<PAGE>
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, 1997
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.)
3500 N.W. 37th Avenue
Miami, Florida 33142
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number
including area code: (305) 633-6400
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
----- -----
<PAGE>
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: $21,575,906.
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 26, 1998
Common stock, par value of $.10 per share -- $8,076,412.
The number of shares of the registrant's common stock outstanding as of
March 26, 1998 - 5,696,054 shares.
Transitional Small Business Disclosure Format
Yes No X
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
NONE
2
<PAGE>
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.
In November 1997, the Company entered into the real estate development
business. See "Real Estate Development."
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 Miami Jai-alai, 3500 N.W. 37th Avenue, Miami, Florida 33142. 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
3
<PAGE>
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.
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%. See "Item 3. Legal
Proceedings."
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
4
<PAGE>
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. See "Item 3. Legal Proceedings."
In 1980, WJA and three other pari-mutuel permit holders formed Summer
Jai-Alai Partners ("SJA"), a Florida general partnership, to conduct pari-mutuel
jai-alai operations at the Miami Fronton during the summer months ("Summer
Operations"). As part of the acquisition of the WJA assets, the Company
acquired and currently owns a 21% interest in SJA. 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 the year
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's 21% interest in SJA 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 are administered and regulated by the DPMW. Games
are 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 Santa Anita. 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
5
<PAGE>
counties. As a result, the Company developed poker rooms in Miami (with 40
tables) and Tampa (with 30 tables) during the second quarter of 1997. The Miami
and Tampa facilities 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 is the pari-mutuel's revenue from each hand
dealt. State taxes are paid at 10% of the rake and 4% of the rake must be paid
as commission payable to the jai-alai players. The Miami facility also offers
dominoes.
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. 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
6
<PAGE>
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").
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
1998 and has applied for permits to conduct live jai-alai performances during
1999. 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
7
<PAGE>
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 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 construction 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
8
<PAGE>
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.
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.
Potential Gaming Joint Ventures
9
<PAGE>
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 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.
10
<PAGE>
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 5,207 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 184,713
shares of the Common Stock and a maximum of 369,427 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 159 jai-alai players under contract as of March 26, 1998.
Players' compensation includes base salary, prizes for winning games played
(first, second, third places), and bonuses. The Company enters into seasonal
contracts with its players with no provision for vacation. Florida law
prohibits any fronton facility from requiring a jai-alai player to perform on
more than six consecutive calendar days.
The Company competes with all other frontons in the United States and
elsewhere for high quality jai-alai players. To the extent additional frontons
are opened in the future, the demand for high quality players will increase the
competition and costs associated with signing such individuals.
As of March 26, 1998, in addition to jai-alai players, the Company employed
approximately 40 part-time employees and 503 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.
11
<PAGE>
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 increased gaming competition such Indian Gaming, gambling cruise ships, and
the state-wide lottery. Also, competition in the sports/entertainment area has
increased significantly with more professional sports teams in jai-alai's home
markets. Average state-wide on-track handle per performance for the state of
Florida fiscal years ended June 30, 1997, 1996 and 1995 was approximately
$67,922, $79,004 and $87,512, respectively. Aggregate handle for the fiscal
year ended June 30, 1997 decreased approximately $11 million or 14%. There can
be no assurance that the jai-alai industry will improve significantly, if at
all, in the future. Because the Company's jai-alai business is tied directly to
many if not all of the factors which influence the jai-alai industry as a whole,
another players strike or the enactment of unfavorable legislation could have an
adverse impact on the Company's operations.
Inter-track wagering has grown significantly since its initiation in the
State of Florida in August 1990. The State-wide ITW handle for the State of
Florida's fiscal year ended June 30, 1991 was approximately $109 million. The
state-wide ITW handle for the State of Florida's fiscal years ended June 30,
1996 and 1997 increased to approximately $480 million and $614 million,
respectively. ITW handle at the Company's Frontons (including the newly
acquired Miami, Tampa and Ocala facilities) has also demonstrated strong 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, and
to approximately $55.7 million for the year ended December 31, 1997.
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-
12
<PAGE>
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.
Government Regulation
General.
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
13
<PAGE>
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.
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."
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,
14
<PAGE>
willful violations of laws, rules or regulations or, as to permits, by a vote of
the county electorate. Any amendment or repeal of the Pari-Mutuel Laws or
suspension or revocation of the Company's permits or licenses, could be
materially adverse to its business.
Discouragement of Share Accumulations. Florida law requires that before
any person or company obtains a 5% or greater equity interest in a pari-mutuel
operator and exercises control with respect to those shares, such person or
company must receive the approval of the DPMW. Such person or company must
submit to a background investigation equivalent to that required of
permit-holders to determine that such person or company has the requisite
qualifications for holding a permit (i.e., that such person or company has not
violated certain laws or engaged in certain conduct). Consistent with Florida
law, the Company cannot issue shares of Common Stock to a person or company who
would thereby have obtained a 5% or greater equity interest, whether in a single
transaction or series of integrated transactions, until the purchaser has
received the approval of the DPMW.
Required Number of Live Jai-Alai Performances. In order to qualify to
offer ITW, a fronton must offer a "full schedule" of live races per year. A
"full schedule" of jai-alai means the operation of at least 100 live evening or
matinee performances during a year. In this context, a live performance must
consist of no fewer than 8 games conducted live for each of a minimum of three
performances per week at the permit-holder's facility under a single admission
charge. The Company anticipates it will offer at least 100 live evening or
matinee performances on an annual basis 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 virtue
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
15
<PAGE>
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 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
16
<PAGE>
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 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
17
<PAGE>
for the performance conducted during the Tournament as well as to
taxes otherwise due and payable by them to the State of Florida.
Real Estate Development
In late 1997 the Company entered into a new segment of business:
residential real estate development described below. The following paragraphs
outline the background and the Company's approach going forward as to management
and use of the assets acquired. On November 26, 1997, the Company acquired
substantially all of the assets of Interstate Capital Corporation
("Interstate"), a wholly-owned subsidiary of Freedom. The assets consist of
certain unimproved properties and a residential real estate development called
Tara Club Estates (collectively, the "Properties"), all of which are situated in
Loganville, Walton County, Georgia. As consideration for the purchase, the
Company paid Interstate $6,373,265 as follows: (i) the Company issued to
Interstate 2,084 shares of Series F 8% Convertible Preferred Stock (the "Series
F Preferred Stock") at a stated value of $1,000 per share (convertible into the
Company's common stock ("Common Stock") on the basis of 296.6689 shares of the
Company's Common Stock for each $1,000 of stated value of the Series F Preferred
Stock), (ii) the Company assumed $1,081,102 of first mortgage promissory notes
to certain lenders by the properties purchased, and (iii) the Company canceled
$3,208,163 owed by Freedom to the Company.
The Company's real estate development activities will comprise a separate
segment of its operations. Because the development was acquired in late 1997,
the Company had virtually no income or expenses attributable to this segment of
its business during 1997. The Company intends to engage the services of a
professional real estate management and marketing company in 1998 to assist with
the evaluation of the market potential, assess competitive factors in the
Atlanta/Walton County market and to develop an advertising and marketing program
for the sale of the developed residential and commercial lots.
These Properties consist of over 100 fully developed, and 150 partially
developed, single-family residential home sites, a swim and tennis club facility
and 23 acres of commercial property. Forty-five home sites have already been
sold to builders. The sites are presently selling at an average in excess of
$40,000 per site. Before the acquisition of the Properties by the Company,
thirty-nine homes had been constructed and sold at an average price of $250,000.
The Properties are located on the east side of Georgia Highway 81, approximately
3/4 miles south of U.S. Highway 78, inside the Loganville, Georgia city limits.
Located in western Walton County, Georgia, the Properties are approximately 2.5
miles east of the Gwinnett County/Walton line. Gwinnett County is inside the
fifteen county region which makes up Metropolitan Atlanta. The
18
<PAGE>
population of the Atlanta area is now in the two and one half million resident
range and is continuing to increase. Gwinnett County is located in the Northeast
section of Metropolitan Atlanta, and is noted as one of the fastest growing
counties in the United States. It has doubled its population in the last ten
years, and now has more than 300,000 residents.
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 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 26, 1998, the Company had 5,696,054 shares of Common Stock
issued and outstanding. In addition, as of that date, 2,209,000 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 Series B, Series C, Series E,
Series F and Series G preferred stock at a conversion price based on the market
price of the Common Stock at
19
<PAGE>
conversion(3,090,813 shares, assuming all shares of preferred stock were
convertible on that date and using the assumed conversion rates as of that
date); and 618,266 shares which were issuable upon conversion of the Series F
preferred stock outstanding (although Freedom cannot convert such shares until
November 10, 1998). 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. Moreover, if the prevailing market price is materially
adversely affected by the addition of shares of Common Stock into the market,
the number of shares of Common Stock issuable upon the conversion of shares of
preferred stock will increase; as the number of shares increases upon
conversion, the prevailing market price would become further depressed as the
shares of Common Stock are added to the market.
Of the approximately 5,696,054 shares of Common Stock issued and
outstanding as of March 26, 1998, 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
since March 25, 1995, hold approximately 2,707,277 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 1995 the price of the Common Stock ranged between $2.50 and $17.25;
during 1996 the price of the Common Stock ranged between $2.50 and $10.00; and
during 1997 the price of the Common Stock ranged between $2.375 and $7.125.
Factors such as the Company's operating results or other announcements by 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 Tara Club Estates. The success of any business
combination, including the acquisition of the Tara Club Estates, 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
20
<PAGE>
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 Tara Club Estates, 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 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.
Management of Growth. Since the change in management of the Company in
March 1993, the Company has expanded its operations rapidly. In 1996, the
Company acquired 3 new Jai Alai facilities and in 1997 the Company acquired a
real estate development in Georgia. Unfortunately, these acquisitions will
require a period of time to yield positive cash flow and the Company's
working capital position has been negatively impacted. The Company recognizes
the need to develop a strategic plan consistent with the need to improve
working capital and achieve profitability in the near term. The development
and implementation of such a plan is critical to the management of past
growth and future operations. There can be no assurance, however, that the
Company will successfully achieve any goals included in a strategic plan. If
the Company is unable to identify and accomplish the goals necessary for its
continued operations, its continued existence as a "going concern" can not be
assured.
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.
21
<PAGE>
Control of the Company. As of March 31, 1998, W. Bennett Collett, Chairman
and chief executive officer of the Company, beneficially owned an aggregate of
2,142,480 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 34.6% 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.
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
22
<PAGE>
management and affiliates create various potential and actual conflicts of
interest. See "Item 12. Certain Relationships and Related Transactions." 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.
Governmental Regulation. The Company must secure regulatory approvals from
state and local authorities for each of its gaming ventures. No assurance can
be given that any of these approvals will be secured in a timely fashion or at
all.
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.
Going Concern. The Company incurred operating losses of $4,094,243 and
$519,100 for the years ended December 31, 1997 and 1996, respectively. During
this period, the Company invested $18,290,000 in land, buildings and
improvements in Tampa, Ocala and Miami, Florida in connection with its
Jai-Alai operations and $6,451,444 in partially developed residential and
commercial real estate in Walton County, Georgia. The acquisition of the
Tampa, Ocala and Miami facilities resulted from the Company's acceptance of
these properties in lieu of foreclosure of certain notes payable issued by
the owner of these facilities. Reference is made to Note C of the audited
financial statements as presented in Item 7 of this report for further
information pertaining to this transaction. The Walton County real estate was
acquired from Freedom Financial Corporation, a related party, in a
transaction which also included the cancellation of notes payable issued by
Freedom to the Company. Reference is made to Note M for further information
pertaining to this transaction. During 1997, the Company also expended
$2,390,000 to remodel and convert parts of its Miami and Tampa Jai-Alai
facilities to accommodate "Card Rooms."
In addition to the Company's significant investment in real estate and
non-earning assets, the Company advanced funds to Freedom during 1997
totaling $1,524,989. This receivable was partially cancelled in connection
with the Company's acquisition of the Freedom's Georgia property. The Company
also continued to fund the operating losses of the "Summer Jai-Alai"
partnership during this period resulting in an account receivable from the
partnership totaling $468,000 at December 31, 1997. Although the Company
expects to collect this receivable, the timing of such collection is not
determinable at this time. (See Note H to the financial statements.)
The Company's working capital position has deteriorated significantly
during 1997. This deterioration was caused by its losses from operations, its
expenditures to fund the "Card Room" remodeling and operating costs, the
cancellation of current notes receivable from Freedom in connection with the
Company's acquisition of the Georgia property and the maturity or
acceleration of certain of its notes payable and other contractual
obligations more fully described in Notes C, H and I of the audited financial
statements as presented in Item 7 of this report. Its working capital deficit
grew from $2,551,000 at December 31, 1996 to $13,262,000 at December 31,
1997. This working capital deficit has prevented the Company from meeting its
current obligations to remit payroll taxes withheld from employee pay, to pay
property taxes on its real estate for calendar years 1996 and 1997, and to
remit to the State of Florida unclaimed winnings which were to be escheated
in August, 1997.
Further, as described in Note B to the financial statements the Company
expects to default on registration demands for its Series G preferred stock
and certain vendors have placed the Company on a COD basis for future
purchases. At December 31, 1997, the Company's more significant delinquent
payments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Payroll taxes withheld and employer matching $ 378,000
Real estate taxes for 1997 and 1996 1,027,000
Unclaimed winnings due to Florida 109,000
Payments due on consulting agreements (Note C) 96,000
Payments due on stock appreciation guarantees (Note H) 284,000
Payments due on notes payable (Note I) 638,000
----------
$2,532,000
----------
----------
</TABLE>
During 1997, the Company funded much of its working capital needs
through the sale of its Preferred Stock. Approximately $5,500,000 in capital
was raised in connection with these stock sales. The Company's continued
ability to operate is dependent on its ability to either refinance its
existing debt, liquidate significant non-earning assets or raise additional
capital. Management believes the Company's most likely source of liquidity
will be the sale of one or more of its Jai-Alai facilities. To that end,
management is actively negotiating the sale of one such facility and intends
to close the transaction in 1998. There can be no assurance that this sale or
any other will occur at a time or in a manner that allows the Company to
continue its operation in its present form.
Item 2. Description of Property.
Set forth below is a brief description of the Frontons:
23
<PAGE>
<TABLE>
<CAPTION>
Size of Number
Number Building of Gaming
Location of Acres Sq. Ft. Seats*
<S> <C> <C> <C>
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*
</TABLE>
*These figures do not include gaming positions 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.
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
24
<PAGE>
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 Statues Section 849.086, the Company
converted the television lounge and standing areas at the Miami and Tampa
Frontons into low-stakes cardrooms. The 12,000 square foot card room in Miami
has 40 tables; the 10,000 square foot card room in Tampa has 30 tables, and each
has the capacity to hold almost twice as many tables.
Pursuant to the Asset Purchase Agreement dated as of September 24, 1997,
the Company purchased from Interstate Capital Corporation ("Interstate") certain
unimproved properties and a residential real estate development called Tara Club
Estates (collectively, the "Properties"), all of which are situated in
Loganville, Walton County, Georgia. These Properties consist of over 100 fully
developed, and 150 partially developed single-family residential home sites, a
swim and tennis club facility and 23 acres of commercial property. Forty-five
home sites have already been sold to builders. The sites are presently selling
at an average in excess of $40,000 per site. Before the acquisition of the
Properties by the Company, thirty-nine homes had been constructed and sold at an
average price of $250,000. The Properties are located on the east side of
Georgia Highway 81, approximately 3/4 miles south of U.S. Highway 78, inside the
Loganville, Georgia city limits.
Item 3. Legal Proceedings.
On March 6, 1998, Richard P. Donovan filed suit in the Circuit Court of the
11th Circuit in Florida, Dade County, against Florida Gaming Centers, Inc.
("Centers"), a subsidiary of the Company. Mr. Donovan claims a breach by
Centers of the Consulting and Non-Competition Agreement entered into on December
31, 1996 between Mr.
25
<PAGE>
Donovan and Centers. Mr. Donovan requests judgment against Centers for
compensatory damages, including $1,053,000 due for consulting services through
the term of the agreement and $56,000 due for life insurance premiums for the
term of the agreement, together with prejudgment interest, attorneys' fees,
costs and such other relief as the Court deems just and proper. The Company has
not yet filed an Answer to the Complaint. The Company and Mr. Donovan are
currently engaged in discussions concerning these issues. The Company
anticipates that the parties will renegotiate a payment schedule with respect to
amounts due under the agreement, although there can be no assurance that such a
revised payment schedule will be obtained.
On March 10, 1998, Roger M. Wheeler, Jr. and Wheeler-Phoenix, Inc. filed
suit in the Circuit Court of the 11th Circuit in Florida, Dade County, against
Centers and the Company. Mr. Wheeler claims that Centers breached the
Consulting and Non-Competition Agreement entered into on December 31, 1996
between Mr. Wheeler and Centers. Mr. Wheeler asserts that the Company
guaranteed the performance of Centers. Mr. Wheeler requests judgment in the
amount of $675,000 due for consulting services through the term of the
agreement, together with prejudgment interest, attorneys' fees, costs and such
other relief as the Court deems just and proper. In addition, Wheeler-Phoenix,
Inc. has alleged that Centers has failed to make payments due under a promissory
note in the principal amount of $500,000. Wheeler-Phoenix has requested
judgment in the amount of $500,000, together with prejudgment interest accrued
up to the time of judgment, attorneys' fees, costs and other relief as the court
deems just and proper. The Company has not yet filed an Answer. The Company is
currently engaged in discussions with Mr. Wheeler concerning these issues and
expects to renegotiate a payment schedule with respect to amounts due under the
agreement, although there can be no assurance that such a revised payment
schedule will be obtained.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's 1997 Annual Meeting of Shareholders held on December 30,
1997, the following actions were taken:
The following Directors were elected for terms of office expiring in 1998:
<TABLE>
<CAPTION>
Broker
Votes for Votes Absten- Non-
Withheld tions* Votes*
<S> <C> <C> <C> <C>
W. Bennett Collett 3,056,033 24,494 N/A N/A
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Robert L. Hurd 3,056,206 23,291 N/A N/A
W. Bennett Collett, Jr. 3,056,706 23,791 N/A N/A
Gary E. Bowman 3,056,706 23,791 N/A N/A
George W. Galloway, Jr. 3,056,706 23,791 N/A N/A
Roland M. Howell 3,056,186 24,311 N/A N/A
Timothy L. Hensley 3,056,686 23,811 N/A N/A
</TABLE>
* 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.
The following summarizes the votes to ratify the appointment of King &
Company PSC as the Company's auditor for 1997:
<TABLE>
<CAPTION>
Broker
Votes Votes Absten- Non-
for Against tions Votes
<S> <C> <C> <C> <C>
King & Company PSC 1,396,825 20,933 10,259 None
</TABLE>
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, 1997 and December 31, 1996. 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.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 High Low
<S> <C> <C>
Quarter Ended December 31, 1997 $ 5 9/16 $2 3/8
Quarter Ended September 30, 1997 4 1/4 2 5/8
Quarter Ended June 30, 1997 5 5/8 3 3/8
Quarter Ended March 31, 1997 7 1/8 5 1/4
</TABLE>
Year Ended December 31, 1996
27
<PAGE>
<TABLE>
<S> <C> <C>
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
</TABLE>
As of March 31, 1998, the Company had approximately 4,000 holders of record
of its Common Stock.
Of the 5,696,054 shares of Common Stock outstanding as of March 26, 1998,
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 2,707,277 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. Of these
Restricted Shares, the resale of 703,297 shares of Common Stock are covered by a
registration statement filed under the Securities Act; such shares have been
held by the holder for over one year. Freedom, the holder of 1,652,480
Restricted Shares, has demand registration rights for its shares. Freedom has
pledged a total of 1,652,480 Shares of Common Stock to secure loans to Freedom,
including the pledge of 1,100,000 shares to one bank, 200,000 shares to another
bank, 302,480 in a margin account and the pledge of 50,000 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, 1,227,480 of the Restricted Shares held
by Freedom have been held by Freedom for over one year and are thus available
for sale in the public market, subject to the volume and other limitations of
Rule 144.
In general, under Rule 144 a person (or person 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
56,960 shares) or the average weekly trading volume of the Common Stock on the
Nasdaq Stock Market during the four calendar weeks preceding such sale. Sales
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
28
<PAGE>
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 1,019,000 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
905,000 shares of Common Stock at an exercise price of $1.25 per share that
expire March 31, 1998. The 905,000 shares issuable upon exercise of the options
granted to Freedom are subject to registration under the Securities Act upon the
request of Freedom. The Company has been informed by Freedom that it has no
plans to exercise these remaining options.
As of March 26, 1998, 395 shares of the Company's Series B Preferred Stock
("Series B Shares") were issued and outstanding. Each Series B Share can be
converted into the number of shares of Common Stock equal to the sum of the
$1,000 purchase price per Series B Share plus 8% accrued and unpaid dividends
from the date of issuance through the date of conversion, divided by eighty
percent (80%) of the average of the closing bid prices for the Common Stock as
reported by NASDAQ for the five consecutive business days immediately preceding
the date of conversion. Assuming a $2.3125 closing bid price for the Common
Stock, which was the five average closing bid price of the Common Stock on March
25, 1998, the outstanding Series B Shares would be convertible into 230,539
shares of Common Stock.
As of March 26, 1998, 100 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 $2.3125 closing bid price for the Common
Stock, which was the five average closing bid price of the Common Stock on March
25, 1998, the outstanding Series C Shares would be convertible into 55,120
shares of Common Stock.
As of March 26, 1998, no shares of the Company's Series D Preferred Stock
("Series D Shares") were issued and outstanding.
29
<PAGE>
As of March 26, 1998, 1,950 shares of the Company's Series E Preferred
Stock ("Series E Shares") were issued and outstanding. Each Series E Share can
be converted into the number of shares of Common Stock equal to the sum of the
$1,000 purchase price per Series E 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 $2.3125 closing bid price for the Common
Stock, which was the five average closing bid price of the Common Stock on March
25, 1998, the outstanding Series E Shares would be convertible into 1,137,454
shares of Common Stock. The holder of 1,500 of the Series E Shares has agreed
not to convert any of such shares before November 10, 1998.
In November and December of 1997, the Company issued 3,000 Series G Shares
at a price per share of $1,000. The Company paid Pacific Continental an
underwriting 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 G Shares were issued in accordance
with the provisions of Regulation D under the Securities Act. The shares were
purchased by seven "accredited investors" as defined in Regulation D.
As of March 26, 1998, 3,000 shares of the Company's Series G Preferred
Stock ("Series G Shares") were issued and outstanding. Each Series G Share can
in general be converted on May 25, 1998, into the number of shares of Common
Stock equal to the sum of the $1,000 purchase price per Series G 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. Each holder of the
Series G Shares may not convert more than 20% of the original purchase amount of
its Series G Shares during any 30 day period commencing on May 25, 1998, on a
cumulative basis pursuant to a voluntary conversion. Assuming a $2.3125 closing
bid price for the Common Stock, which was the five average closing bid price of
the Common Stock on March 25, 1998, the outstanding Series G Shares would be
convertible into 1,667,808 shares of Common Stock.
30
<PAGE>
The Company is obligated to file a registration statement (the "Series G
Registration Statement") covering the resale of the shares of Common Stock
issuable on conversion of the Series G Preferred Stock (the "Series G Conversion
Shares") and to use its best efforts to cause the Series G Registration
Statement to become effective. In the event of a Registration Default (as
defined below), then the Company shall pay as liquidated damages to each holder
of Series G Preferred Stock an amount equal to 1% of the liquidation preference
of the Series G Preferred Stock for the first 30 day period after May 25, 1998
(or pro rata portion thereof) and 2% of the liquidation preference of the Series
G Preferred Stock for each 30 day period thereafter (or pro rata portion
thereof) that there continues to be a Registration Default, in cash ratably
according to the number of Series G Preferred Stock held by each holder,
immediately payable following the occurrence of such Registration Default. A
"Registration Default" means if (i) the Series G Registration Statement has not
been declared effective by May 25, 1998, (ii) within the first 30 days following
May 25, 1998, the Company postpones the filing of the Series G Registration
Statement or allows such Series G Registration Statement to fail to be
effective and usable, or elects that such Series G Registration Statement not
for a reasonable period of time, but not in excess of 90 days, or (iii) the
Series G Registration Statement is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time exceeding 45 days in the aggregate per year. The Company has not yet filed
the Series G Registration Statement and anticipates that a Registration Default
will occur.
Pursuant to the Asset Purchase Agreement dated as of September 24, 1997,
the Company purchased from Interstate Capital Corporation ("Interstate") certain
unimproved properties and a residential real estate development called Tara Club
Estates (collectively, the "Properties"), all of which are situated in
Loganville, Walton County, Georgia. Interstate is a wholly owned subsidiary of
Freedom. As consideration for the purchase, the Company paid Interstate the sum
of $6,373,265, payable as follows: (i) the Company's assumption of $1,081,102 of
first mortgage promissory notes to certain lenders secured by the Properties,
(ii) the Company's issuance of 2,084 shares of Series F 8% Convertible Preferred
Stock at a stated value of $1,000 per share (convertible on the basis of
296.6689 shares of the Company's common stock for each $1,000 of stated value of
the preferred stock), and (iii) the cancellation of $3,208,163 owed by Freedom
to the Company. The transaction was approved by a Committee of the Board of
Directors of the Company who do not have a direct financial interest in the
31
<PAGE>
transaction. The shares of Series F Preferred Stock were sold in a privately
negotiated transaction exempt from registration under Section 4(2) of the
Securities Act of 1933. On March 31, 1998, the outstanding Series F Shares
would be convertible into 618,258 shares of Common Stock, although Freedom has
agreed that the Series F Shares cannot be converted until November 10, 1998.
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 31, 1998.
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, increase significantly the number of shares of Common Stock issuable upon
the conversion of the Company's preferred stock, the conversion rates of which
are related to the prevailing market price, and 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
The Company currently owns and operates four jai-alai and inter-track
pari-mutuel wagering facilities (each, a "Fronton," and collectively, the
"Frontons") located in South and Central Florida. The Company's business
consists primarily of its operations at the Frontons, which include, among other
things, live jai-alai, ITW
32
<PAGE>
on jai-alai, thoroughbred racing, harness racing, and dog racing, poker,
dominoes, and the sale of food and alcoholic beverages.
Results of Operations
Fiscal Year 1997 Compared with Fiscal Year 1996
During the twelve months ended December 31, 1997, the Company's operations
reflects twelve months' operation of live Jai-Alai performances at the Miami
and Tampa facilities. The Ft. Pierce Fronton conducted live jai-alai
performances January through April. A full schedule of inter-track wagering was
also conducted at all facilities with the exception of Miami, which offers
limited ITW product due to blackouts imposed as a result of its close proximity
to other South Florida pari-mutuels. The Miami facility, however, broadcasts
its jai-alai performances to other gaming facilities in Florida, the rest of the
United States, and Mexico. Also, the Miami fronton operates six months per year
under a summer partnership agreement. See Item 1 "Business." The Ocala Fronton
only operated inter-track wagering during the first quarter and began its live
season May 25th and concluded its live season September 1st.
Handle Analysis
Total Handle (amount of money wagered) for the twelve months ended December
31, 1997 was $126,333,388 of which $53,283,207 was wagered on live jai-alai,
$17,385,401 was wagered on the Miami jai-alai signal as a host site via
inter-track and $55,664,780 was wagered on inter-track guest signals carried at
the Company's frontons. These numbers do not include handle for the Miami
facility for the period from July 2, 1997 through November 30, 1997, since
this was the permit period the facility was operated by the summer
partnership.
Total handle for the twelve months ended December 31, 1996 was $25,658,425
of which $3,665,582 was from live jai-alai wagering and $21,992,843 was from
inter-track guest wagering.
Handle Increase
Total handle for the twelve months ended December 31, 1997 was
$126,333,388, an increase over 1996 of $100,674,963. This increase was
attributable to an increase in live and host jai-alai wagering
33
<PAGE>
handle of $67,003,026 and an increase in inter-track wagering handle of
$33,671,937. These increases were primarily the result of the pari-mutuel
operations acquired from World Jai-Alai. Although all four frontons were owned
and operated in 1997 only, a comparison of year to year handle at all facilities
indicates a $15.2 million decrease in jai-alai handle (18%) and a $5.3 (10.6%)
million increase in inter-track guest handle.
Revenues
Pari-mutuel revenues for the twelve months ended December 31, 1997 were
$16,850,905 compared to pari-mutuel revenues of $2,934,088 for 1996. Revenues
for the twelve months ended December 31, 1997, consisted of $11,832,731 from
live and simulcast jai-alai wagering and $5,018,174 from inter-track guest
commissions. Revenues for the twelve months ended December 31, 1996, consisted
of $807,805 from live jai-alai wagering and $2,126,283 from inter-track guest
wagering. These increases were primarily the result of the pari-mutuel
operations acquired from World Jai-Alai as described above. Pari-mutuel
revenues from jai-alai on a year to year basis including the frontons acquired
in the WJA transaction decreased $2 million (15%), while inter-track guest
commissions increased $331,386 (7%). These numbers do not include revenues for
the Miami facility for the period from July 2, 1997 through November 30, 1997,
since the facility is operated under a permit owned by the summer partnership
during this time. The Company recognizes income and losses on its 21% ownership
in the summer partnership on the equity basis.
The Company opened two card room facilities during 1997, one at Tampa on
May 22, 1997, and one at Miami on June 19, 1997. Card room revenue for the
twelve months ended December 31, 1997 was $500,158. Revenues from the card room
operations have been disappointing. Unless the Florida legislature in its
current 60-day session that began March 1998 provides card rooms with
additional, more competitive card-related products, the Company may close its
card room facilities.
Admissions income for the year ended December 31, 1997, was $499,591, net
of state taxes, compared to $134,464 for the year ended December 31, 1996.
Program revenue for the year ended December 31, 1997, increased $389,379 to
$594,337, from $204,958 for the year ended December 31, 1996. These increases
were primarily the result of the WJA asset acquisition. Attendance for live
jai-alai performances and ITW performances was approximately 1,010,000 for the
year ended December 31, 1997. This compares to
34
<PAGE>
209,000 for 1996 when the Company only owned and operated the Ft. Pierce
facility. Total attendance for all facilities in 1996 was approximately
1,118,000.
Food and beverage income increased $2,005,958 to $2,456,062 for the year
ended December 31, 1997, compared to $450,104 for the year ended December 31,
1996. These increases were primarily the result of the WJA asset acquisition.
Other income for the year ended December 31, 1997, increased to $674,853
compared to $48,920 for 1996. This category consisting primarily of parking
revenue, fronton rental and other commissions and fees also increased as the
result of the WJA asset acquisition.
General and Administrative Expenses
The Company's general and administrative expenses were $6,421,955 and
$2,443,085 for the twelve months ended December 31, 1997 and 1996,
respectively. The increase of $3,978,870 resulted from taking on the cost of
administration for three additional Jai-Alai facilities in Miami, Tampa, and
Ocala, Florida, net of staff reductions and consolidations.
Significant categories of general and administrative expenses and their
comparison for 1997 versus 1996 are as follows. Executive salaries and related
expenses were $1,106,591 in 1997, compared to $686,056 for 1996. Professional
fees were $533,978 in 1997 compared to $289,045 in 1996. Consulting fees
increased from $38,907 in 1996 to $466,500 in 1997. Expenses totaling $342,000
were paid and accrued for former executives of World Jai-Alai, pursuant to the
purchase agreement. Travel and entertainment expense increased approximately
$248,000 to $412,721. Telephone and other data line charges increased
approximately $252,000 to $308,755. Property and other taxes increased
significantly to $587,479 in 1997 from $72,079 for 1996, as a result of the
company's expanded operations.
Other general and administrative expenses increased $1,600,680 during 1997
to $2,138,781. These included an increase in insurance expense to $617,428
during 1997 up from $89,513, public company costs including shareholder
relations/information and filing fees increasing to $140,892 from $129,873, and
also includes employee benefits totaling $901,288. Employee benefits are mainly
health insurance and self insurance cost associated with player personnel
($760,585). Interest expense totaled $849,150 and $327,486 for the twelve month
periods ended December 31, 1997 and 1996, respectively. The $521,664 increase in
interest expense was
35
<PAGE>
primarily the result of the bank debt incurred which was related to the purchase
of the WJA facilities described earlier.
Operating Expenses
The Company's operating expenses for the year ended December 31, 1997,
increased $16,022,599 to $19,016,948, from $2,994,349 for the year ended
December 31, 1996. The components of these expenses and the net increase are
described in the following items. Advertising and promotion expense increased
$961,523 during 1997 to $1,212,092, with approximately $250,000 used in the
promotion and introduction of the new card room facilities. Operating payrolls
and related costs totaled $4,609,917 and $1,006,673, respectively, for the years
ended December 31, 1997 and 1996, excluding player costs and payroll costs
included in the bar, restaurant and concessions areas. Of the $4,609,917,
$1,447,675 was mutuel payroll, $748,777 was maintenance/janitorial payroll,
$994,910 was in security payroll, $165,377 was admissions and $1,150,578 was
payroll taxes for all payrolls. Player 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, but represented the
expenses of only the Ft. Pierce facility. The year ending December 31, 1997,
included player costs for all for facilities totaling $6,345,124. Operating
expenses, including payroll costs for the bar, restaurant, souvenir and
concessions costs were $2,142,002 and $321,641 for the twelve month periods
ended December 31, 1997 and 1996, respectively. Repairs and Maintenance
expenses for the twelve months ended December 31, 1997, totaled $438,173. These
increases were primarily the result of the expanded pari-mutuel operations due
to acquisition of the facilities of World Jai-Alai.
Rental and service costs for totalizator wagering equipment also represent
a significant portion of operating expenses. These expenses totaled $824,262 for
the year ended December 31, 1997, compared to $294,309 for the year ended
December 31, 1996, representing an increase of $529,953, although 1996's
expenses included satellite and camera rentals reflected in other operating
costs for 1997. Programs expense totaled $584,554 for the year ended December
31, 1997, compared to $131,389 for 1996. Card room payroll and related costs
totaled $477,177 for the twelve months ended December 31, 1997, while other
card room operating costs totaled $161,336. The Company had no card room
operations in 1996. Depreciation and amortization expense for the twelve month
period ended December 31, 1997 was $736,349, compared to $193,205
36
<PAGE>
for the twelve month period ended December 31, 1996. Utilities expense totaled
$1,067,100 and $115,941, respectively, for the years ended December 31, 1997 and
1996. Other miscellaneous operating expenses, including security, cleaning
supplies janitorial expense, and operating leases, increased to $418,862, from
$155,989 for the year ended December 31, 1997. Significant items in this
category included $239,182 in police contracts; $709,774 in satellite, camera,
and television rentals; ($2,441,135) in allocated operating costs recovered
via charge backs to the summer operation; $672,358 in janitorial contracts;
$301,152 in ITW tote and other costs; and $210,479 in local office payrolls.
Again, these increases were primarily the result of the expanded pari-mutuel
operations due to acquisition of the facilities of World Jai-Alai.
Other Income (Expense)
The Company had net interest and dividend income of $ 280,830 and
$1,179,386 for the twelve months ended December 31, 1997 and 1996,
respectively, a decrease of $898,556. Of the $1,179,386, approximately
$1,101,000 was attributable to interest income on the WJA Notes acquired from
the Bank of Oklahoma. The decrease reflects that this note was forgiven and
became part of the Company's basis in the WJA assets acquired at year end 1996.
The Company also recorded a non-recurring loan reserve of $322,193 for the
twelve months ended December 31, 1997 related to an expired gaming contract
with the Rincon Tribe of California. At year ended 1996 the Company had
reserved $34,000 on the same contract.
Also the Company had $223,222 in other expenses associated with the
issuance of warrants in connection with the Series G preferred stock sold in
November and December of 1997, and approximately $26,000 in other income from
the gains on the sale of fixed assets.
Tax Loss Carryforwards
At December 31, 1997, the Company had approximately $14,000,000 in net
operating loss carryforwards. However, because of IRC section 382 limitations
due to the change of control that occurred in March, 1993, the bulk of these
carryforwards are limited to approximately $95,000 per year. Operating losses of
approximately $5,000,000 attributed to the period after the change of ownership
are not subject to the Section 382 limitation.
37
<PAGE>
Summary of Operations
The Company had a net loss of $4,094,243 ($0.80 per common share) for the
twelve months ended December 31, 1997. This loss compares to a net loss of
$519,100 ($0.14 per common share) for the twelve months ended December 31,
1996. The increase in loss occurred for the year was primarily caused by the
factors detailed above. A summary of items and circumstances contributing to
the loss included the $322,000 non recurring reserve on the Rincon Indian
Gaming Venture, approximately $250,000 in advertising costs promoting the card
rooms, a $1,000,000 operating loss at the Tampa facility (incurred by running
the facility 12 months to in order to run a card room), approximately $200,000
in legal and professional fees associated with the acquisition and continued
acquisition issues, a $133,000 loss from our equity position in the summer
partnership, and $168,280 in training expenses charged directly to the Company
for card room operations with another $132,451 charged to the summer partnership
of which we bear 21% of the cost.
Other Information
During 1997 the Company spent $2.4 million in improvements for card room
additions. It also acquired the Tara Club residential development discussed in
the liquidity section that follows. Certain excess property was disposed of the
first quarter of 1998 for approximately $480,000. A contract to sell the
Company's Tampa real estate for $8.3 million was also signed during the first
quarter (see the Company's Current Report on Form 8-K/A filed February 9,
1998). The Company has not contracted to sell its Tampa gaming permit.
38
<PAGE>
Liquidity and Capital Resources
The balance of the Company's cash and cash equivalents at December 31, 1997
was $1,042,110. At December 31, 1997, the Company had a decrease in working
capital of approximately $10,711,000 from December 31, 1996. The decrease was
the result of the construction and pre-opening costs associated with the card
rooms in Tampa and Miami (approximately $2.5 million), growth in accounts
payable/accrued expenses (approximately $3 million), and a $5.4 million
increase in the current portion of long term debt maturing within one year as
the result of the Bank of Oklahoma's ("BOK") September 1998 balloon payment
and the $1 million in debt assumed in the purchase of the "Tara" residential
development in November 1997. The decrease in liquidity is also net of $5.7
million in additional funds received in connection with Regulation D and
Regulation S Convertible Preferred Stock offerings, and the cancellation of the
Freedom Financial note receivable as part of the purchase of the Tara
development described below.
During the twelve months ended December 31, 1997, net cash provided by in
the Company's operating activities was $677,667. 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.
During the twelve months ended December 31, 1997, cash flow used by
investing activities was $5,258,570. $468,372 was attributable to an increase in
miscellaneous accounts receivable. $3,184,725 was the result of additions to
plant and equipment, the bulk of which was attributable to card room
construction (approximately $2.5 million) and the acquisition of the Tara
development. During the fourth quarter of 1995, the Company lent an affiliated
company (Freedom) funds on a demand credit line, which bore interest at the
prime rate plus 2%. Funds advanced to Freedom during the twelve months ended
December 31, 1997 totaled $1,524,989. As set forth on its Current Report on
Form 8-K dated September 24, 1997, and subsequent amendments filed October 10,
1997, and February 9, 1998, the Company purchased from Interstate Capital
Corporation ("Interstate") (a wholly owned subsidiary of Freedom) certain
unimproved properties and a residential real estate development called Tara
Club Estates (collectively, the "Properties") situated in Loganville, Walton
County, Georgia. As consideration for the purchase, the Company paid
Interstate the sum of $6,373,265 as follows (i) the company issued 2,084
shares of Series F 8% Convertible Preferred Stock (the "Series F Preferred
39
<PAGE>
Stock"), (ii) it assumed $1,081,102 of first mortgage promissory notes to
certain lenders secured by the Properties, and (iii) canceled $3,208,163
including accrued interest owed by Freedom. The Properties consist of a
residential and commercial development of over 100 fully developed, and 150
partially developed single-family residential home sites, a swim and tennis
club facility and 23 acres of commercial property. The Company anticipates
hiring a professional management company and that income generated from lot
sales should augment cash flow given the large inventory of lots ready for sale.
During the twelve months ended December 31, 1997, cash flow from financing
activities was $4,715,486. Cash flow from financing activities included
$5,650,153 in net funds generated from the sale of convertible preferred and
common stock. The company also had a net reduction or use of funds
totaling $934,667 for the twelve months ended December 31, 1997, in net
repayments of long-term debt.
The Company has terminated discussions the Rincon Luiseno Band of the
Mission Indians in San Diego County, California. Due to adverse decisions in
other Courts in related cases in California and 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 the Company and the Rincon tribe have
requested arbitration relative to the Company's Loan Agreement. The outstanding
balance on the loan to the Rincon tribe and costs totaling $322,193 was
reserved for during the third quarter of 1997. The Company also has terminated
all discussions concerning the possible expansion of its gaming operations to
Nevada.
The working capital needs of the Company have been met primarily through
its financing activities, including the issuance of convertible preferred stock
and the exercise of options previously granted to Freedom.
Also subsequent to year end on March 11, 1997, the Company sold certain
excess property in North Miami for $487,000. The bulk of the proceeds from
this sale were paid to the Bank of Oklahoma. As of the date of this report the
company is currently two payments in arrears on the Bank of Oklahoma obligation.
The Company and the bank are currently negotiating to amend the payment
schedule to interest only monthly payments until such time as the Tampa facility
transaction has been closed.
40
<PAGE>
Other situations existing at present that illustrate current liquidity
shortfall the Company is experiencing are outlined below. Real estate taxes
totaling approximately $470,000 for 1996 payable in 1997 are currently in
arrears. 1997 real estate of approximately $500,000 will be due March 31, 1998.
Other tax payments and a $109,000 escheated outs payment due to the state of
Florida is currently in arrears. The Company is currently behind in its
consulting payments to Mr. Wheeler and Mr. Donovan, although the Company is
negotiating with both parties and believes an arrangement can be reached. Also
the $500,000 Wheeler-Phoenix note assumed when the assets of WJA were acquired
is currently in default; the Company is currently negotiating with Mr. Wheeler
to cure the default.
In November and December of 1997, the Company raised $3.0 million via the
issuance of Series G Preferred Stock. The Company is obligated to file a
registration statement (the "Series G Registration Statement") covering the
resale of the shares of Common Stock issuable on conversion of the Series G
Preferred Stock (the "Series G Conversion Shares") and to use its best efforts
to cause the Series G Registration Statement to become effective. In the event
of a Registration Default (as defined below), then the Company shall pay as
liquidated damages to each holder of Series G Preferred Stock an amount equal to
1% of the liquidation preference of the Series G Preferred Stock for the first
30 day period after May 25, 1998 (or pro rata portion thereof) and 2% of the
liquidation preference of the Series G Preferred Stock for each 30 day period
thereafter (or pro rata portion thereof) that there continues to be a
Registration Default, in cash ratably according to the number of Series G
Preferred Stock held by each holder, immediately payable following the
occurrence of such Registration Default. A "Registration Default" means if (i)
the Series G Registration Statement has not been declared effective by May 25,
1998, (ii) within the first 30 days following May 25, 1998, the Company
postpones the filing of the Series G Registration Statement or allows such
Series G Registration Statement to fail to be effective and usable, or elects
that such Series G Registration Statement not be usable for a reasonable period
of time, but not in excess of 90 days, or (iii) the Series G Registration
Statement is filed and declared effective but shall thereafter cease to be
effective (without being succeeded immediately by an additional registration
statement filed and declared effective) for a period of time exceeding 45 days
in the aggregate per year. The Company has not yet filed the Series G
Registration Statement and anticipates that a Registration Default will occur.
41
<PAGE>
The Company's cash flow is not currently adequate to meet its debts and
other obligations as they come due. The Company is currently evaluating its
alternatives to improve its cash flow, including the sale of selected assets
and the refinancing of its indebtedness using its real estate holdings as
collateral. In light of items described in the preceding paragraphs, in
January 1998, the Company entered into an agreement with Monroe's Prestige
Group, Inc. ("MPG"), a real estate development company based in Tampa, Florida,
which provides MPG with a ninety day inspection period during which MPG may
elect to purchase the land and improvements where the Company's Tampa, Florida,
gaming operations are located for $8.3 million in cash. A copy of this
agreement was filed with the Company's Current Report on From 8-K/A dated
February 9, 1998. MPG can terminate the agreement for any reason during the
ninety day period without penalty. If MPG determines to proceed with the
purchase, the closing would likely occur late in the second quarter or early in
the third quarter of 1998. The proposed transaction does not include the
Company's gaming licenses which would be available for use at a different
Hillsborough County, Florida facility. There can be no assurances that the
transaction with MPG will be consummated, or if consummated, that it will be on
the terms and conditions as set forth in the January 1998 agreement.
Item 7. Financial Statements.
List of Financial Statements Filed. See accompanying
Financial Statements:
Balance Sheets as of December 31, 1997 and 1996.
Statements of Operations for the years ended December 31, 1997
and 1996.
Statement of Stockholders' Equity for the two years ended December
31, 1997.
Statements of Cash Flows for the years ended December 31, 1997 and
1996.
Notes to Financial Statements.
42
<PAGE>
Audited Consolidated Financial Statements
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
Audited Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Shareholders
Florida Gaming Corporation and Subsidiary
Miami, Florida
We have audited the accompanying consolidated balance sheets of Florida Gaming
Corporation and Subsidiary (a Delaware Corporation) as of December 31, 1997 and
1996 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 and Subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue operating as a going concern. As discussed in
Note N to the consolidated financial statements, the Company has incurred
significant operating losses; is delinquent in the payment of payroll taxes,
property taxes and escheated unclaimed winnings; is in default with respect to
certain notes payable and other obligations and has made significant investments
in illiquid assets. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans with regard to these
matters are also described in Note N. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
/s/ KING & COMPANY, PSC
Louisville, Kentucky
February 13, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 1,042,110 $ 907,527
Note receivable from related
party--Notes G and K........................................... -0- 1,796,860
Accounts receivable, ITW......................................... 473,431 184,051
Inventory........................................................ 142,257 169,419
Interest receivable from related party--Notes G and K............ -0- 119,348
----------------- -----------------
1,657,798 3,177,205
PROPERTY, PLANT AND EQUIPMENT--Notes C and J
Land............................................................. 12,451,389 11,457,495
Buildings and improvements....................................... 11,313,654 9,747,978
Furniture, fixtures and equipment................................ 2,136,270 1,717,520
----------------- -----------------
25,901,313 22,922,993
Less accumulated depreciation.................................... (1,188,054) (528,700)
----------------- -----------------
24,713,259 22,394,293
ADVANCES TO RELATED PARTY--Note G.................................. 233,034 -0-
REAL ESTATE DEVELOPMENT--Note M.................................... 6,451,444 -0-
GAMING VENTURE INVESTMENTS--Notes H and L.......................... -0- 310,000
OTHER ASSETS--Notes C and H........................................ 957,835 423,551
----------------- -----------------
$34,013,370 $26,305,049
----------------- -----------------
----------------- -----------------
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1996
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Unclaimed winnings........................................................... $ 733,188 $ 930,017
ITW payables................................................................. 256,737 40,647
Accrued payroll and related expenses......................................... 439,151 203,338
Accounts payable and accrued expenses--Note C................................ 6,645,330 3,130,547
Current portion of long-term debt--Note I.................................... 6,845,381 1,423,703
------------- ------------
14,919,787 5,728,252
LONG-TERM DEBT (less current portion)--Note I.................................. 1,779,915 7,095,289
STOCKHOLDERS' EQUITY--Notes B, D and H
Class A cumulative convertible preferred stock;
1,200,000 shares authorized; 34,435 shares issued and
outstanding; aggregate1997 liquidation preference of $344,350.............. 3,443 3,443
Series B cumulative convertible preferred stock; 5,000 shares authorized;
445 and 1,990 shares issued and outstanding in 1997 and 1996,
respectively; aggregate 1997 liquidation preference of $445,000............ 45 199
Series C 8% cumulative convertible preferred stock, 5,000 shares
authorized; 150 and 550 shares issued and outstanding in 1997
and 1996, respectively; aggregate 1997 liquidation preference
of $153,025................................................................ 15 55
Series D 8% cumulative convertible preferred stock, 5,000 shares
authorized; 650 shares issued and outstanding in 1996...................... -0- 65
Series E 8% cumulative convertible preferred stock, 2,000 shares
authorized; 2,000 shares issued and outstanding in 1997;
aggregate1997 liquidation preference of $2,000,000......................... 200 -0-
Series F 8% cumulative convertible preferred stock, 2,500 shares
authorized; 2,084 shares issued and outstanding in 1997;
aggregate 1997 liquidation preference of $2,103,468........................ 208 -0-
Series G 5% cumulative convertible preferred stock, 3,000 shares
authorized; 3,000 shares issued and outstanding in 1997;
aggregate 1997 liquidation preference of $3,000,000........................ 300 -0-
Common stock, $.10 par value; 15,000,000 shares authorized;
5,620,060 and 4,340,626 issued and outstanding in 1997
and 1996, respectively..................................................... 562,006 434,063
Capital in excess of par value............................................... 43,184,670 35,276,095
Accumulated deficit.......................................................... (26,437,219) (22,232,412)
------------- ------------
17,313,668 13,481,508
COMMITMENTS AND CONTINGENCIES--Notes H and N
------------ ------------
$ 34,013,370 $ 26,305,049
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
HANDLE
Live Jai-Alai................................................................ $ 53,283,207 $ 3,665,582
ITW-Guest.................................................................... 55,664,780 21,992,843
ITW-Host..................................................................... 17,385,401 -0-
------------- ------------
Total Pari-Mutuel Handle $126,333,388 $25,658,425
------------- ------------
JAI-ALAI MUTUEL REVENUE....................................................... $ 17,155,970 $ 893,464
Less pari-mutuel taxes to State of Florida.................................. (3,105,309) (85,659)
Less simulcast guest commissions............................................ (2,217,930) -0-
INTER TRACK MUTUEL COMMISSIONS................................................ 5,018,174 2,126,283
------------- ------------
Net Pari-Mutuel Revenue 16,850,905 2,934,088
ADMISSION INCOME.............................................................. 499,591 134,464
PROGRAM REVENUE............................................................... 594,337 204,958
FOOD AND BEVERAGE............................................................. 2,456,062 450,104
CARD ROOM REVENUE............................................................. 500,158 -0-
OTHER......................................................................... 674,853 48,920
------------- ------------
TOTAL OPERATING REVENUE 21,575,906 3,772,534
OPERATING EXPENSES
Advertising and promotions.................................................. 1,212,092 250,569
Operating and mutuels payroll and related costs............................. 4,609,917 1,006,673
Player payroll and related costs............................................ 6,345,124 665,401
Food and beverage costs..................................................... 2,142,002 321,641
Repairs and maintenance..................................................... 438,173 109,801
Totalizator/teleview rent--Note H........................................... 824,262 294,309
Programs.................................................................... 584,554 131,389
Card room payroll and related costs......................................... 477,177 -0-
Other card room operating costs............................................. 161,336 -0-
Depreciation and amortization............................................... 736,349 193,205
Utilities................................................................... 1,067,100 115,941
Miscellaneous............................................................... 418,862 155,989
------------- ------------
TOTAL OPERATING EXPENSES 19,016,948 2,994,349
GENERAL AND ADMINISTRATIVE
Executive payroll and related costs......................................... 1,106,591 686,056
Directors' fees--Note G..................................................... 18,000 18,000
Management consulting....................................................... 466,500 38,907
Telephone and travel........................................................ 721,476 222,842
Professional fees--Note H................................................... 533,978 289,045
Interest expense............................................................ 849,150 327,486
Property taxes.............................................................. 587,479 72,079
Other--Note H............................................................... 2,138,781 538,101
------------- ------------
6,421,955 2,443,085
------------- ------------
(LOSS) FROM OPERATIONS (3,862,997) (1,664,900)
OTHER INCOME (EXPENSE):
Interest and dividend income--Notes C and K................................. 280,830 1,179,386
Provision for loss on gaming venture investment--Note L..................... (322,193) (34,000)
Other (net)................................................................. (189,883) 414
------------- ------------
(231,246) 1,145,800
------------- ------------
NET LOSS $ (4,094,243) $ (519,100)
------------- ------------
------------- ------------
BASIC LOSS PER COMMON SHARE--Note F........................................... $ (.80) $ (.14)
------------- ------------
------------- ------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the two years ended December 31, 1997
<TABLE>
<CAPTION>
Class A Series B Series C Series D Series E
Preferred Stock Preferred Stock Preferred Stock Preferred Stock Preferred Stock
Par Value $.10 Par Value $.10 Par Value $.10 Par Value $.10 Par Value $.10
------------------ -------------------- ---------------- ------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996.. 34,735 $3,473 2,400.0 $ 240 0 0 0 0
Stock issued--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
and D......................
-------- -------- ---------- -------- ------ ------- -------- --------- -------- ---------
BALANCES AT
DECEMBER 31, 1996.......... 34,435 3,443 1,992.5 199 550 55 650 65
Stock issued--Notes B and C.. 2,000 $200
Conversion of preferred
stock to common stock
--Note B................... (1,547.5) (154) (400) (40) (650) (65)
Dividend on Class A
preferred
stock--$.90 per share......
Dividends on Series C, D and F
preferred stock............
Net loss for the year........
Stock warrants issued--Note D
-------- -------- ---------- -------- ------ ------- -------- --------- -------- ---------
BALANCES AT
DECEMBER 31, 1997.......... 34,435 $3,443 445.0 $ 45 150 $ 15 0 $ 0 2,000 $200
======== ======== ========== ======== ====== ======= ======== ========= ======== =========
Series F Series G
Preferred Stock Preferred Stock Common Stock
Par Value $.10 Par Value $.10 Par Value $.10
-------------------- ------------------- ---------------------- Capital in
Shares Amount Shares Amount Shares Amount Excess of Accumulated
------ ------ ------ ------ ------ ------ Par Value Deficit
------------ -------------
<C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1996 3,123,586 $312,359 $27,278,152 $(21,682,272)
Stock issued--Notes B and C 738,221 73,822 7,939,260
Conversion of preferred
stock to common stock--
Note B..................... 473,655 47,366 (46,814)
Dividend on Class A preferred
stock--$.90 per share...... 5,164 516 30,475 (31,040)
Net loss for the year........ (519,100)
Stock options granted--Note C
and D...................... 150,928
--------- --------- -------- --------- ---------- ---------- ------------ -------------
BALANCES AT
DECEMBER 31, 1996 4,340,626 434,063 35,276,095 (22,232,412)
Stock issued--Notes B and C.. 2,084 $208 3,000 $300 447,500 44,750 7,737,316
Conversion of preferred
stock to common stock--
Note B..................... 822,350 82,235 (81,976)
Dividend on Class A
preferred 9,577 958 30,013 (30,971)
stock--$.90 per share......
Dividends on Series C, D and F
preferred stock............ (79,593)
Net loss for the year........ (4,094,243)
Stock warrants issued--Note D 223,222
--------- --------- -------- --------- ---------- ---------- ------------ -------------
BALANCES AT
DECEMBER 31, 1997.......... 2,084 $208 3,000 $300 5,620,060 $562,006 $43,184,670 $(26,437,219)
========= ========= ======== ========= ========== ========== ============ =============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
For the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................................... $(4,094,243) $ (519,100)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............................................. 736,349 193,205
Warrants issued for funding origination--Note D............................ 223,222 -0-
(Increase) in interest receivable......................................... -0- (117,133)
Provisions for loss on gaming venture...................................... 322,193 34,000
Decrease (increase) in inventory........................................... 27,162 (135,837)
Increase in accounts receivable............................................ (289,380) -0-
(Decrease) in unclaimed winnings........................................... (196,829) (4,185)
Increase in accounts payable and accrued expenses.......................... 3,966,686 220,732
Realized gain on sale of assets............................................ (17,493) -0-
-------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 677,667 (328,678)
INVESTING ACTIVITIES
Purchases of property and equipment............................................ (3,184,725) (13,973,886)
Increase in other assets....................................................... (163,502) (393,565)
Investments in gaming ventures................................................. -0- (21,000)
Increase in miscellaneous receivable........................................... (468,372) (153,455)
Loans to affiliated company.................................................... (1,524,989) (1,446,860)
Proceeds from the sale of fixed assets......................................... 83,018 -0-
-------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (5,258,570) (15,988,766)
FINANCING ACTIVITIES
Net long-term debt issued (repaid)............................................. (934,667) 6,533,938
Proceeds from sale of stock.................................................... 5,650,153 7,969,168
-------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,715,486 14,503,106
-------------- ----------------
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS 134,583 (1,814,338)
Cash and cash equivalents at beginning of period................................. 907,527 2,721,865
-------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,042,110 $ 907,527
============== ================
SUPPLEMENTAL DISCLOSURES
Issuance of common stock pursuant to-
-Conversion of preferred stock............................................... $ 106 $ 552
-Asset acquisitions.......................................................... -0- $ 4,747,255
Interest paid.................................................................. $ 734,428 $ 327,486
Payment of dividend through issuance of common stock........................... $ 30,971 $ 31,040
Cancellation of debt pursuant to asset acquisition............................. $ 3,208,163 $ -0-
Issuance of preferred stock pursuant to asset acquisition...................... $ 2,084,000 $ -0-
Debt assumed pursuant to asset acquisition..................................... $ 1,010,000 $ 3,578,647
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
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 live Jai
Alai frontons in Ft. Pierce, Miami, Tampa and Ocala, Florida. The Company also
conducts intertrack wagering (ITW) on jai alai, horse racing and dog racing from
its Tampa and Ocala Jai Alai facilities. On November 26, 1997, the Company
acquired Tara Club Estates ("Tara"), a residential and commercial real estate
development in Walton County, Georgia. The Company intends to complete the
development and market the property for sale. (See Note M).
Approximately 34% 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 investment company.
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
near its existing jai alai frontons ($1,617,495 at December 31, 1997 and 1996)
is carried at cost and is included with land under property, plant and equipment
in the accompanying balance sheets.
Inventory: The Company's inventory, comprising food and beverage products and
souvenirs, is stated at the lower of cost or market.
Pari-mutuel Wagering: Revenue is derived from acceptance of wagers under a
pari-mutuel 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 $256,737 and $40,647 at December 31,
1997 and 1996, respectively. Unclaimed winnings (outs) totaled $733,188 and
$930,017 at December 31, 1997 and 1996, respectively.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Income Taxes: The Company utilizes the asset and liability approach to
accounting for income taxes. The objective of the asset and liability method is
to establish deferred tax assets and liabilities for temporary differences
between the financial reporting and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Loss Per Common Share: During 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earning Per Share,
("SFAS 128"), which requires the computation and disclosure of basic and diluted
income (loss) per common share. The Company's 1996 loss per common share amount
has been restated to conform to SFAS 128. Basic income (loss) per common share
is determined by dividing income (loss) by the weighted average number of shares
of common stock outstanding. Diluted income (loss) per common share is
determined by dividing income (loss) by the weighted average number of shares of
common stock outstanding plus the weighted average number of shares that would
be issued upon exercise of dilutive stock options assuming proceeds are used to
repurchase shares pursuant to the treasury stock method plus the weighted
average number of shares that would be issued if holders of the Company's
preferred stock converted those shares to common stock using the "if converted"
method. Diluted loss per common share is not presented when the resulting
calculation is antidilutive relative to basic loss per common share.
The weighted average number of shares outstanding used in the calculation of
basic net loss per common share was 5,087,656 and 3,598,905 for 1997 and 1996,
respectively. Diluted loss per common share is not presented for either year
since the amount is antidilutive.
Options and warrants to purchase 2,209,000 shares of the Company's common stock
were outstanding on December 31, 1997. Had the Company reported income, 965,000
of these shares, net of forfeitures would have been included in the computation
of diluted income per common shares because the weighted average market price
was greater than the exercise price of those options.
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 or greater than 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 1996 amounts have been reclassified to conform with
their 1997 presentation.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
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 $30,971 and $31,040 during 1997 and 1996 respectively. These
dividends were paid by the issuance of 9,577 common shares and $20 cash in lieu
of fractional shares in 1997 and 5,164 common shares and $49 cash in lieu of
fractional shares in 1996.
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, 1997 and 1996, -0-
shares and 300 shares of Class A preferred stock were converted into -0- shares
and 67 shares of common stock, respectively. The Class A preferred is redeemable
at the option to the Company at $10.60 per share. In the event of dissolution,
the holders of Class A preferred shall be entitled to receive $10.00 per share,
plus accrued dividends, prior to any distribution to holders of common stock.
The Company's Series B convertible preferred stock provides annual cumulative
dividends at the rate of 8% 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 stock 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 1996, the Company issued 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. During 1997, 1547.5 Series B shares were converted to 295,951 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.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE B--PREFERRED STOCK--CONTINUED
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.
All shares of Series C Preferred Stock have been sold in 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, 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 exercises the 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. During
1997, 400 Series C shares were converted to 144,518 shares of common stock.
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' 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.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE B--PREFERRED STOCK--CONTINUED
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.
During 1996, the Company issued 650 Series D shares at $1,000 per share. During
1997, the Company issued an additional 525 Series D shares at $920 per share and
1,175 Series D shares were converted to 311,503 shares of common stock.
The Company is authorized to issue 2,000 shares of Series E 8% cumulative
convertible preferred stock, $.10 par value (the "Series E Preferred Stock"),
which provides annual dividends at the rate of 8% of the share's stated value,
payable upon conversion of the Series E preferred stock into common stock. The
stated value per share equals $1,000 (as adjusted for any stock dividends,
combination or splits).
Holders of Series E Preferred Stock may convert all or any such shares to the
Company's common stock (the "Series E Conversion Shares") beginning 120 days
after the issuance of the Series E Preferred Stock. If not converted earlier by
the holder, the Series E Preferred Stock shall be converted automatically two
years from the date of issuance. In general, the number of Series E Conversion
Shares issuable on conversion of each share of Series E 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 and (ii) 80%
of the average of the closing bid price of the common stock on the five trading
days before conversion. A holder of Series E Conversion Shares may not sell more
than 25% of such shares between 120 and 150 days of his purchase of Series E
Preferred Stock converted into each share, 50% of such shares between 151 and
180 days of his purchase of Series E Preferred Stock converted into such shares
and 75% of such shares between 181 and 210 of his purchase of Series E Preferred
Stock converted into each share; a holder may generally sell all of his Series E
Conversion Shares 211 days after his purchase.
Upon liquidation, the holders of Series E Preferred Shares shall be entitled to
be paid $950 per share plus accrued dividends before any distribution to holders
of common stock.
During 1997, the Company issued 2,000 Series E shares at $1,000 per share.
The Company is also authorized to issue up to 2,500 shares of Series F 8%
Cumulative Convertible Preferred Stock (the "Series F Preferred Stock"), which
provides annual dividends at the rate of 8% of the shares' 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 F Preferred Stock.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE B--PREFERRED STOCK--CONTINUED
Holders of Series F Preferred Stock may convert all or any of such shares to the
Company's common stock at any time. Each share of Series F Preferred Stock shall
be converted into 296.6689 shares of common stock (the "Conversion Stock"). The
number of shares of Conversion Stock into which each share of Series F Preferred
Stock shall be converted shall be proportionately adjusted for any increase or
decrease in the number of shares of common stock or Series F Preferred Stock.
Upon liquidation, the holders of Series F Preferred Shares shall be entitled to
be paid $1,000 per share plus accrued dividends before any distribution to
holders of common stock.
During 1997, the Company issued 2,084 Series F shares at $1,000 per share (See
Note M).
The Company is also authorized to issue up to 5,000 shares of Series G 5%
Convertible Preferred Stock (the "Series G Preferred Stock"), which provides
semi-annual dividends at the rate of 5% of the shares' 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 G Preferred Stock.
Holders of Series G Preferred Stock may convert all or any of such shares to the
Company's common stock at any time following the 180th day following the first
date of issuance. If not converted earlier by the holder, the Series G Preferred
Stock shall be converted automatically on September 30, 2002. In general, the
number of Series G Conversion Shares issuable on conversion of each share of
Series G Preferred Stock shall equal the consideration paid for such share
together with accrued and unpaid dividend on such share, if any, divided by the
lesser of (i) 105% of the average of the reported closing price of the Company's
common stock during the fifteen consecutive trading days immediately preceding
the issuance date or (ii) 80% of the closing bid price of the common stock on
the five trading days before conversion.
Upon issuance, Series G Convertible Preferred Stock shall have all of the same
voting rights as issued and outstanding common stock of the Company. Upon
liquidation, the holders of Series G Convertible Preferred Shares shall be
entitled to be paid $1,000 per share plus accrued dividends before any
distribution to holders of common stock. The affirmative vote of the holders of
a majority of the Series G Preferred Stock is required to approve the issuance
of additional equity financing before January 1, 1999.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE B--PREFERRED STOCK--CONTINUED
The Company is obligated to file a registration statement (the "Series G
Registration Statement") covering the resale of the shares of Common Stock
issuable on conversion of the Series G Preferred Stock (the "Series G Conversion
Shares") and to use its best efforts to cause the Series G Registration
Statement to become effective. In the event of a Registration Default (as
defined below), then the Company shall pay as liquidated damages to each holder
of Series G Preferred Stock an amount equal to 1% of the liquidation preference
of the Series G Preferred Stock for the first 30 day period after the expiration
of 180 days after the First Closing (or pro rata portion thereof) and 2% of the
liquidation preference of the Series G Preferred Stock for each 30 day period
thereafter (or pro rata portion thereof) that there continues to be a
Registration Default, in cash ratably according to the number of Series G
Preferred Stock held by each holder, immediately payable following the
occurrence of such Registration Default. A "Registration Default" means if (i)
the Series G Registration Statement has not been declared effective within 180
days from the First Closing, (ii) within the first 30 days following the 180th
day after the First Closing, the Company postpones the filing of the Series G
Registration Statement or allows such Series G Registration Statement not be
usable for a reasonable period of time, but not in excess of 90 days, or (iii)
the Series G Registration Statement is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by an
additional registration statement filed and declared effective) for a period of
time exceeding 45 days in the aggregate per year. The Company has not yet filed
the Series G Registration Statement and anticipates that a Registration Default
will occur. Should a default occur, the penalty will be $30,000 for the first
30 days after default and $60,000 per month thereafter until cured.
During 1997, the Company issued 3,000 Series G shares at $920 per share.
The Class A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock, the
Series F Preferred Stock and the Series G 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.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
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 for the cancellation of the above-described notes and the assumption of
certain liabilities. (See details below.) 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 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. No net profit payments were due for 1997.
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). Subsequent to December 31,
1997 a lawsuit was filed against the Company seeking collection of amounts due
under these agreements. (See Note I.)
During 1997, the Company discontinued the required payments under the above
consulting agreements because of its working capital deficiencies. Delinquent
payments totaling $96,000 are included in the accompanying balance sheet as
accrued expenses. Management intends to fulfill its contractual obligations
under these agreements as working capital becomes available.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE C--ACQUISITION OF WJA ASSETS --CONTINUED
A summary of the WJA assets acquired and consideration therefor is as follows:
<TABLE>
<CAPTION>
Allocated
Assets Acquired Amount
--------------- -----------
<S> <C>
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
-----------
-----------
</TABLE>
Management allocated the purchase price to the basis of the assets acquired
based on available appraisals or other fair value information.
<TABLE>
<CAPTION>
Consideration paid Amount
------------------ -----------
<S> <C>
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 (See Note I)..................... 500,000
Fair value of stock options issued.................................. 150,298
-----------
$18,421,243
-----------
-----------
</TABLE>
The three jai alai frontons had a loss from operations in 1996 of $127,000.
Interest expense and compensation of officers and directors of the three
frontons totaling $2,596,000 is not included in this amount.
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.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
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 and 1997. Freedom continues to hold options for
905,000 shares at $1.25 per share at December 31, 1997 which expire March 31,
1998.
The Company's 1994 Stock option plans provide options on up to 150,000 common
shares to Directors and options on up to 75,000 shares to employees.
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.
The Company's 1996 Stock option plan provides options on up to 100,000 common
shares to the Company's officers.
During 1997, the Company granted stock options to its directors for up to
350,000 shares of its common stock pursuant to a plan approved by the Board
providing options for up to 10,000 shares for each year of service as a director
of the Company. The Company also awarded stock options for 60,000 shares to
certain key employees during 1997. The above options have an average exercise
price at or above the market price at the date of grant. The options are not
exercisable for a period of one year from the date of grant and expire in five
years.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE D--STOCK OPTIONS -CONTINUED
Warrants for the purchase of 150,000 shares of the Company's common stock were
also issued during 1997 to an organization utilized by the Company to locate
capital funding sources to purchase its preferred stock. The exercise price is
110% of the quoted price of the Company's stock at date of grant or $4.18 per
share. These warrants are vested immediately and expire in five years. The
warrants had a fair value of $1.49 each at the date of issue or a total of
$223,222. This amount has been charged to Other Expense in the accompanying 1997
Statement of Operations. A summary of the Company's current stock-based
compensation arrangements is as follows:
<TABLE>
<CAPTION>
At January 1, 1996
---------------------------------------------
Number of Options Weighted Average
Exercise Price
<S> <C> <C>
1993 Plans 84,250 $2.50
1994 Plans 250,000 $6.20
1995 Plans 344,000 $5.46
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------
Number of Options Weighted Average
Exercise Price
<S> <C> <C>
1993 Plans 84,250 $2.50
1994 Plans 250,000 $6.20
1995 Plans 344,000 $5.46
1996 Plans 100,000 $6.31
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------
Number of Options Weighted Average
Exercise Price
<S> <C> <C>
1994 Plans 225,000 $5.63
1995 Plans 344,000 $5.46
1996 Plans 100,000 $6.31
1997 Plans 410,000 $5.65
</TABLE>
<TABLE>
<CAPTION>
Expiration Weighted Average Grant
Year Date Fair Value
------------------- -------------------------
<S> <C> <C>
1994 Plans 1999 $2.34
1995 Plans 2000 $2.06
1996 Plans 2001 $2.38
1997 Plans 2002 $2.02
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE D--STOCK OPTIONS --CONTINUED
No options from the above compensation plans were exercised or forfeited in
either 1997 or 1996. The fair value of the options was determined using the
Black-Scholes option pricing model. The assumptions used during 1997 and 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 1997 or 1996 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 $908,011 and $238,362, respectively. Additionally, basic
loss per share would have increased by $(.18) and $(.07) in 1997 and 1996,
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 1997 and1996 balance sheets.
NOTE E--INCOME TAXES
At December 31, 1997, the Company had tax net operating loss (NOL) carryforwards
of approximately $14,000,000 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 2013. However, $9,000,000 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 $5,000,000) are not subject to the Section
382 limitation.
The Company has unused general business tax credits of approximately $137,000 to
offset any future tax liabilities of the Company. These credits expire at
various dates through the year 2001. Any deferred tax assets arising from
differences from taxable income and financial reporting income are deemed to be
offset by an allowance in an equal amount due to the uncertainty of future
taxable income.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE F--RETIREMENT PLAN
The Company provides defined contribution retirement plans under Internal
Revenue Code Section 401(k). The plans, which cover employees included in its
current Collective Bargaining Agreement and certain non-union employees, provide
for the deferral of salary and employer matching. The Company's costs for
matching employee contributions totalled $139,800 and $20,840 during 1997 and
1996, respectively.
NOTE G--RELATED PARTY TRANSACTIONS
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.
In addition to loans made to Freedom under the credit facility described in Note
K, the Company provided working capital advances to Freedom and made payments to
third parties on Freedom's behalf throughout 1997. These third party payments
comprised transfers totaling approximately $582,000 to Freedom's brokerage
margin account, which funds were used by Freedom to cover "margin calls" made by
the brokerage as the value of Freedom's collateral in the margin account
decreased in value. The collateral included Florida Gaming common stock acquired
by Freedom during 1997 pursuant to its exercise of options. The Company also
advanced approximately $118,000 directly to Freedom through this open account
during the year. Freedom made payments to the Company during 1997 totaling
$259,500 as a reimbursement of these advances and also incurred expenses on
behalf of the Company totaling approximately $207,500 which were likewise
credited to Freedom's open account. The remaining balance in the open account of
$233,034 is included in the accompanying 1997 balance sheet as a non-current
advance to a related party. Management expects the receivable to be extinguished
by the return from Freedom of an equivalent value of the Company's Series F
Preferred Stock obtained by Freedom in connection with its sale of real estate
to the Company as described in Note M. Florida Gaming further provides a
guarantee of Freedom's indebtedness under its brokerage margin account. The
Company's legal counsel has advised the Board of Directors that up to 125,000
shares of its common stock issued to Freedom pursuant to the exercise of its
options may be invalid because the funding of the purchase involved funds drawn
from Freedom's margin account at about the time of the Company's advances to
that same margin account with respect to these particular shares. A rescission
of the option exercise would require the Company to return up to $156,250 or
$1.25 per share (the option price).
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE G--RELATED PARTY TRANSACTIONS --CONTINUED
Reference is made to Note D for information relating to Freedom's stock options
with respect to the Company's common stock and the exercise of a portion of
those options during 1997. Additional information can be found in Note D
pertaining to compensating stock option arrangements between the Company and its
Directors.
Reference is made to Note M for details of the Company's purchase of certain
real estate from Freedom.
During 1996, the Board of Directors established the Chairman's annual salary at
$360,000, payable monthly. The Chairman had previously received no salary.
During 1997, the Chairman received 8 monthly payments of $30,000 consistent with
the Board's directive. In September, 1997, the Company discontinued the salary
payments to the Chairman and began paying $30,000 per month to Freedom Financial
Corporation in lieu of the salary. No written employment or consulting agreement
exists between the Company and Freedom.
NOTE H--COMMITMENTS AND CONTINGENCIES
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 its Ft.
Pierce Fronton ("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 Fronton, 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 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.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE H--COMMITMENTS AND CONTINGENCIES -CONTINUED
The Letter of Intent provides that Casino America will be the manager of the
casino and all casino-related improvements. The Company will manage the
operation of the jai-alai fronton, intertrack wagering and all other non-casino
related activities. Each corporation will receive a management fee based on
costs. The Letter of Intent provides that Casino America has the exclusive right
to enter into a Joint Venture with the Company for six years and Casino America
has a right of first refusal to enter into other potential gaming opportunities
in Florida with the Company for such period and during the term of the Joint
Venture. The formation of the Joint Venture is subject to certain conditions,
including the satisfactory completion of due diligence by Casino America, the
receipt of all required regulatory approvals, the approval of each partner's
board of directors, the execution of a definitive joint venture agreement, and
the approval of the Company's stockholders, if required by law. Either party may
terminate discussions in connection with the Joint Venture and neither party
shall have any liability to the other, except as otherwise specified in the
Letter of Intent.
Freedom Financial Corporation has informed the Company that Casino America has
purchased 22,500 shares of Freedom's 7% Series AA Mandatorily Redeemable
Preferred Stock (the "Series AA Stock"). The Series AA 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 Series AA
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 Series AA
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 1997, Freedom purchased an additional 425,000 shares of
common stock pursuant to the same option. In addition to its remaining option to
purchase 905,000 shares of the Company's Common Stock, (which expires on March
31, 1998) Freedom now owns directly 1,765,400 shares of the Company's 5,620,060
shares of issued and outstanding Common Stock. (See Note D.)
Registration Rights: The Company has committed upon certain terms and
conditions, to register for resale, certain shares held by other parties,
allowing those shares to be publicly traded. The Company may not be able to
comply with those commitments.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE H--COMMITMENTS AND CONTINGENCIES --CONTINUED
Leases: The Company rents totalizator (Autotote) and other equipment under
leases which expire at various dates through 2001. 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 years ended December 31,
1997 and 1996 was approximately $824,262 and $294,000, respectively. The
remaining minimum lease commitments under all operating leases at December 31,
1997, including those obligations assumed in connection with the Company's
acquisition of certain WJA assets (see Note C), are as follows:
<TABLE>
<CAPTION>
Minimum
Year Annual Rental
---- -----------------
<S> <C>
1998................... $ 875,000
1999................... 525,000
2000................... 125,000
2001................... 125,000
-----------------
$1,650,000
-----------------
-----------------
</TABLE>
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 common stock having a quoted market value of $3.10 on the date of issue.
Certain relevant provisions of the real estate purchase agreement included the
Company's guarantee of the appreciation in value of such stock as follows:
- - If the seller held 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.
- - For the purpose of the agreement, the price per share on the $10.00
Guaranty Date shall be the over the counter bid price, ("Market Value").
On the $10.00 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.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE H--COMMITMENTS AND CONTINGENCIES --CONTINUED
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 closing price of the Company's common stock at the end of the three
year period in 1997 ($3.00), a payment of $284,016 is due under the guarantee.
This amount is included as an accrued expense in the accompanying 1997 balance
sheet. Of this amount, $217,000 was recorded as additional purchase price of the
subject real estate with the difference ($67,000) charged to interest expense
based on the time value of the money paid over the three years. The seller has
made a demand for payment under this agreement but the Company has been unable
to fulfill its obligations due to its working capital deficiencies.
Other Commitments: Reference is made to Notes C and L for details of other
Company commitments.
Litigation Costs: In addition to legal fees incurred in the normal course of the
Company's business activities, during 1997 and 1996 the Company paid
approximately $83,000 and $107,000, respectively for settlement costs and legal
fees associated with various lawsuits. Such costs are included in Professional
Fees in the accompanying Statements of Operations.
Collective Bargaining Agreement: The Company is a party to a collective
bargaining agreement with the International Jai Alai Players Association U.A.W.
Local 8868, AFL-CIO. The agreement allows the Company to negotiate individual
contracts with players and provides for minimum salaries and bonuses based on
parimutuel handle, certain cesta allowances and retirement benefits. The
agreement continues from year to year unless timely notice of termination is
given by either party to the agreement.
Concentration of Credit: The Company maintains significant cash balances with
financial institutions in excess of the insurance provided by the Federal
Deposit Insurance Corporation (FDIC).
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE H--COMMITMENTS AND CONTINGENCIES -CONTINUED
Summer Jai Alai: The Company is a partner in "The Summer Jai Alai Partnership"
or "SJA" and operates certain live Jai Alai dates annually on behalf of the
partnership. The partnership was formed in 1980 pursuant to an Operator's
Agreement and Fronton Lease. The 1996 summer season resulted in an operating
loss and the Company made demand upon its partners for their respective shares
of the losses and to fund a "money bank " and "operations bank" for SJA's 1997
summer season. Neither request was honored and as a result, the Company filed
suit against the partnership to collect on the 1996 losses on July 20, 1997.
This lawsuit was amended on February 20, 1998 seeking damages from the partners
for breaching the Operator's Agreement and Fronton Lease. The Company has
declared the partnership terminated and is currently winding up the
partnership's affairs. Because the 1997 SJA summer season resulted in an
additional loss, the Company intends to further amend its complaint to include
its partners' share of that loss, once the annual independent audit of the
partnership is completed. At December 31, 1997, the Company is carrying an
account receivable from its SJA partners of $468,372. The Company believes its
lawsuit will be successful and the partners will be required to contribute their
respective shares of the balance due.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE I--LONG-TERM DEBT
The Company's long-term debt comprised the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
S> <C> <C> <C> <C>
Mortgage note dated September 30, 1994
secured by 18.584 acres in St. Lucie
County, Florida (Graham Road); payable
in monthly installments of $2,042
including interest at 10% per annum
through August 30, 1997 with a balloon
payment of $172,888, including interest,
due on September 30, 1997...................... $ 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.......... $ 3,151 $ 22,605 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................................ 1,913 228,877 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................................ 2,009 288,112 24,952 315,404
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 nterest,
due on February 1, 2000........................ 27,293 288,112 24,952 315,404
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE I--LONG-TERM DEBT--CONTINUED
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
S> <C> <C> <C> <C>
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 -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.
(In default)................................... $5,317,936 -0- $1,166,667 4,833,333
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%. (In default) 500,000 -0- 50,000 450,000
Note payable dated July 7, 1993 secured
by investment real estate in Walton
County, Georgia; interest payable in
monthly installments at an adjusted
monthly rate of prime plus 1 point
through September 23, 1998..................... 493,079 -0- -0- -0-
Mortgage note dated June 30, 1997
secured by second mortgage in investment
real estate in Walton County, Georgia;
payable on December 31, 1997; interest
is payable at prime + .25%..................... 500,000 -0- -0- -0-
---------- ---------- ---------- ----------
$6,845,381 $1,779,915 $1,423,703 $7,095,289
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE I--LONG-TERM DEBT--CONTINUED
The approximate maturities of the Company's long-term debt for the five years
subsequent to December 31, 1997 are as follows: 1998--$7,445,381;
1999--$137,576; 2000--$601,235; 2001--$139,718; 2002--$143,401;
thereafter--$157,985.
The Company is in default for non-payment of its mortgage note dated September
12, 1996 which was issued in connection with the acquisition of its Tampa, Miami
and Ocala Jai Alai facilities. The note, which is secured by substantially all
of the Company's real estate utilized in its Jai Alai operations, had a balance
of $5,317,936 at December 31, 1997. Payments totaling approximately $638,000
were delinquent at December 31, 1997. The note, which matures September 12,
1998, if not accelerated by the lender prior to that date, provides for a 5%
increase in interest rate should payments become delinquent. At December 31,
1997 the resulting interest rate was 13.5%. The Company is also in default of
its note payable to Wheeler-Phoenix, Inc. The note had a remaining balance of
$500,000 at December 31, 1997 and on January 28, 1998, the lender submitted a
demand for payment of the entire balance. The note was originally due in 10
annual installments. Subsequent to December 31, 1997, a lawsuit was filed
against the Company seeking collection of amounts due under the Wheeler-Phoenix
note payable and related consulting agreements. (See Note C.)
NOTE J--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprise the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Land (undeveloped)................... $ 1,617,495 $ 1,617,495
Land (improved)...................... 10,833,894 9,840,000
Buildings and improvements........... 11,313,654 9,597,450
Equipment furniture and fixtures..... 2,050,360 1,663,669
Vehicles............................. 85,910 59,851
Less accumulated depreciation........ (1,188,054) (528,700)
------------- -------------
$ 24,713,259 $ 22,249,765
------------- -------------
------------- -------------
</TABLE>
The Company made three purchases of undeveloped land during 1994. The three
purchases comprised approximately 20 acres, including two separate lots, all of
which are adjacent to the 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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE K--NOTES RECEIVABLE
Included in notes receivable in the accompanying 1996 balance sheet is a note
comprising a line of credit granted to Freedom Financial Corporation on December
15, 1995. The balance of such line was $1,796,860 at December 31, 1996. The
credit facility, which was secured by refundable income taxes and real estate
owned by Freedom, was due on demand and bore interest at 2% above prime.
Interest receivable on this line of credit totaled $119,348 at December 31,
1996. Freedom paid no interest to the Company during 1996. Freedom Financial is
owned substantially by the Company's Chairman. As described in Note M, the
Company canceled this line as part of the acquisition of Tara Club Estates from
Freedom Financial Corporation in 1997.
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 provided 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 was contingent upon the Tribes'
procurement of judicial or regulatory approval to operate a gaming venture.
Recovery of these funds under the "loan" agreement was 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 expired on June 30, 1997, resulted in
Company advances to the tribe totaling $356,193 at December 31, 1996. These
advances, less the $34,000 reserve provided in 1996, were carried as an
investment on the accompanying 1996 balance sheet. Management has provided a
reserve of $322,193 against the remaining investment to reflect its diminished
expectation of success of this venture in the short-term.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE M--REAL ESTATE DEVELOPMENT
On November 26, 1997, Florida Gaming Corporation (the "Company") acquired
substantially all of the assets of Interstate Capital Corporation (ICC), a
wholly-owned subsidiary of Freedom Financial Corporation (Freedom). The assets
consist of certain unimproved properties and a residential real estate
development called Tara Club Estates (collectively, "Tara" or the "Properties"),
all of which are situated in Loganville, Walton county, Georgia. As
consideration for the purchase, the Company paid ICC $6,373,265 as follows: (i)
the Company issued to ICC 2,084 shares of Series F 8% Convertible Preferred
Stock (the "Series F Preferred Stock") at a stated value of $1,000 per share
(convertible into the Company's common stock ("Common Stock") on the basis of
296.6689 shares of the Company's Common Stock for each $1,000 of stated value of
the Series F Preferred Stock), (ii) the Company assumed $1,081,102 of first
mortgage promissory notes to certain lenders by the properties purchased, and
(iii) the Company canceled $3,208,163 owed by Freedom to the Company.
The Company accounted for the acquisition of ICC's assets using the purchase
method of accounting. The total purchase price was $6,373,265 comprising the
above indebtedness cancellation, debt assumption and preferred stock. In
accordance with generally accepted accounting principles, the purchase price was
allocated to the assets acquired based on their fair value at the date of
acquisition. Management estimated fair value using available appraisals or other
cost information with respect to the individual assets.
The proforma results of operations of Florida Gaming combined with the Tara
operating entity for the years ended December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ----------------
<S> <C> <C>
Proforma revenue..................... $ 21,854,906 $3,930,534
Proforma net loss.................... $(4,136,701) $(939,329)
Proforma basic loss per share........ $ (.81) $ (.27)
</TABLE>
The Company's real estate development activities will comprise a separate
segment of its operations. Because the development was acquired in late 1997,
the Company had virtually no income or expenses attributable to this segment of
its business. The Company intends to engage the services of a professional real
estate management and marketing company in 1998 to assist with the evaluation of
the market potential, assess competitive factors in the Atlanta/Walton County
market and to develop an advertising and marketing program for the sale of the
developed residential and commercial lots.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE N--GOING CONCERN
The Company incurred operating losses of $4,094,243 and $519,100 for the years
ended December 31, 1997 and 1996, respectively. During this period, the Company
invested $18,290,000 in land, buildings and improvements in Tampa, Ocala and
Miami, Florida in connection with its Jai Alai operations and $6,451,444 in
partially developed residential and commercial real estate in Walton County,
Georgia. The acquisition of the Tampa, Ocala and Miami facilities resulted from
the Company's acceptance of these properties in lieu of foreclosure of certain
notes payable issued by the owner of these facilities. Reference is made to Note
C for further information pertaining to this transaction. The Walton County real
estate was acquired from Freedom Financial Corporation, a related party, in a
transaction which also included the cancellation of notes payable issued by
Freedom to the Company. Reference is made to Note M for further information
pertaining to this transaction. During 1997, the Company also expended
$2,390,000 to remodel and convert parts of its Miami and Tampa Jai Alai
facilities to accommodate "Card Rooms."
In addition to the Company's significant investment in real estate and
non-earning assets, the Company advanced funds to Freedom during 1997 totaling
$1,524,989. This receivable was partially cancelled in connection with the
Company's acquisition of the Freedom's Georgia property. The Company also
continued to fund the operating losses of the "Summer Jai Alai" partnership
during this period resulting in an account receivable from the partnership
totaling $468,000 at December 31, 1997. Although the Company expects to collect
this receivable, the timing of such collection is not determinable at this time.
(See Note H.)
The Company's working capital position has deteriorated significantly during
1997. This deterioration was caused by its losses from operations, its
expenditures to fund the "Card Room" remodeling and operating costs, the
cancellation of current notes receivable from Freedom in connection with the
Company's acquisition of the Georgia property and the maturity or acceleration
of certain of its notes payable and other contractual obligations more fully
described in Notes C, H and I. Its working capital deficit grew from $2,551,000
at December 31, 1996 to $13,262,000 at December 31, 1997. This working capital
deficit has prevented the Company from meeting its current obligations to remit
payroll taxes withheld from employee pay, to pay property taxes on its real
estate for calendar years 1996 and 1997, and to remit to the State of Florida
unclaimed winnings which were to be escheated in August, 1997.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION AND SUBSIDIARY
December 31, 1997 and 1996
NOTE N--GOING CONCERN -CONTINUED
Further, as discussed in Note B, the Company anticipates a default with
respect to its Series G Preferred Stock and certain vendors have placed the
Company on a COD basis for future purchases. At December 31, 1997, the
Company's more significant delinquent payments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Payroll taxes withheld and employer matching............. $ 378,000
Real estate taxes for 1997 and 1996...................... 1,027,000
Unclaimed winnings due to Florida........................ 109,000
Payments due on consulting agreements (Note C)........... 96,000
Payments due on stock appreciation guarantees (Note H)... 284,000
Payments due on notes payable (Note I)................... 638,000
---------------
$2,532,000
===============
</TABLE>
During 1997, the Company funded much of its working capital needs through the
sale of its Preferred Stock. Approximately $5,500,000 in capital was raised in
connection with these stock sales. The Company's continued ability to operate is
dependent on its ability to either refinance its existing debt, liquidate
significant non-earning assets or raise additional capital. Management believes
the Company's most likely source of liquidity will be the sale of one or more of
its Jai Alai facilities. To that end, management is actively negotiating the
sale of one such facility and intends to close the transaction in 1998. There
can be no assurance that this sale or any other will occur at a time or in a
manner that allows the Company to continue its operations in its present form.
31
<PAGE>
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 26, 1998:
<TABLE>
<CAPTION>
Director or
Executive
Officer
Name Age Position With The Company Since
--- ------------------------- -----------
<S> <C> <C> <C>
W. Bennett Collett 65 Chief Executive Officer 1993
and Chairman
Robert L. Hurd 58 President and Director 1993
W. Bennett Collett, 42 Executive Vice President, 1993
Jr. Secretary and Director
Timothy L. Hensley 42 Executive Vice President, 1993
Treasurer, Chief Financial
Officer and Director
Gary E. Bowman 46 Director 1994
George W.
Galloway, Jr. 64 Director 1994
Roland M. Howell 82 Director 1995
</TABLE>
W. Bennett Collett has served as Chairman of the Board, Chief Executive
Officer and a director of Freedom since its formation in 1985. In addition to
its interest in the Company, Freedom's
32
<PAGE>
interests include Interstate Capital Corporation, a wholly owned subsidiary with
real estate holdings 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 served as Chairman and
Chief Executive Officer of FHC Corporation ("FHC") since its formation in July
1997. FHC's sole business currently is to hold shares of Holding. 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. Mr. Hurd has served as President and as a director of FHC since its
formation in July 1997. 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 has served as
Executive Vice President, Secretary and as a director of FHC since its formation
in July 1997. 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.
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
33
<PAGE>
Vice President since 1988. Mr. Hensley was appointed to the Company's Board of
Directors on February 27, 1997. Mr. Hensley has served as Executive Vice
President, Treasurer and Chief Financial Officer of FHC since its formation in
July 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, 1997, 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
34
<PAGE>
On February 28, 1990, Freedom filed a registration statement with the
Securities and Exchange Commission (Commission File No. 33-33625) (the "Freedom
Registration Statement") to register shares of its Common Stock, Class A
Preference. On March 5, 1990, Freedom filed an application with the New Jersey
Bureau of Securities pursuant to the New Jersey state securities laws to
register certain of the shares to be offered. The New Jersey Bureau of
Securities indicated that the Freedom Registration Statement may have been
materially deficient because certain civil and administrative proceedings
involving Mr. Collett including an injunction prohibiting future violations of
federal securities laws were not disclosed. Without admitting or denying the
materiality of the omitted information, which information had been omitted
following consultation with legal counsel, on June 11, 1990, Freedom requested
withdrawal of the application for registration of securities in New Jersey. On
August 23, 1990, the State of New Jersey Bureau of Securities issued a Consent
Order In the Matter of: Freedom Financial Corporation (SR-5587). On November 5,
1990, the Securities and Exchange Commission issued an order consenting to the
withdrawal of the Freedom Registration Statement. The New Jersey Consent Order
granted the request for withdrawal of the application for registration and
denied the effectiveness of certain exemptions of the New Jersey state
securities laws for secondary trading in Freedom's securities. In addition,
Freedom agreed that it would not sell, give or otherwise distribute its
securities in or from New Jersey without first notifying and receiving written
authority to do so from the New Jersey Bureau of Securities.
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, 1997, 1996, and 1995, to W. Bennett
Collett, the Company's chief executive officer on December 31, 1997 and to the
Company's executive officers who received total salary and bonus compensation in
excess of $100,000 during 1997. 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.
35
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long Term
Compens. Compens.
--------- ----------
Name and Principal Fiscal Options/ All Other
Position Year Salary SARS (#) Compensation
------------------ ------ --------- ---------- ------------
<S> <C> <C> <C> <C>
W. Bennett Collett 1997 $237,000 165,000 $ - 0 -
Chairman of the Board and 1996 390,000 - 0 - - 0 -
Chief Executive Officer 1995 - 0 - 300,000 - 0 -
W. Bennett Collett, Jr. 1997 $165,000 40,000 $ - 0 -
Executive Vice President 1996 97,000 100,000 - 0 -
and Director 1995 84,000 - 0 - - 0 -
Timothy L. Hensley 1997 $110,208 25,000 $ - 0 -
Executive Vice President, 1996 80,462 - 0 - - 0 -
CFO and Director 1995 70,650 - 0 - - 0 -
</TABLE>
Stock Option Grants
Option Grants in Fiscal 1997
<TABLE>
<CAPTION>
Number of % of Total Options
Securities Granted to Exercise
Name Underlying Employees & Price Expiration
Options Granted Directors in 1997 ($/Sh) Date
- ----- ---------------- ----------------- --------- -----------
<S> <C> <C> <C> <C>
W. Bennett 125,000(1) 30.5% $6.625 2/27/02
Collett 40,000(1) 9.8% 6.50 2/26/02
W. Bennett 40,000(1) 9.76% $6.50 2/26/02
Collett, Jr.
Timothy L. 25,000(2) 6.10% $6.4375 2/27/02
Hensley
</TABLE>
___________________________
(1) Options immediately exercisable upon grant.
(2) Options became exercisable on February 27, 1998.
Aggregated Option Exercises in Fiscal 1997 and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Options
at Fiscal Year End (#) (1)
Shares Acquired Value Exercisable/
Name on Exercise (#) Realized ($) Unexercisable
<S> <C> <C> <C>
W. Bennett Collett - 0 - - 0 - 490,000/-0-
W. Bennett Collett, Jr. - 0 - - 0 - 215,000/-0-
Timothy L. Hensley - 0 - - 0 - 50,000/25,000
- -----------------------
</TABLE>
36
<PAGE>
(1) Based on a per share closing price of $3.00 at December 31, 1997, 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 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.
37
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 26, 1998
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, the Class B Common Stock of
Freedom and the Common Stock of FHC by each director and executive officer, and
all directors and executive officers as a group. Of the 1,652,480 shares of the
Company's Common Stock currently held of record by Freedom, 1,100,000 shares
have been pledged by Freedom to a bank to secure a $1,800,000 line of credit and
the remaining shares have been pledged to other creditors. Freedom, Holding and
FHC each 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 is a wholly owned subsidiary of FHC. FHC's sole business currently is
to hold shares of Holding. Holding's sole business currently is to hold shares
of Freedom.
<TABLE>
<CAPTION>
THE COMPANY FREEDOM FHC CORPORATION
------------------------- ------------------------- -------------------------
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........................ 2,142,480(5) 34.6% 1,109,011(6) 95.0% 407.26(7) 73.5%
Robert L. Hurd....................... 66,000(8) 1.2% --- --- 54.3(9) 9.8%
W. B. Collett, Jr.................... 215,000(10) 3.6% --- --- 87.94 15.9%
Timothy L. Hensley................... 75,000(11) 1.3% --- --- 4.79 0.9%
Roland M. Howell..................... 395,000(12) 6.9% --- --- --- ---
Gary E. Bowman....................... 55,500(13) 1.0% --- --- --- ---
George W. Galloway, Jr............... 55,000(13) 1.0% --- --- --- ---
All current directors and executive
officers as a group (7 persons)...... 3,003,980(14) 44.9% 1,109,011 95.0% 554.3 100%
5% Beneficial Owners
Freedom Financial Corporation(15).... 1,652,480(16) 29.0% N/A N/A N/A N/A
BOK DPC Asset Holding
Corporation.......................... 703,297 11.0% N/A N/A N/A N/A
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
Roland M. and Dorothy V.
Howell............................. 395,000(12) 6.9% N/A N/A N/A N/A
Plaza Venetia; Suite 22A-B
555 N.E. 15th Street
Miami, Florida 33132
Casino America, Inc.................. 369,427(17) 6.5% N/A N/A N/A N/A
711 Washington Loop
Biloxi, Mississippi 39530
</TABLE>
- ------------------------------
38
<PAGE>
(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 5,696,054 shares outstanding as of March 26, 1998. Shares of
Common Stock subject to options exercisable or preferred stock convertible
within 60 days are deemed outstanding for computing the percentage of class
of the person holding such options or preferred stock 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 26, 1998. Class B Common
Stock is the only class of Freedom's capital stock issued and outstanding.
(4) Based on 554.3 shares outstanding as of March 26, 1998.
(5) Includes 1,652,480 shares beneficially owned by Freedom, excluding 905,000
shares which Freedom has the right to acquire through March 31, 1998.
Freedom has informed the Company that it does not intend to exercise these
options. See Note 14. 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
exercisable options.
(6) Includes 1,109,011 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 88 shares formerly owned by Mr. Collett's former spouse that
were purchased by Freedom. Under Delaware law these shares may not be
voted by Freedom as a subsidiary of FHC Corporation.
(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 exercisable options.
(9) Includes 54.3 shares owned by the Hurd Family Partnership, L.P., of which
Mr. Hurd is general partner.
39
<PAGE>
(10) Includes 215,000 shares that may be purchased pursuant to options.
(11) Includes 75,000 shares that may be purchased pursuant to options.
(12) Of the 395,000 shares, Mr. and Mrs. Howell own 195,000 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 1,000,000 shares which may be acquired by all directors and
executive officers as a group pursuant to options, excluding options for
905,000 shares owned by Freedom that expire March 31, 1998. See Note 5.
(15) The address of Freedom Financial Corporation, Holding, and FHC 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.
(16) Excludes 905,000 shares which Freedom currently has the right to acquire
that expire March 31, 1998. See also Note 5.
(17) Casino America, Inc. owns 27,707 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
184,713 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 369,427 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
Freedom, Holding and FHC 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, Holding and FHC,
see "Item 11. Security Ownership of Certain Beneficial Owners and Management."
40
<PAGE>
On September 12, 1996, the Company consummated the purchase of notes (the
"WJA Notes") of WJA Realty Limited Partnership ("WJA") from the Bank of
Oklahoma, National Association ("BOK"). The WJA Notes totaled $20,728,826
(consisting of $16,887,907 principal and $3,840,919 accrued but unpaid
interest), bearing interest at 9.25% on the principal and unpaid interest. The
Company paid $2,000,000 in cash, issued 703,297 shares of the Company's Common
Stock to BOK DPC Asset Holding Corporation, a wholly owned subsidiary of BOK,
issued a promissory note in the original principal amount of $6,000,000 (the
"BOK Note") to BOK bearing interest at New York Prime Rate, and issued a
$1,000,000 original principal amount non-interest bearing promissory note to BOK
in payment of a contingent liability relating to certain collections by the
Company in excess of $12,000,000 on account of the WJA Notes. The terms of the
transaction were determined based on arm's length negotiations. The Company
failed to make payments due under the BOK Note beginning in October 1997. BOK
has taken the position that the applicable rate of interest under the BOK Note
increases to the Applicable Prime Rate, as defined, plus 5 percent, on December
15, 1997. On March 11, 1997, the Company sold certain surplus real estate in
North Miami for aggregate consideration of $487,000. From the proceeds of this
sale, the Company paid BOK two delinquent payments totaling $422,175.08, thus
reducing the principal balance owed to BOK to approximately $4.8 million.
Although no definitive agreement has yet been reached with BOK and there can be
no assurance that any agreement will be reached, the Company and BOK are in
negotiations to modify the loan repayment schedule so that the Company will pay
interest only until the closing of the proposed sale of the Tampa facility, at
which time the Company would repay all amounts then due BOK. See "Item 7.
Management's Discussion and Analysis."
The WJA Notes were secured by real estate and improvements consisting of
jai-alai and inter-track wagering facilities located at Miami, Tampa and Ocala,
Florida. The Company entered into an Assets Purchase Agreement dated as of
November 20, 1996 (the "Agreement") between the Company, Florida Gaming Centers,
Inc. (the "Subsidiary"), and WJA, pursuant to which the Subsidiary (a wholly
owned subsidiary of Company) agreed to acquire all of the tangible and
intangible properties and assets owned by WJA. Upon the terms and subject to
the conditions set forth in the Agreement, as of January 1, 1997, the Company
acquired WJA's jai-alai and inter-track wagering facilities located in Miami,
Tampa and Ocala, Florida. The assets acquired have been combined with the
Company's Ft. Pierce Jai-Alai and Inter-Track Wagering operations into the
Subsidiary.
The Company and Freedom entered into a Credit Line Agreement dated October
1, 1996, whereby the Company agreed to lend Freedom up to $2,000,000 at an
annual interest rate of 2% above the prime
41
<PAGE>
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 superseded a $1,000,000
line of credit established on December 1, 1995. Principal and interest
outstanding under the Credit Line Agreement were payable upon demand by the
Company; the agreement did not provide for periodic payments of principal or
interest.
Pursuant to the Asset Purchase Agreement dated as of September 24, 1997,
the Company purchased from Interstate Capital Corporation ("Interstate") certain
unimproved properties and a residential real estate development called Tara Club
Estates (collectively, the "Properties"), all of which are situated in
Loganville, Walton County, Georgia. Interstate is a wholly owned subsidiary of
Freedom. As consideration for the purchase, the Company paid Interstate the sum
of $6,373,265, payable as follows: (i) the Company's assumption of $1,081,102 of
first mortgage promissory notes to certain lenders secured by the Properties,
(ii) the Company's issuance of 2,084 shares of Series F 8% Convertible Preferred
Stock at a stated value of $1,000 per share (convertible on the basis of
296.6689 shares of the Company's common stock for each $1,000 of stated value of
the Preferred Stock), and (iii) the cancellation of $3,208,163 owed by Freedom
to the Company in accordance with the Credit Line Agreement and otherwise. The
transaction was approved by a Committee of the Board of Directors of the Company
who do not have a direct financial interest in the transaction.
On July 10, 1997, the Company issued to an unrelated party a $1,200,000 5%
Cumulative Convertible Debenture due December 31, 1998 (the "Debenture"). The
Debenture provided its holder with certain demand rights after December 31,
1997 to redeem part of the Debenture under certain circumstances (the "Demand
Rights"). Freedom guaranteed the Demand Rights by pledging 300,000 shares of
the Company's Common Stock pursuant to a Guaranty and Stock Pledge Agreement.
The Company completed its redemption of the Debenture on December 5, 1997.
42
<PAGE>
Pursuant to a Stock Purchase Agreement, on March 31, 1993, the Company
issued an aggregate of 699,480 shares of Common Stock and options for 2,030,000
shares of Common Stock to Freedom. On May 1, 1997, Freedom exercised options to
purchase 300,000 shares of Common Stock at an exercise price of $1.25 per share.
On August 1, 1997, Freedom exercised options to purchase 25,000 shares of
Common Stock at an exercise price of $1.25 per share. On August 21, 1997,
Freedom exercised options to purchase 100,000 shares of Common Stock at an
exercise price of $1.25 per share. Freedom used its working capital to effect
these purchases. Freedom retains an option to purchase 905,000 shares at an
exercise price of $1.25 per share which expires March 31, 1997; Freedom has
informed the Company that it will not exercise this option.
The Company provided working capital advances to Freedom and made payments
to third parties on Freedom's behalf throughout 1997. These third party
payments comprised transfers totaling approximately $582,000 to Freedom's
brokerage margin account, which funds were used by Freedom to cover "margin
calls" made by the brokerage as the value of Freedom's collateral in the margin
account decreased in value. The collateral included Florida Gaming common stock
acquired by Freedom during 1997 pursuant to its exercise of options. The
Company also advanced approximately $118,000 directly to Freedom through this
open account during the year. Freedom made payments to the Company during 1997
totaling $259,500 as a reimbursement of these advances and also incurred
expenses on behalf of the Company totaling approximately $207,500 which were
likewise credited to Freedom's open account. The remaining balance in the open
account of $233,034 is included in the accompanying 1997 balance sheet as a
non-current advance to a related party. Management expects the receivable to be
extinguished by the return from Freedom of an equivalent amount of the Company's
Series F Preferred Stock. Florida Gaming further provides a guarantee of
Freedom's indebtedness under its brokerage margin account.
During 1996, the Board of Directors established the Chairman's annual
salary at $360,000, payable monthly. The Chairman had previously received no
salary. During 1997, the Chairman received 8 monthly payments of $30,000
consistent with the Board's directive. In September, 1997, the Company
discontinued the salary payments to the Chairman and began paying $30,000 per
month to Freedom in lieu of the salary. During the first quarter of 1998, the
Company has paid $33,000 per month to Freedom; the Company has made no salary
payments to either Mr. Collett or Mr. Hurd during this period. No written
employment or consulting agreement exists between the Company and Freedom.
43
<PAGE>
Item 13. Exhibits List and Reports on Form 8-K.
(a) List of Exhibits Filed.
<TABLE>
<S> <C>
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 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 Designations of Series E 8% Cumulative Convertible
Preferred Stock is hereby incorporated by reference to Exhibits 3.1
and 4.1 Current Report on Form 8-K dated April 4, 1997.
4.5 Certificate of Designations of Series F 8% Cumulative Convertible
Preferred Stock is hereby incorporated by reference to Exhibits 3.1
and 4.1 Current Report on Form 8-K dated November 26, 1997.
4.6 Certificate of Designations of Series G 8% Cumulative and Convertible
Preferred Stock is hereby
44
<PAGE>
incorporated by reference to Exhibits 3.2 and 4.2 Current Report on
Form 8-K dated November 26, 1997.
4.7 Form of Series G Convertible Preferred Stock Purchase Agreement is
hereby incorporated by reference to Exhibit 4.3 Current Report on Form
8-K dated November 26, 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.
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].
45
<PAGE>
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.
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.
Incorporated by reference to Exhibit
46
<PAGE>
10.19 to the Form 10-KSB of the Registrant for the year ended
December 31, 1996.
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.
Incorporated by reference to Exhibit 10.X to the Form 10-KSB of
the Registrant for the year ended December 31, 1996.
10.24 Asset Purchase Agreement dated as of September 24, 1997, among
the Registrant, Freedom Financial Corporation and Interstate
Capital Corporation Incorporated by reference to Exhibit 2.1 to
Form 8-K dated September 26, 1997.
10.25 Addendum dated as of October 9, 1997, to Asset Purchase Agreement
dated as of September 24, 1997, among the Registrant, Freedom
Financial Corporation and Interstate Capital Corporation.
Incorporated by reference to Exhibit 2.2 to Form 8-K dated
October 10, 1997.
10.26 Second Addendum dated as of October 31, 1997, to Asset Purchase
Agreement dated as of September 24, 1997, among the Registrant,
Freedom Financial Corporation and Interstate Capital Corporation.
Incorporated by reference to Exhibit 2.3 to Form 8-K dated
November 26, 1997.
47
<PAGE>
10.27 Agreement for Sale and Purchase of Property between Florida
Gaming Centers, Inc., City National Bank of Florida, Trustee, and
Monroe's Prestige Group, Inc., and Staack and Klemm, P.A., Escrow
Agent. Incorporated by reference to Exhibit 2.4 to Form 8-K/A
dated November 26, 1997.
10.28 Stock Option Grant to W.Bennett Collet. Incorporated by
reference to Quarterly Report on Form 10-QSB for the period ended
March 31, 1997.
10.29 Continuing Stock Option Grant to W.Bennett Collet, Jr.
Incorporated by reference to Quarterly Report on Form 10-QSB for
the period ended March 31, 1997.
10.30 Continuing Stock Option Grant to W.Bennett Collett.
Incorporated by reference to Quarterly Report on Form 10-QSB for
the period ended March 31, 1997.
10.31 Continuing Stock Option Grant to Robert L. Hurd. Incorporated by
reference to Quarterly Report on Form 10-QSB for the period ended
March 31, 1997.
10.32 Stock Option Grant to Timothy L. Hensley. Incorporated by
reference to Quarterly Report on Form 10-QSB for the period ended
March 31, 1997.
10.33 Continuing Stock Option Grant to George W. Galloway, Jr. Incorporated
by reference to Quarterly Report on Form 10-QSB for the period ended
March 31, 1997.
10.34 Continuing Stock Option Grant to Roland M. Howell. Incorporated
by reference to Quarterly Report on Form 10-QSB for the period
ended March 31, 1997.
10.35 Continuing Stock Option Grant to Gary E. Bowman. Incorporated by
reference to Quarterly Report on Form 10-QSB for the period ended
March 31, 1997.
</TABLE>
27. Financial Data Schedule
(b) Reports on Form 8-K.
During the quarter ended December 31, 1997, the Company filed (i) a
Form 8-K/A Current Report dated September 24, 1997, as amended, concerning Item
5, OTHER EVENTS; (ii) (i) a Form 8-K Current Report dated November 26, 1997, as
amended, concerning Item 2, ACQUISITION OR DISPOSITION OF ASSETS and Item 5,
OTHER EVENTS. As amended by Form 8-K/A Current Report dated November 26, 1997
and filed with the Commission on February 9, 1998, the following financial
statements were filed as a part of these Form 8-K Current Reports:
48
<PAGE>
(a) The following historical financial statements of Interstate Capital
Corporation:
Independent Auditors' Report.
Interstate Capital Corporation
Balance Sheet as of December 31, 1996.
Interstate Capital Corporation
Statement of Operations for the year ended December 31,
1996.
Interstate Capital Corporation
Statement of Changes in Stockholder's Equity for the year
ended December 31, 1996.
Interstate Capital Corporation
Statement of Cash Flows for the year ended December 31,
1996.
Interstate Capital Corporation
Notes to Financial Statements as of December 31, 1996.
(b) The following pro forma financial information:
Florida Gaming Corporation and Interstate Capital
Corporation Pro Forma Combined Balance Sheet as of September
30, 1997 (unaudited).
Florida Gaming Corporation and Interstate Capital
Corporation Pro Forma Combined Statements of Operations for
the year ended December 31, 1996 (unaudited).
Florida Gaming Corporation and Interstate Capital
Corporation Pro Forma Combined Statements of Operations for
the nine months ended September 30, 1997 (unaudited).
Florida Gaming Corporation and Interstate Capital
Corporation Notes to Pro Forma Combined Financial Statements
(unaudited).
49
<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 31, 1998 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 31, 1998
- --------------------------- of Directors and
W. Bennett Collett Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy L. Hensley Executive Vice President, March 31, 1998
- --------------------------- Treasurer, Chief Financial
Timothy L. Hensley Officer, and Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Robert L. Hurd President and Director March 31, 1998
- ---------------------------
Robert L. Hurd
/s/ W. Bennett Collett, Jr. Director, Executive March 31, 1998
- --------------------------- Vice President and
W. Bennett Collett, Jr. Secretary
<PAGE>
/s/ Gary E. Bowman Director March 31, 1998
- ---------------------------
Gary E. Bowman
/s/ George W. Galloway, Jr. Director March 31, 1998
- ---------------------------
George W. Galloway, Jr.
/s/ Roland M. Howell Director March 31, 1998
- ---------------------------
Roland M. Howell
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATION FUND, IN ITEM #7 OF THE COMPANY'S FORM
10-K-SD THE YEAR-TO-DATE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,042
<SECURITIES> 0
<RECEIVABLES> 473
<ALLOWANCES> 0
<INVENTORY> 142
<CURRENT-ASSETS> 1,658
<PP&E> 25,901
<DEPRECIATION> (1,188)
<TOTAL-ASSETS> 34,013
<CURRENT-LIABILITIES> 14,920
<BONDS> 0
4
0
<COMMON> 562
<OTHER-SE> 16,748
<TOTAL-LIABILITY-AND-EQUITY> 34,013
<SALES> 0
<TOTAL-REVENUES> 21,576
<CGS> 0
<TOTAL-COSTS> 25,439
<OTHER-EXPENSES> 231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 849
<INCOME-PRETAX> (4,094)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,049)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,094)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS THE BALANCE SHEETS AND STATEMENTS OF
OPERATION FOUND ON PAGES 3,4 AND 5 OF THE COMPANY'S 10QSB FOR THE 3-MOS ENDED
SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 15,969
<ALLOWANCES> 0
<INVENTORY> 35
<CURRENT-ASSETS> 16,275
<PP&E> 5,463
<DEPRECIATION> (481)
<TOTAL-ASSETS> 21,622
<CURRENT-LIABILITIES> 592
<BONDS> 0
422
4
<COMMON> 0
<OTHER-SE> 11,916
<TOTAL-LIABILITY-AND-EQUITY> 21,622
<SALES> 0
<TOTAL-REVENUES> 624
<CGS> 0
<TOTAL-COSTS> 1,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> 126
<INCOME-TAX> 0
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> .04<F1>
<EPS-DILUTED> .02<F2>
<FN>
<F1>RESTATED PER SHARE CALCULATIONS DISCLOSED.
<F2>RESTATED PER SHARE CALCULATIONS DISCLOSED.
</FN>
</TABLE>
