closing price of the Company's common stock
($5.31), a payment of $222,006, the equivalent of 41,809 shares would be due
under the $10 guarantee and a payment of $695,366, the equivalent of 130,954
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 1996 and 1995 the Company paid
approximately $107,000 and $99,000, respectively for settlement costs and legal
fees associated with the defense of the various lawsuits described above. Such
costs are included in Professional Fees in the accompanying Statements of
Operations.
21
<PAGE>
NOTE H--COMMITMENTS AND CONTINGENCIES--CONTINUED
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).
NOTE I--LONG-TERM DEBT
The Company's long-term debt comprises the following at December 31, 1996:
CURRENT LONG-TERM
------- ---------
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. $175,606 -0-
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. 2,909 $ 25,524
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. 1,741 230,790
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. 1,828 240,238
22
<PAGE>
NOTE I--LONG-TERM DEBT--CONTINUED
CURRENT LONG-TERM
------- ---------
Mortgage note 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. $ 24,952 $ 315,404
A non-interest bearing note payable dated
September 12, 1996 unsecured; payable in
quarterly installments based on net cash
flow calculations computed by the note
maker (Florida Gaming Corporation) at the
end of each quarter; note maker has no
obligation to pay principal under the note
except to the extent of an undivided fifty
percent (50%) of all collections in excess
of $12,000,000 United States dollars in
respect of the WJA (World Jai Alai) notes -0- 1,000,000
Mortgage note dated September 12, 1996
secured by real estate located in Tampa,
Ocala, Fort Pierce, and Miami, Florida;
also secured by security agreement on
furniture, fixtures, equipment, receivables
and intangibles in Tampa, Ocala, and Miami,
Florida payable as follows: interest only
on the last day of January and February 1997
at prime rate per annum; principal amount
of $83,333.33 plus interest on the last day
of March 1997, April 1997, May 1997, June 1997,
July 1997, and August 1997 at prime rate per
annum; principal amount of $166,666.66 plus
interest on last day of September 1997 and
thereafter on the last day of each month
until August 31, 1998 at prime rate per annum;
a final installment in the amount of all
principal then outstanding plus interest on
September 12, 1998 at prime rate per annum. 1,166,667 4,833,333
23
<PAGE>
NOTE I--LONG-TERM DEBT--CONTINUED
CURRENT LONG-TERM
------- ---------
Note payable to Wheeler-Phoenix, Inc.,
assumed in connection with the
acquisition of assets described in Note C;
payable in 10 annual installments plus
interest at 6%. $ 50,000 $ 450,000
---------- ----------
$1,423,703 $7,095,289
---------- ----------
---------- ----------
The approximate maturities of the Company's long-term debt for the five years
subsequent to December 31, 1996 are as follows: 1997--$1,373,703;
1998--$4,856,105; 1999--$28,272; 2000--$745,646; 2001--$4,002;
thereafter--$1,011,264.
NOTE J--PROPERTY, PLANT AND EQUIPMENT
Plant and equipment comprise the following:
December 31,
1996 1995
----------- ----------
Land (undeveloped) $ 1,617,495 $1,617,495
Land (improved) 9,840,000 1,115,030
Buildings and improvements 9,597,450 1,898,151
Equipment, furniture and fixtures 1,663,669 543,390
Vehicles 59,851 47,015
Less accumulated depreciation (528,700) (336,644)
----------- ----------
$22,243,765 $4,884,437
----------- ----------
----------- ----------
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 Ft. Pierce 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.
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.
24
<PAGE>
NOTE J--PROPERTY, PLANT AND EQUIPMENT--CONTINUED
During 1995, the Company acquired an additional 80 acres of undeveloped land
adjacent to its other properties in Ft. Pierce, 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 its Ft. Pierce 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 1996 and 1995 balance sheets is
a note comprising a line of credit granted to Freedom Financial Corporation on
December 15, 1995. The balances of such line were $1,796,860 and $350,000 at
December 31, 1996 and 1995, respectively. The credit facility, which is secured
by refundable income taxes and real estate owned by Freedom, is due on demand
and bears interest at 2% above prime. Interest receivable on this line of
credit totaled $119,348 and $2,215 at December 31, 1996 and 1995, respectively.
Freedom paid no interest to the Company during 1996. Freedom Financial is owned
substantially by the Company's Chairman. No independent determination of the
loan to collateral value ratio has been made.
As described in Note C, during 1996 the Company acquired certain notes of WJA
with a face value of approximately $20,000,000. These notes were ultimately
canceled by the Company in exchange for substantially all of the assets of WJA.
The Company accrued interest income of $1,101,087 on these notes from their date
of acquisition to their date of cancellation.
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, 1996, 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 should the gaming operations materialize.
The Company expended $21,000 and
25
<PAGE>
NOTE L--GAMING VENTURE INVESTMENTS--CONTINUED
$729,347 during 1996 and 1995, respectively related to these gaming venture
arrangements of which $-0- and $406,347 are included in Other Expense in the
accompanying 1996 and 1995 Statements of Operations, respectively. $21,000 and
$323,000 of the funds expended in 1996 and 1995, respectively were made to one
Tribe as working capital loans and are carried as an Investment on the
accompanying Balance Sheets 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. The Tribe has not
been able to obtain the necessary regulatory or judicial approval to operate the
contemplated gaming ventures. The financing agreement which is carried as an
investment on the accompanying balance sheet expires on June 30, 1997, unless
extended. Management has provided a reserve of $34,000 against the investment
to reflect the diminished expectation of success in the short-term.
26
<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 28, 1997 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 28, 1997
- ---------------------------- of Directors and
W. Bennett Collett Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy L. Hensley Executive Vice President, March 28, 1997
- ---------------------------- Treasurer, Chief Financial
Timothy L. Hensley Officer, and Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Robert L. Hurd President and Director March 28, 1997
- ----------------------------
Robert L. Hurd
/s/ W. Bennett Collett, Jr. Director, Executive March 28, 1997
- ---------------------------- Vice President and
W. Bennett Collett, Jr. Secretary
/s/ Gary E. Bowman Director March 28, 1997
- ----------------------------
Gary E. Bowman
/s/ George W. Galloway, Jr. Director March 28, 1997
- ----------------------------
George W. Galloway, Jr.
/s/ Roland M. Howell Director March 28, 1997
- ----------------------------
Roland M. Howell
<PAGE>
CREDIT LINE AGREEMENT
Date: 10/1/96
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 $2,000,000
advanced under this agreement for value received with interest from date at the
rate of TWO percent (2%) above prime rate as published in the Wall Street
Journal per annum until paid, and all costs of collection, including fifteen
percent attorneys fees if collected by law or through an attorney at law.
Maker hereby waives demand, protest sand 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 $95,000
THROUGH AND FOR THE YEAR ENDED 12/31/95 AND A SECURITY INTEREST IN 26.5 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 10.23
DEED TO SECURE DEBT
STATE OF GEORGIA
Walton County.
THIS INDENTURE, Made the 19th day of March, in the year one thousand nine
hundred ninety-seven, between FREEDOM FINANCIAL CORPORATION of the County of
_________, and State of Kentucky, as party or parties of the first part,
hereinafter call Grantor, and FLORIDA GAMING CORPORATION whose address is 3500
NW 37th Avenue, Miami, Florida 33142 as party of the second part, hereinafter
called Grantee.
WITNESSETH, That Grantor, for the consideration hereinafter set forth, in
hand paid at and before the sealing and delivery of these presents, the receipt
whereof is hereby acknowledged, has granted, bargained, sold, aliened, conveyed
and confirmed, and by these presents does grant, bargain, sell, alien, convey
and confirm unto the said Grantee, all that tract or parcel of land lying and
being in
All that tract or parcel of land lying and being in the City
of Loganville in Land Lots 157 and 158 of the 4th District
of Walton County, Georgia, and being partially shown and
delineated upon a plat of survey by Landworks Associates,
Inc. recorded in Plat Book 59, Page 186, Walton County,
Georgia Records, and being more particularly described on
Exhibit "A" attached hereto and made a part hereof by
reference.
THIS CONVEYANCE is made under the provisions of the existing Code of the
State of Georgia to secure a debt (and interest thereon and other indebtedness
as described herein) evidenced by a Credit Line Agreement dated 10/1/96 made by
Grantor to order of Grantee, for the principal sum of TWO MILLION AND NO/100 ---
($2,000,000) Dollars bearing interest as therein provided, and being due and
payable upon demand, but in no event later than March 18, 1999.
The indebtedness hereby secured includes any renewal or extension of any
part or all of said indebtedness; and if any portion of said indebtedness or any
provision of this instrument shall be held invalid for any reason, it is the
intent of the parties that such portion shall be severable, and such invalidity
shall not affect the remainder of said debt or instrument. Any one of several
persons named as grantee herein or their assigns may receive payment of the
secured indebtedness and execute a valid cancellation or reconveyance hereof.
No release of any part of the property herein described or extension of all or
any part of the indebtedness hereby secured, shall affect the personal liability
of any person upon the indebtedness hereby secured, nor the priority of this
instrument.
<PAGE>
TO HAVE AND TO HOLD the said bargained property with all and singular the
rights, members and appurtenances thereto appertaining, to the only proper use,
benefit and behoof of Grantee, in fee simple and Grantor hereby covenants that
Grantor is lawfully seized and possessed of said property, and has a good right
to convey it, and it is unencumbered; and Grantor, the said bargained property,
unto Grantee, against Grantor, and against all and every other person or persons
shall and will WARRANT AND FOREVER DEFEND.
Should the indebtedness hereby secured be paid according to the tenor and
effect thereof when the same shall become due and payable, and should Grantor
perform all covenants, herein contained, then this deed shall be cancelled and
surrendered, it being intended by the parties hereto that this instrument shall
operate as a deed, and not as a mortgage.
The Grantor covenants and agrees, so long as any indebtedness secured
hereby shall remain unpaid, to keep the property and all improvements thereon in
as good condition as now exists, natural wear and tear excepted, and also not to
demolish, destroy, or remove any permanent structure now existing on the
premises or make any alteration thereon that would constitute a structural
change without the written consent of the Grantees; to pay all taxes and
assessments that may be liens upon said property, as they become due; and to
keep the improvements on said property fully insured against loss by fire and
other hazards as may, from time to time, be required by Grantee in amounts and
companies and with mortgage clauses approved by Grantee, and shall deliver the
policies of insurance and any renewals thereof to the said Grantee; and that any
tax, assessment, prior lien or premium of insurance, not paid when due by the
Grantor may be paid by the Grantee, and any sum so paid shall be added to the
amount of said principal debt as part thereof, shall draw interest from the time
of said payment at the rate of ten per cent per annum, and shall, with interest,
be covered by the security of this deed.
AND Grantor hereby further covenants and agrees that in case of any default
in any partial payment of said indebtedness or in the due performance of any of
the covenants herein expressed to be performed by Grantor, then and in that
event, the entire amount of said principal indebtedness, together with any and
- 2 -
<PAGE>
all sums paid for account of Grantor in accordance with the provisions above set
forth, shall, at the option of Grantee, then and thereby become and be due and
payable forthwith, with accrued interest, and all expenses and cost of
collection, including fifteen per centum of the amount due as attorney's fees,
and the amount of such costs, expenses and fees shall be added to the amount of
the debt hereby secured as part thereof, and as such shall also be covered by
the security of this deed; and time is the essence of this contract.
Should default occur in the payment of any portion of the indebtedness
secured hereby, or taxes, or insurance premiums herein mentioned, or in the
performance of any obligation or condition recited herein, then and in that
event Grantee shall be at liberty immediately to apply for and shall be entitled
as a matter of right, without regard to the value of the property above
described, or to the solvency or insolvency of Grantor, to the appointment of a
receiver to collect the rents and profits of said property and with the power to
sell said property under order of Court and apply the net proceeds of the sale
toward the payment of the debt secured by this deed.
In consideration of the loan made Grantor by Grantee, and to further secure
the indebtedness of Grantor to Grantee hereunder, Grantor hereby sells, assigns
and transfers to Grantee all of the rent which shall hereafter become due or be
paid on the above described property; but Grantee agrees that this rent
assignment will not be enforced so long as no default on the part of Grantor
exists under the terms and conditions of this deed, and while no such default
exists, Grantee waives its rights to and its interest in said rents, but upon
any default in the performance of any agreement or covenant to be performed by
Grantor under the terms of this deed, Grantor agrees that Grantee may enter upon
said property and collect the rents therefrom, and hereby constitutes Grantee as
Grantor's agent to declare the existence of a default hereunder, and Grantor
hereby agrees that any tenant in said property or any renting agent in charge
thereof shall be, and is hereby, authorized when a default shall be so declared
to exist, to pay any such rents to Grantee, to be applied toward the payment of
the debt secured hereby or as provided by law.
The title, interest, rights and powers granted herein by Grantor to
Grantee, particularly the power of sale granted herein, shall inure to the
benefit of anyone to whom Grantee shall assign the indebtedness herein secured,
and/or convey the property herein described, as well as to the successors and
legal representatives of Grantee.
In case the debt hereby secured shall not be paid when it becomes due by
maturity in due course, or by reason of a default as herein provided, Grantor
hereby grants to Grantee, the following irrevocable power of attorney: To sell
- 3 -
<PAGE>
all or any part of the said property at auction, at the usual place for
conducting sales at the Court House in the County where the land or any part
thereof lies, in said State, to the highest bidder for cash, after advertising
the time, terms and place of such sale once a week for four weeks immediately
preceding such sale (but without regard to the number of days) in a newspaper
published in the County where the land or any part thereof lies, or in the paper
in which the Sheriff's advertisements for such County are published, all other
notice being hereby waived by Grantor, and Grantee (or any person on behalf of
Grantee) may bid and purchase at such sale and thereupon execute and deliver to
the purchaser or purchasers at such sale a sufficient conveyance of said
property in fee simple, which conveyance may contain recitals as to the
happening of the default upon which the execution of the power of sale herein
granted depends, and Grantor hereby constitutes and appoints Grantee the agent
and attorney in fact of Grantor to make such recitals, and hereby covenants and
agrees that the recitals so made by Grantee shall be binding and conclusive upon
Grantor, and that the conveyance to be made by Grantee shall be effectual to bar
equity of redemption of Grantor in and to said property, and Grantee shall
collect the proceeds of such sale, and after reserving therefrom the entire
amount of principal and interest due, together with the amount of taxes,
assessments and premiums of insurance or other payments theretofore paid by
Grantee, with ten per centum per annum thereon from date of payment, together
with all costs and expenses of sale and fifteen per centum of the aggregate
amount due for attorney's fees, shall pay any over-plus to Grantor as provided
by law.
AND Grantor further covenants that in case of a sale as hereinbefore
provided, Grantor, or any person in possession under Grantor, shall then become
and be tenants holding over and shall forthwith deliver possession to the
purchaser at such sale, or be summarily dispossessed, in accordance with the
provisions of law applicable to tenants holding over.
The power and agency hereby granted are coupled with an interest and are
irrevocable by death or otherwise and are granted as cumulative to the remedies
for collection of said indebtedness provided by law.
It is agreed that the Grantee shall be subrogated to the claims and liens
of all parties whose claims or liens are discharged or paid with the proceeds of
the loan secured hereby.
Whenever the terms "Grantor" or "Grantee" are used in this deed such terms
shall be deemed to include the heirs, administrators, executors, successors and
assigns of said parties. All rights and powers herein granted to the Grantee
- 4 -
<PAGE>
shall inure to and include his, her or its heirs, administrators, executors,
successors and assigns, and all obligations herein imposed on the Grantor shall
extend to and include Grantor's heirs, administrators, executors, successors and
assigns.
IN WITNESS WHEREOF, Grantor has caused this instrument to be executed and
sealed the day and year first above written.
Signed, sealed and delivered FREEDOM FINANCIAL CORPORATION
in the presence of
/s/ Sue E. Whitefield By: /s/ W. B. Collett (L.S.)
_______________________________ __________________________
UNOFFICIAL WITNESS W. B. COLLETT, Chairman
_______________________________ __________________________(L.S.)
NOTARY PUBLIC
_______________________________ __________________________(L.S.)
- 5 -
<PAGE>
EXHIBIT "A"
All that tract or parcel of land lying and being in the City of Loganville in
Land Lots 157 and 158 of the 4th District of Walton County, Georgia, and being
partially shown and delineated upon a plat of survey by Landworks Associates,
Inc. recorded in Plat Book 59, page 186, Walton County, Georgia Records, and
being more particularly described as follows:
BEGINNING at the intersection of the Northerly right of way of Tara Boulevard,
said right of way being variable in width, with the Easterly right of way of Ga.
Highway No. 81, said right of way being 100' in width; thence along the Easterly
right of way of Ga. Highway No. 81 on a bearing of North 19 degrees 33 minutes
26 seconds West for a distance of 1,417.00 feet to a point; thence continuing
along said right of way and following a curve to the right an arc distance of
251.67 feet to a point (said curve having a radius length of 5,205.19 feet and
being subtended by a chord line with a bearing of N 18DEG. 10'21" W with a
chord length of 251.65 feet); thence leaving said right of way on a bearing of
North 57 degrees 56 minutes 23 seconds East for a distance of 618.98 feet to a
point; thence South 19 degrees 14 minutes 27 seconds East for a distance of
574.10 feet to a point; thence South 32 degrees 42 minutes 16 seconds East for a
distance of 135.64 feet to a point; thence South 62 degrees 07 minutes 35
seconds East for a distance of 155.57 feet to a point; thence South 19 degrees
39 minutes 24 seconds East for a distance of 476.88 feet to a point; thence
South 07 degrees 31 minutes 16 seconds West for a distance of 184.75 feet to a
point; thence South 49 degrees 51 minutes 24 seconds West for a distance of
228.20 feet to a point; thence South 70 degrees 26 minutes 33 seconds West for a
distance of 194.75 feet to a point; thence South 20 degrees 37 minutes 31
seconds East for a distance of 304.51 feet to a point on the Northerly right of
way of Tara Boulevard; thence Westerly along the Northerly right of way of Tara
Boulevard and following a curve to the right an arc distance of 15.45 feet to a
point (said curve having a radius length of 764.00 feet and being subtended by a
chord line with a bearing of S 69DEG. 57' 15" W and chord length of 15.45
feet); thence continuing along the right of way of Tara Boulevard the following
bearings and distances; South 70 degrees 32 minutes 00 seconds West for a
distance of 79.29 feet to a point; North 19 degrees 28 minutes 02 seconds West
for a distance of 14.00 feet to a point; South 70 degrees 32 minutes 00 seconds
West for a distance of 43.00 feet to a point; North 19 degrees 28 minutes 00
seconds West for a distance of 30.00 feet to a point; South 70 degrees 32
minutes 00 seconds West for a distance of 119.65 feet to a point on the Easterly
right of way of Ga. Highway No. 81 and the point of beginning.
Subject to such covenants, easements and restrictions that appear of record.
Said property containing 24.224 acres, more or less.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation by reference of our report dated February 25, 1997 included in
the 1996 Form 10-KSB of Florida Gaming Corporation, into the previously filed
Registration Statements of Florida Gaming Corporation on Forms S-3
(Registration Nos. 33-99380, 333-10535, and 333-21497).
/s/ King & Company, PSC
KING & COMPANY, PSC
Louisville, Kentucky
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 908
<SECURITIES> 0
<RECEIVABLES> 2,100
<ALLOWANCES> 0
<INVENTORY> 169
<CURRENT-ASSETS> 3,177
<PP&E> 22,923
<DEPRECIATION> (529)
<TOTAL-ASSETS> 26,305
<CURRENT-LIABILITIES> 5,729
<BONDS> 0
4
0
<COMMON> 434
<OTHER-SE> 13,044
<TOTAL-LIABILITY-AND-EQUITY> 26,305
<SALES> 0
<TOTAL-REVENUES> 4,952
<CGS> 0
<TOTAL-COSTS> 5,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327
<INCOME-PRETAX> (519)
<INCOME-TAX> 0
<INCOME-CONTINUING> (519)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (519)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
