<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
F O R M 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission file number 0-9099
FLORIDA GAMING CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-1670533
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(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3500 NW 37TH AVENUE, MIAMI, FLORIDA 33142-0000
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (305) 633-6400
Former name, former address and former fiscal year, if changed since last
report N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
5,782,250 shares of the issuer's Common Stock were outstanding as of the
latest practicable date, November 13, 1998
Transitional Small Business Disclosure Format:
YES NO X
----- -----
<PAGE>
FLORIDA GAMING
CORPORATION
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 ............................ 3
Statements of Operations (unaudited) for Three Months and Nine Months ended September 30, 1998 and 1997 5
Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 1998 and 1997 ............. 6
Notes to Financial Statements (unaudited) .............................................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................................................ 15
PART II. OTHER INFORMATION ............................................................................ 23
SIGNATURES ............................................................................................. 25
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
FLORIDA GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)................................ $ 909,871 $ 1,042,110
Accounts receivable & current portion of notes receivable (Note 11) 998,087 1,174,837
Inventory (Note 2) ................................................ 52,552 142,257
Prepaid and other expense ......................................... 179,475 75,643
------------ ------------
Total current assets $ 2,139,985 $ 2,434,847
PROPERTY AND EQUIPMENT:
Land (Notes 2,7and 8 ) ........................................... $ 8,507,946 $ 12,451,389
Buildings and Improvements ........................................ 8,097,922 11,313,654
Furniture, fixtures and equipment ................................. 1,782,570 2,136,270
------------ ------------
$ 18,388,438 $ 25,901,313
Less accumulated depreciation ..................................... (1,538,285) (1,188,054)
------------ ------------
$ 16,850,153 $ 24,713,259
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REAL ESTATE DEVELOPMENT ............................................ 6,232,229 6,451,444
OTHER ASSETS ........................................................ 540,343 413,820
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$ 25,762,710 $ 34,013,370
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</TABLE>
3
<PAGE>
FLORIDA GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note 2) .................................... $ 6,124,909 $ 8,074,406
Short-term borrowing and current portion of long-term debt ........................ 613,056 6,845,381
------------ ------------
Total current liabilities ............................................. $ 6,737,965 $ 14,919,787
LONG-TERM LIABILITIES
Long-term portion note payable .................................................... 4,362,728 1,779,915
STOCKHOLDERS' EQUITY (See Notes 2,4,5,6, and 7):
Class A convertible preferred stock, convertible to common stock; $.10 par
value, 1,200,000 shares authorized, 34,435 shares issued and outstanding at
September 30, 1998 and December 31, 1997 ........................................ 3,443 3,443
Class B convertible preferred stock; convertible to common stock, 5,000
shares authorized; 195 shares issued and outstanding at September 30,
1998 and 445 shares issued and outstanding at December 31, 1997, respectively ... 20 45
Class C 8% cumulative convertible preferred stock, convertible to common
stock, 5,000 shares authorized; 100 shares issued and outstanding at
September 30, 1998 and 150 shares issued and outstanding December 31, 1997....... 10 15
Class E 8% cumulative convertible preferred stock, 2,000 shares authorized; 1,950
shares issued and outstanding at September 30,1998 and 2,000 shares issued and
outstanding in at December 31, 1997 ............................................. 195 200
Class F 8% cumulative convertible preferred stock, 2,500 shares authorized; 2,000
shares issued and outstanding at September 30, 1998 and 2,084 shares issued and
outstanding at December 31, 1997 ................................................ 200 208
Class G 5% cumulative convertible preferred stock, 5,000 shares authorized; 3,000
shares issued and outstanding at September 30, 1998 and December 31, 1997 ...... 200 300
Common stock, $.10 par value, authorized 15,000,000 shares, 5,782,250
issued and outstanding at September 30, 1998, and 5,620,057 shares issued
and outstanding at December 31, 1997 ............................................ 578,225 562,006
Capital in excess of par value ...................................................... 38,226,515 43,184,670
Accumulated deficit ................................................................. (24,146,791) (26,437,219)
------------ ------------
Total stockholders' equity ............................................ 14,662,017 17,313,668
------------ ------------
Total liabilities and stockholders' equity ............................ $ 25,762,710 $ 34,013,370
------------ ------------
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLORIDA GAMING CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
HANDLE:
Jai-Alai ...................................... $ 1,598,624 $ 6,070,069 $ 38,964,200 $ 60,484,796
Inter- Track Wagering (ITW) ................... 14,293,567 13,713,488 46,553,032 42,690,426
------------ ------------ ------------ -------------
Total Pari-Mutuel Handle .................... $ 15,892,191 $ 19,783,557 $ 85,517,232 $ 103,175,222
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
REVENUE:
On Site Mutuel Revenue, Net of
Pari-Mutuel taxes to State of Florida ......... $ 374,876 $ 1,211,417 $ 6,660,928 $ 10,190,036
Inter-Track Mutuel Commissions ................ 1,239,345 1,220,115 4,182,500 3,859,616
------------ ------------ ------------ -------------
Net Pari-Mutuel Revenue ..................... $ 1,614,221 $ 2,431,532 $ 10,843,428 $ 14,049,652
Cardroom Income ............................... 9,579 206,291 405,010 305,941
Admissions Income ............................. 48,481 86,800 270,406 412,399
Programs, Food, Beverage and Other ............ 681,517 826,130 3,004,144 3,113,007
------------ ------------ ------------ -------------
Total Operating Revenue ..................... $ 2,353,798 $ 3,550,753 $ 14,522,988 $ 17,880,999
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
COSTS AND EXPENSE:
Operating ..................................... $ 1,515,106 $ 2,920,008 $ 10,051,695 $ 12,863,963
General and Administrative .................... 1,426,949 1,852,864 6,061,176 6,645,909
Depreciation & Amortization ................... 226,727 191,269 720,606 482,991
Summer Jai-Alai ............................... (191,042) 31,912 (154,864) 54,247
------------ ------------ ------------ -------------
Total Costs and Expense ..................... 2,977,740 $ 4,996,053 $ 16,678,613 $ 20,047,110
------------ ------------ ------------ -------------
Net Income (Loss) From Operations ........... ($ 623,942) ($ 1,445,300) ($ 2,155,625) ($ 2,166,111)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
OTHER INCOME (EXPENSES)
Interest and Other Income ................... (315,859) 55,517 (33,936) 267,079
Gain on Sale of Fixed Assets ................ 641,819 993,077
Reserved Loss ............................... (322,193) (322,193)
------------ ------------ ------------ -------------
Net Income (loss) ........................... $ (297,982) $ (1,711,976) $ (1,196,484) $ (2,221,225)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
Earnings (loss) per Common Share ............. $ (0.05) $ (0.32) $ (0.21) $ (0.45)
Earnings per Common Share (diluted See Note 4) N/A N/A N/A N/A
Weighted Avg. Common Shares Outstanding ....... 5,782,250 5,369,594 5,743,498 4,918,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FLORIDA GAMING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <S>
Cash flows from operating activities:
Net Loss........................................................................ $(1,196,484) $(2,221,225)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ................................................. 720,605 482,991
Gain on sale of assets ........................................................ (993,076) --
Equity in earnings of Summer Jai-Alai ......................................... (154,864) 54,247
Change in Accounts receivable, net ............................................ 176,750 (400,349)
Change in Prepaid expenses and other current assets ........................... (103,832) (369,474)
Change in Other assets ........................................................ (26,941) (67,932)
Change in Inventories ......................................................... 89,705 76,511
Change in Accounts payable and accrued expenses ............................... (1,135,852) 2,206,092
----------- -----------
Total adjustments ......................................................... (1,427,505) 1,982,086
Net cash used in operating activities ....................................... ($2,623,989) $ (239,139)
Investing activities:
Loan to affiliated company .................................................. 0 (927,966)
Proceeds from sales of property ............................................. 8,377,600 -0-
Capital Expenditures ........................................................ 32,474 (2,627,677)
----------- -----------
Net cash provided by (used in) investing activities ......................... $ 8,410,074 ($3,555,643)
Financing activities:
Net proceeds from borrowing (Repayment of Borrowings) (Note 8) .............. ($3,666,011) (440,366)
Convertible Bond Issue ...................................................... -- 1,200,000
Stockholders Equity:
Issuance (Redemption) of Preferred and Common Stock ....................... (1,455,166) 2,930,646
----------- -----------
Net cash provided by (used in) from financing activities................... ($5,121,177) $ 3,690,280
----------- -----------
NET INCREASE (DECREASE) IN CASH ................................................. $ 664,908 $ (104,502)
CASH AND EQUIVALENT AT BEGINNING OF YEAR ........................................ $ 244,963 $ 907,527
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER ..................................... $ 909,871 $ 803,025
----------- -----------
----------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................................... $ 596,367 $ 408,423
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FLORIDA GAMING CORPORATION
September 30, 1998
(unaudited)
(1) BASIS OF PRESENTATION
The financial statements of Florida Gaming Corporation (the "Company") have
been prepared without audit for filing with the Securities and Exchange
Commission. The accompanying unaudited financial statements have been prepared
in accordance with the rules and regulations of the Securities and Exchange
Commission for interim financial information. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. Therefore, it is suggested that
the accompanying financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-KSB.
Certain information and notes have been condensed or omitted pursuant to the
rules and regulations of the Commission. The financial information presented
herein, while not necessarily indicative of results to be expected for the
year, reflects all adjustments of a normal recurring nature, which, in the
opinion of the Company, are necessary to a fair statement of the results for
the periods indicated.
(2) 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 games at frontons in Ft. Pierce, Miami, and Ocala, Florida. The Company
also conducts Inter Track wagering (ITW) on Jai Alai, horse racing and dog
racing from its Ft. Pierce 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.
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
held for resale near its existing Jai Alai frontons ($1,617,495 at December 31,
1997 and September 30, 1998) 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 offsite
Inter-Track Wagering ("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.
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.
7
<PAGE>
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. 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.
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.
(3) 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 Company stock purchased by Freedom
Financial Corporation 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.
(4) INCOME PER COMMON SHARE
The net loss per common share was calculated based upon net loss attributable
to common stock shareholders and the weighted average number of outstanding
common shares (5,782,250 and 5,369,594 for the three months ended September 30,
1998, and 1997, respectively). Weighted average outstanding common shares for
the nine months ended September 30, 1998, and 1997, were 5,743,498 and
4,918,200, respectively. Options and convertible securities were not included
in the computations of loss per shares for these periods because their
inclusion would be anti-dilutive. Refer to the Company's latest annual report
on Form 10-KSB/A for more information on outstanding options, warrants, and
conversion features of preferred stock.
(5) 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. On September 21, 1998, the Company declared a
dividend on shares of the Class A preferred that were issued and outstanding at
the close of business on September 21, 1998.
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.
8
<PAGE>
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.
During the nine months ending September 30, 1998, 150 Series B shares were
converted to 113,466 shares of common stock.
The Company is authorized to issue 5,000 shares of Series C 8% Cumulative
Convertible Preferred Stock, $.10 par value (the "Series C Preferred Stock"),
which provides annual dividends at the rate of 8% of the share's Stated Value.
The Stated Value per share equals $1,000 (as adjusted for any stock dividends,
combination or split). At the discretion of the Company's Board of Directors,
such dividends may be paid in shares of the Series C Preferred Stock.
Holders of Series C Preferred Stock may convert all or any of such shares to
the Company's Common Stock (the "Series C Conversion Shares") beginning 90 days
after the issuance of the Series C Preferred Stock. If not converted earlier
by the holder, the Series C Preferred Stock shall be converted automatically on
December 31, 1998. In general, the number of Series C Conversion Shares
issuable on conversion of each share of Series C Preferred Stock shall equal
the consideration paid for such share together with accrued and unpaid
dividends on such share, if any, divided by the lesser of (i) $7.50 or (ii) 80%
of the closing bid price of the Common Stock on the five trading days before
conversion. A holder of Series C Conversion Shares may not sell more than 33%
of such shares between 90 and 120 days of his purchase of Series C Preferred
Stock converted into such shares and 67% of such shares between 121 and 150
days of his purchase; a holder may generally sell all of his Series C
Conversion Shares 151 days after his purchase.
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. During the nine months ending September 30, 1998, 50 Series C shares
were converted to 23,551 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
9
<PAGE>
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.
During the nine months ending September 30, 1998, 50 Series E shares were
converted to 25,176 shares of common stock.
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.
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. On
June 22, 1998 Florida Gaming repurchased 84 shares from Freedom Financial
Corporation as part of the cancellation of a receivable.
During 1997, the Company issued 3,000 Series G shares at $1000 per share or
$3,000,000 face amount. During the period from August 25, 1998 to November 4,
1998, the Company repurchased all $3,000,000 face amount of the Series G shares
in exchange for approximately $1,560,000 in cash and a two-year unsecured
promissory note for $2,000,000 bearing interest at twenty percent (20%) per
annum. There are no principal payments due on the note for twenty-four (24)
months unless certain properties are sold or re-financed by the Company.
Interest on the note is payable monthly Pursuant to the terms of the
repurchase agreements, the Company is no longer required to file a Registration
Statement for the Series G Preferred Stock.
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,
and the Series F Preferred Stock are all equal in rank with respect to the
payment of dividends and with respect to the distribution of assets upon
liquidation of the Company.
(6) 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 riverboat
and dockside casinos located in Mississippi and Louisiana. If the Joint
Venture to build a flea market at the Fort Pierce facility 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. The
Company contends that Casino America is in default of the Letter of Intent
since they failed to contribute the $2,500,000 as needed, to construct a flea
market facility. .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 annual
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
either Joint Venture will be allocated between the partners based upon capital
accounts.
The Letter of Intent provides that Casino America will be the manager of the
casino and all casino-related improvements. The Company will manage the
operation of the jai-alai fronton, 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
10
<PAGE>
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. The Company has taken
the position that Casino America is in default on a continuing basis of the
Letter of Intent since Casino America failed to contribute its share of
capital ($2,500,000) to build a flea market at Fort Pierce.
Freedom Financial Corporation has informed the Company that Casino America has
purchased 22,500 shares of Freedom's 7% Series AA Mandatory 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. Freedom's
remaining option to purchase 905,000 shares of the Company's Common Stock
expired on March 31, 1998. Freedom now owns directly 1,652,480 shares of the
Company's 5,782,250 shares of issued and outstanding Common Stock as of
September 30, 1998.
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 intends to use
reasonable efforts to comply with these commitments.
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 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 real estate
adjoining the Ft. Pierce property, 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 are
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.
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<PAGE>
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 became 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. During the month of September, 1998, the Company paid the stock
guaranty payment in full.
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).
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. At December 31,1997,
the Company was carrying a balance due from its SJA partners of $468,372.
On June 11, 1998, a settlement agreement covering certain operational issues
was executed by the Company and other members of SJA which, among other things,
1. Continues the existence of the partnership;
2. States that the Summer Jai-Alai season (May 1, 1998 to November 28,1998)
will be operated by the Company at it's own risk and for its own benefit.
Provided, however, that if net profits for the 1998 Summer Season exceed
$250,000, then, in that event, the other members of SJA will be paid a
total of $50,000 for the 1998 Summer Season.
3. States that the Company will pay one of the SJA partners about $110,000 for
monies owed for ITW payments previously held by the Company as a potential
off-set of claims made in the suit.
4. States that the Company will have the right, subject to State Approval, to
operate the 1999 Summer Season for its own benefit, provided that the tax
credits available for the 1998 Summer Season have not been exhausted.
Effective July 1, 1998, legislation was passed by the state of Florida by
which Summer Jai-Alai was granted a tax credit of $922,000. SJA expects to
utilize the tax credits during the 1998 SJA Season. SJA credited the Company's
capital account for the amount due the Company at December 31, 1997. The
Company has reclassified its' receivable from SJA to investment accounts
consistent with SJA's treatment of the offsetting payable.
(7) 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.
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
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<PAGE>
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. Subsequent to
December 31, 1997 a lawsuit was filed against the Company seeking collection
of amounts due under these agreements.
During 1997, the Company discontinued the required payments under the above
consulting agreements because of inadequate working capital, and the continuing
lack of performance by the individuals pursuant to their obligations under the
consulting agreements. Delinquent payments totaling $96,000 are included in
the accompanying balance sheet as accrued expenses.
(8) SALE OF TAMPA JAI-ALAI
On September 8, 1998, the Company sold the Tampa Jai-Alai facility for 8.3
million. The sale was pursuant to an agreement dated January, 1998, between
the Company and Monroe's Prestige Group, Inc. ("MPG"), a real estate
development company unaffiliated with the Company and based in Tampa, Florida.
The terms of the sale were determined through arms-length negotiations with
MPG. The sale did not include the Company's Tampa gaming permit which remains
available for possible use at a different Hillsborough County, Florida
facility.
The Company's costs associated with the transaction totaled $1,237,779. These
costs consisted of commissions, property taxes, legal fees, and other expenses
related to the closing of operations. The Company was required by the Bank of
Oklahoma to apply $3,084,465 of the proceeds received from the sale of the
Tampa Jai-alai facility toward its related first mortgage obligations to the
Bank of Oklahoma.
The Company received an additional $125,000 for vacating the property by
November 1, 1998.
For further information regarding the sale, please refer to the Company's Form
8-K dated September 8, 1998.
(9) 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
consisted of 23 acres of certain partially improved commercial properties and
a residential real estate development containing about 250 single family
residential lots, 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 $6,473,265 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 $1,181,102 of first
mortgage promissory notes to two commercial banks secured by the properties
purchased, and (iii) the Company canceled $3,208,163 owed by Freedom to the
Company.
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<PAGE>
The Company accounted for the acquisition of ICC's assets using the purchase
method of accounting. The total purchase price was $6,473,265 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 independent appraisals or
other cost information with respect to the individual assets.
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 has engaged a professional real estate management
and marketing company to assist with the advertising and marketing program for
the sale of developed residential lots and commercial property.
(10) 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 totaled $139,800 during 1997.
(11) RELATED PARTY TRANSACTIONS
In addition to loans made to Freedom under the credit facility referred to in
Note 9(iii) above, 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 firm as the value of Freedom's collateral
in the margin account decreased in value. The collateral consisted of Florida
Gaming common stock acquired by Freedom during 1997 pursuant to Freedom's
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 Freedom also incurred expenses and on behalf of the Company totaling
approximately $207,500 which were 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.
Freedom Financial paid off the inter-company receivable in full plus interest
at 2% above prime on June 22, 1998.
Reference is made to Note 9 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 for
a period of three (3) years. 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 as a management fee in lieu
of the salary. No written employment or consulting agreement exists between
the Company and Freedom. Beginning November 1, 1997, the Company also
discontinued salary payments of $9,000 per month to the President and began
paying $8,000 per month to Freedom Financial Corporation as a management fee in
lieu of Salary.
On November 10, 1998, the Board of Directors of the Company authorized the
Company to borrow up to $1,500,000 from Freedom with the loan to be
represented by a promissory note (the "Company Note") bearing interest at the
rate of 15% per annum and secured by a first lien on the shares of the
Company's wholly-owned subsidiaries, Florida Gaming Centers, Inc. ("Gaming
Centers") and Tara Club Estates, Inc. ("Tara") and by a second lien on
substantially all of the Company's other assets. The Note will be guaranteed
by Gaming Centers and Tara with their guaranties secured by a second lien on
substantially all of their respective assets. Freedom may partially fund the
Company Note out of the proceeds of a loan from a commercial bank (the
"Freedom Note"). The Freedom Note will bear interest at 13% per annum and
must be personally guaranteed by W. Bennett Collett, the Company's Chairman
and Chief Executive Officer. The Freedom Note will be secured by an
assignment of the Company Note and the collateral securing the Company Note.
The Company Note and the Freedom Note will be due on demand or one (1) year
from date if not demand is made. Five points must be paid at the closing of
the Freedom Note and a like amount will be paid at the closing of the Company
Note.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Florida Gaming Corporation (the "Company") currently owns and operates three
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, inter-track pari-mutuel wagering
("ITW") on jai-alai, thoroughbred racing, harness racing, and dog racing,
poker, dominoes, and the sale of food and alcoholic beverages. The Company
also owns a fourth gaming permit which was previously operated in Hillsborough
County (Tampa) Florida.
The Company's Fort Pierce and Ocala locations provide audio, video and Inter-
Track Wagering ("ITW") on live inter-track and interstate broadcasting of
horse racing, dog racing and jai-alai from around the State of Florida as well
as the rest of the country. The Miami location receives limited ITW
broadcasts, but broadcasts its jai-alai performances to other gaming facilities
in Florida, certain other states, and Mexico. ITW provides significant
additional revenue as well as providing additional entertainment for customers.
The term "pari-mutuel wagering," which refers to the betting by members of the
public against each other, as used in this report includes wagering on both
live Jai-Alai performances and ITW.
The Company's principal place of business and executive offices are located at
3500 NW 37th Avenue, Miami, Florida 33142. The Company was incorporated in
Delaware in 1976.
ACQUISITION OF FRONTONS/DEVELOPMENT OF CARD ROOMS
On November 25, 1996, the Company entered into an agreement with WJA Realty,
Limited Partnership ("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 assets. The WJA Frontons acquired were combined with
the Fort Pierce Fronton into the Subsidiary.
The consideration for the acquisition included (i) the cancellation of WJA
Notes and related obligations acquired by the Company from the Bank of
Oklahoma, NA, (ii) the retention by WJA of 200,000 shares of the Company's
common stock owned by WJA, and (iii) a profit sharing arrangement described in
more detail below. The Company 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., an affiliate of WJA with the
terms of the promissory note amended to provide for repayment of principal over
a ten year period following the closing in equal annual installments of $50,000
and an annual interest rate of 6%.
The profit sharing arrangement is based on the Subsidiary's net profits, as
defined, before income taxes. The Company will pay WJA 20% of the 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 pay 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 after the ten year period. If during
the ten year period, the Subsidiary disposes of any of its significant assets
or operations, then WJA would be entitled to receive an amount equal to ten
percent of the Subsidiary's gain, if any, on the disposition.
Two principals of WJA, Roger M. Wheeler, Jr. and Richard P. Donovan, have
entered into consulting arrangements with the Subsidiary. Mr. Wheeler has
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.
Mr. Donovan has entered into a five-year consulting agreement with the
Subsidiary, with annual compensation of $240,000, plus certain benefits.
Messrs. Donovan and Wheeler have each filed lawsuits in connection with the
arrangement. See Part II, Item 1, Legal Proceedings.
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<PAGE>
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. Refer to Note 6, Summer Jai-Alai.
CARD ROOM DEVELOPMENT. Florida House Bill No. 337 (now known as section
849.086 of the Florida Statutes) became effective June 1, 1996. This
legislation authorized card rooms at licensed pari-mutuel facilities beginning
in January, 1997. The card rooms are administered and regulated by the
Florida Department of Pari-Mutuel Wagering ("DPMW"). Games are limited to non-
banked poker games and dominoes. Card room authorization 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 and Ocala are currently carrying several of these
signals. This legislation also reduced the pari-mutuel tax on handle from 5%
to 4.25% at the Fort Pierce and Ocala frontons. The pari-mutuel tax at Miami
was reduced from 5% to 3.85%.
In late 1996, the county governments of Dade County and Hillsborough County,
Florida, passed legislation permitting card rooms to be operated by all pari-
mutuel facilities located in those counties. As a result, the Company opened
card rooms in Miami (on June 19th with 40 tables initially) and Tampa (on
May 22nd with 30 tables initially) during the second quarter of 1997.
Pursuant to Florida Statute 849.086 the Miami facility conducts low stakes
($10 per hand) poker and dominoes at these facilities two hours prior to,
during and two hours following live jai-alai performances. A rake of $.25
per person is the pari-mutuel's revenue from each hand dealt. Domino tables
are rented at the rate of $1.50 per half hour per player. Florida state
taxes are paid at 10% of this revenue and 4% of the revenues are paid to the
Jai-Alai players.
The jai-alai industry generally has declined in the last several years due to
increased gaming competition such as Indian Gaming, gambling cruise ships,
commercial bingo operations 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 State of Florida's 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.
Inter-track wagering ("ITW") has grown significantly since its initiation in
the State of Florida in August, 1990. The State-wide ITW handle for all pari-
mutuels in 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 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.
REAL ESTATE DEVELOPMENT. In late 1997, the Company entered into a new business
- -- residential real estate development. 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 Financial Corporation. See Note 8 to the
accompanying financial statements. The assets consisted of 23 acres of
partially improved commercial property and a residential real estate
development containing about 250 single family residential lots, known as Tara
Club Estates (collectively, the "Properties"), all of which are situated in
Loganville, Walton County (near Atlanta), 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 two lenders secured by the properties purchased,
and (iii) the Company canceled a line of credit having a principal balance of
$2,107,076 plus accrued interest of $1,101,087 for a total of $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
16
<PAGE>
acquired in late 1997, the Company had virtually no income or expenses
attributable to this segment of its business during 1997. The Company
engaged the services of a professional real estate management and marketing
company in 1998 to assist with the formulation of 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 partially-commercial property. As of September 30,
1998, over sixty (60) home sites had been sold to builders. The residential
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, having a
market value of approximately $10,000,000 had been constructed and sold at an
average price of $250,000 each. The Properties are located on Georgia Highway
81, approximately one (1) mile 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 population of the Atlanta area is now over three million
residents. 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.
JAI-ALAI TAX LEGISLATION. Major tax legislation which limits the amount of
state handle and admission taxes went into effect July 1, 1998.
The new law, (Section 2, Subsection (1b) of section 550.09511, Florida
Statutes) states, in part, that "Any jai-alai permit holder that incurred state
taxes on handle and admissions in an amount that exceeds its operating earnings
in a fiscal year that ends during or after the 1997-1998 state fiscal year, is
entitled to credit the excess amount of the taxes against state pari-mutuel
taxes due and payable after June 30, 1998, during its next ensuing meets."
The Company paid state taxes on handle and admissions in the amount of
$3,105,309 for the year ended December 31, 1997. Taxes paid to the state in
fiscal 1997 of approximately $1,724,881 ($.29 per share) are eligible for
recovery by the Company during the twelve-month period beginning July 1, 1998.
This legislation is expected to have a positive impact on the Company's future
earnings.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS 1998 COMPARED WITH THREE AND NINE
MONTHS 1997
During the three months and nine months periods ended September 30, 1998,
the Company's operations reflects nine months' operation of live Jai-Alai
performances at Miami. The Tampa Fronton conducted live jai-alai from
January 1 through July 4, 1998. The Ft. Pierce Fronton conducted live
jai-alai performances January through April, 1998. A full schedule of
Inter-Track Wagering ("ITW") was also conducted at all facilities except
Miami, which offers limited ITW product due to blackouts imposed because 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. The Tampa Fronton
conducted inter-track wagering from January 1, 1998 through September 7,
1998. The sale of the Tampa facility was completed on September 8, 1998. The
Ocala Fronton only operated inter-track wagering during the first quarter and
began its live season May 22, 1998. For the period from May 1, 1998 through
September 30, 1998, the Miami facility is operated by the Summer Jai-Alai
Partnership. This report does not include information relative to the
operation of the Summer Jai-Alai Partnership gaming permit. The net income
from the Summer Partners operation is reported separately as a one-line item.
HANDLE ANALYSIS
Total handle (amount of money wagered) for the quarter ended September 30, 1998
was $15,892,191 of which $1,598,624 was from live jai-alai wagering and
$14,293,567 was from inter-track wagering. Total handle for the nine months
ended September 30, 1998 was $85,517,232, of which, $38,964,200 was from live
jai-alai wagering and $46,553,032 was from inter-track wagering. Total Handle
for the quarter ended September 30, 1997 was $19,783,557 of which $6,070,069
was from live and host jai-alai wagering and $13,713,488 was from inter-track
guest wagering. Total handle for the nine months ended September 30, 1997 was
$103,175,222, of which $60,484,796 was from live and host jai-alai wagering
and $42,690,426 was from guest inter-track wagering.
HANDLE DECREASE
Total handle for the quarter ended September 30, 1998 was $15,892,194, a
decrease of $3,891,366 over the same period in 1997. The decrease consisted of
a decrease in live and host jai-alai handle of $4,471,445 and an increase of
$580,079 in ITW handle. A significant portion of the decrease was due to the
closing of the Tampa Jai-Alai facility. The last Jai-Alai performance at the
Tampa facility was held
17
<PAGE>
on July 4, 1998. The sale of the Tampa facility was closed on September 8,
1998. Live Jai-Alai performances were conducted at the Tampa facility
during the entire year of 1997.
Total handle for the nine months ended September 30, 1998 was $85,517,232, a
decrease over the same period in 1997 of $17,657,990. This decrease was
attributable to a decrease in live and host jai-alai wagering handle of
$21,520,596 and an increase in inter-track wagering handle of $3,862,606.
These numbers do not include handle for the Miami facility for the period
from May 1, 1998 through September 30, 1998. The Miami facility was operated
by the Summer Jai-Alai Partnership during this time. Summer Jai-Alai
Partnership has handle for the period of May 1, 1998 through September 30,
1998 was $13,186,227 from live Jai-Alai performances, and handle of
$11,129,390 from ITW.
REVENUES
Pari-mutuel revenues (net of state pari-mutuel taxes) for the quarter ended
September 30, 1998 were $1,614,221compared to pari-mutuel revenues of
$2,431,531, for the same period in 1997. Pari-mutuel revenues for the nine
months ended September 30, 1998 were $10,843,428 compared to pari-mutuel
revenues of $14,049,652 for the same period in 1997. Revenues for the quarter
ended September 30, 1998 were $1,614,221 which consisted of $374,876 from live
Jai-Alai wagering and $1,239,345 from Inter-Track Wagering. Pari-mutuel
Revenues of $2,431,532 for the quarter ended September 30, 1997 consisted of
$1,211,417 from live Jai-Alai wagering and $1,220,115 from Inter-Track
wagering. Pari-mutuel Revenues for the nine months ended September 30, 1998
were $10,843,428 which consisted of $6,660,928 from live Jai-Alai games and
$4,182,500 from Inter-Track Wagering. Pari-mutuel Revenues for the nine months
ended September 30, 1997 were $14,049,652 which consisted of $10,190,036 from
live Jai-Alai wagering and $3,859,616 from Inter-Track Wagering. These numbers
do not include handle for the Miami facility for the period from May 1, 1998
through September 30, 1998, since the facility is operated by the Summer
Partnership during this time. Summer Jai-Alai year to date revenues total
$4,366,899. The decrease in revenues is also a result of the closing of the
Tampa Jai-Alai facility. The 1997 revenues included three full months of live
Jai-Alai and ITW for the Tampa facility.
Card room Revenue for the nine months ended September 30, 1998 was $405,010,
compared to $305,941 for period ending September 30, 1997. The reason for the
$99,069 increase in revenue can be attributed to the fact that the cardrooms
were only opened a portion of the 1997 calendar year. The cardroom in Tampa
opened May 22, 1997,, and the cardroom in Miami opened June 20, 1997. Direct
operating costs totaled $262,945 for the nine months ending September 30, 1998,
compared to $375, 886 for period ending September 30, 1997. The expenses were
much higher in 1997 due to expense in training and pre-opening costs.
Admissions income, net of state taxes, for the three month and nine months
periods ended September 30, 1998 were $48,481 and $270,406 respectively. This
compares to $86,801 and $412,399 for the three and nine month period ended
September 30, 1997. Food, beverage and other income for the quarter and nine
months ended September 30, 1998 were $681,517 and $3,004,144, respectively.
This compares to $826,130 and $3,113,007 respectively for the three and nine
month periods ended September 30, 1997. Attendance for live jai-alai
performances and ITW performances were approximately 106,621 and 653,011 for
the quarter and nine months ended September 30, 1998 compared to 169,858 and
836,174 for the same period in 1997. These numbers do not include attendance
for the Miami facility for the period May 1, 1998 through September 30, 1998,
since the facility is operated by the Summer Jai-Alai Partnership during that
period of time. In 1997, Summer Jai-Alai Partnership did not start until
July 1, 1997. There is an additional 2 months of income included in 1997
which is not included in 1998. During the same period in 1997, live Jai-Alai
performances were also conducted at the Tampa facility. The Tampa facility
only conducted live games and ITW for a portion of this period during 1998.
For the nine months ending September 30, 1998, the Company had $425,500 in
revenues from lot sales from the Tara Club Estates residential development.
Lot costs attributable to this revenue totaled $230,008. Operational Expenses
totaled $135,444.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses were $1,426,950 and
$6,061,176 for the three months and nine months periods ended September 30,
1998, respectively. This compares to $1,852,864 and $6,645,909 for the three
months and nine months periods ended September 30, 1997, respectively. The
decrease of $425,915 for the quarter ended September 30, 1998 is largely
attributable to the closing of the Tampa Jai-Alai facility.
GENERAL AND ADMINISTRATIVE QUARTER ENDED SEPTEMBER 30, 1998
The Company's general and administrative expenses and their comparison to the
third quarter last year are as follows. Executive salaries were $120,417 for
the quarter ended September 30, 1998 compared to $327,134 for the quarter ended
September 30, 1997 (see consulting fees). Advertising costs for the quarter
ended September 30, 1998 were $88,608 compared to $137,138 for the same period
in 1997. Advertising costs in 1997 were higher due to increased advertising
related to the opening of the two new card rooms. Professional fees
18
<PAGE>
were $140,972 compared to $131,257 for the same three month period in 1997.
Consulting fees increased from $86,200 to $207,633. This increase was
primarily the result of the salaries of the Chairman/CEO and the President of
Florida Gaming being replaced by management fees paid to Freedom Financial
Corporation for their services. Travel and entertainment expense totaled
$66,007 for the third quarter of 1998, compared to $101,946 for the third
quarter of 1997. In 1997, extensive travel costs were incurred which was
related to the opening of the cardrooms and pursuing acquisitions. Payroll
taxes decreased from $256,993 for the third quarter 1997, to $169,541 for
the third quarter 1998. The closing of the Tampa Jai-Alai facility resulted
in a significant reduction in the number of employees, including players.
Employee benefits were $220,578 for the third quarter of 1998 decreasing
$14,864 from the same period in 1997. Public company costs including
shareholder relations/information for the quarter ended September 30, 1998
were $11,802 compared to $39,595 for the quarter ended September 30, 1997.
The shareholder relations and information costs were significantly higher in
1997 due to the mailing of brochures to all shareholders in connection with
the opening of the two new cardrooms at Tampa and Miami. Property, licenses
and other taxes were $142,296 for the quarter ended September 30, 1998,
compared to $161,558 for the same period in 1997. Insurance expense decreased
from $188,586 for the quarter ended September 30, 1997 to $129,067 for the
quarter ended September 30, 1998. Interest expense totaled $153,373 and
$166,431 for the three month period ended September 30, 1998 and September 30,
1997, respectively.
GENERAL AND ADMINISTRATIVE FOR NINE MONTHS ENDING SEPTEMBER 30, 1998
Following is a comparison of Significant categories of general and
administrative expenses for the nine month period in 1998 versus 1997.
Executive salaries were $429,096 for the nine months ended September 30, 1998,
compared to $869,832 for 1997. This $440,736 decrease was primarily the result
of the salaries of the Chairman/CEO and the President of Florida Gaming being
replaced by management fees paid to Freedom Financial Corporation for their
services. Advertising decreased from $997,860 for the nine months ended
September 30, 1997 to $554,446 for the nine months ended September 30, 1998.
The decrease of $443,414 can be attributed to higher advertising costs in 1997
related to the opening of the two new card rooms. Professional fees were
$446,075 compared to $281,986 for the same period in 1997. This increase was
primarily the result of litigation with Summer Jai Alai partners prior to
settlement. Consulting fees increased from $260,300 to $634,342. This increase
was primarily the result of the salaries of the Chairman/CEO and the President
of Florida Gaming for the nine months ended September 30, 1998 being replaced
by management fees paid to Freedom Financial Corporation for their services.
Travel and entertainment expense totaled $205,320 compared to $309,934 for the
first nine months of 1997. In 1997, extensive travel costs were incurred which
were related to the opening of the cardrooms and pursuing acquisitions.
Payroll taxes decreased significantly from $934,458 in 1997 to $761,053 in
1998. The closing of the Tampa Jai-alai facility resulted in a significant
reduction in the number of employees, including players. Property, Licenses
and other taxes increased $92,524 to $641,827 for the nine months ended
September 30, 1998, compared to $549,303 for the same period in 1997. A
portion of the increase is due to Tara Club Estates property taxes. The
Company did not purchase Tara Club Estates until November of 1997. Insurance
expense increased $33,075 to $460,907 for the nine months ended September 30,
1998 compared to $427,832 for 1997. Public company costs including
shareholder relations/information and filing fees decreased to $113,326 from
$121,066. The shareholder relations and information costs were significantly
higher in 1997 due to the mailing of brochures to all shareholders in
connection with the opening of the two new cardrooms at Tampa and Miami.
Interest expense totaled $596,367 and $482,704 for the nine month period
ended September 30, 1998 and September 30, 1997, respectively. The $113,663
increase in interest expense was the result of a higher interest rate with
Bank of Oklahoma due to late payments and the increase in interest expense on
the development loan at Tara Club Estates.
OPERATING EXPENSES QUARTER ENDED SEPTEMBER 30, 1998
The Company's operating expenses for the three months ended September 30,
1998 and September 30, 1997 were $1,515,106 and $2,920,008 respectively.
The $1,404,902 decrease can largely be attributed to the closing of the Tampa
Jai-Alai. The last Jai-Alai performance at the Tampa facility was held on
July 4, 1998. The sale of the Tampa facility was closed on September 8,
1998. Live performances were conducted at the Tampa facility during the
entire year of 1997. Depreciation and amortization expense for the three
months ended September 30, 1998 and September 30, 1997, was $226,727 and
$191,268 respectively. Player costs, which include salaries, benefits, and
support staff, represent a significant portion of operational expenses.
Player costs for the quarter ending September 30, 1998 and September 30,
1997, were $1,070,305 and $1,632,555 respectively. Rental and service costs
for totalizator wagering equipment and satellite receiving/television
equipment also represent a significant portion of operating expenses. These
expenses totaled $173,942 for the three months ended September 30, 1998,
compared to $270,643 for three months ended September 30, 1997. The
components of the 1998 wagering equipment and expenses were $76,311 in ITW
tote, interface, and telephone charges; $61,376 in totalizator equipment
rental; ($0) in satellite charges and $35,895 in camera/television rental.
Utilities expense totaled $258,896 and $330,872 respectively, for the three
months periods ended September 30, 1998 and September 30, 1997. Program costs
totaling $92,822 and $114,318, respectively, are also included in the total
operating expenses for the three month periods ended September 30, 1998 and
1997. Operating expenses, including payroll costs for the bar, restaurant,
souvenir and concessions costs were $109,312 and $188,128 for the three month
periods which ended September 30, 1998 and September 30, 1997, respectively.
Operating payrolls and contract labor costs totaled $709,118 and $955,351 for
the three month periods ended September 30, 1998 and September 30, 1997,
respectively,
19
<PAGE>
excluding player costs and payroll costs included in the bar, restaurant,
souvenir and concessions areas. Of the $709,118, $204,077 was mutuels
payroll, $279,795 was maintenance payroll and $225,246 was security payroll.
Maintenance expense for the three months ended September 30, 1998, totaled
$125,561.
OPERATING EXPENSES NINE MONTHS ENDING SEPTEMBER 30, 1998
The Company's operating expenses for the nine months ended September 30, 1998
and September 30, 1997 were $10,097,054 and $12,863,963 respectively. The
$2,812,268 decrease can be largely attributed to the closing of the Tampa
Jai-Alai. The last Jai-Alai performance at the Tampa facility was held on
July 4, 1998. The sale of the Tampa facility was closed on September 8,
1998. Live performances were conducted at the Tampa facility during the
entire year of 1997. Depreciation and amortization expense for the nine
month period ended September 30, 1998 and September 30, 1997, was $720,606
and $482,991, respectively. Player costs, which include salaries, benefits,
and support staff, represent a significant portion of operational expenses.
Player costs for the nine months ended September 30, 1998 and September 30,
1997, were $4,353,836 and $4,943,119, respectively, reflecting the expanded
operation of two year-round schedules in Miami and Tampa and an additional
one and a half month's operation in Ocala compared to only four months of
jai-alai operation at only the Ft. Pierce fronton during this same period in
1998. Rental and service costs for totalizator wagering equipment and
satellite receiving/television equipment also represent a significant portion
of operating expenses. These expenses totaled $1,131,005, for the nine
months ended September 30, 1998, compared to $1,414,027 for nine months ended
September 30, 1997. The components of the 1998 total were $223,635 in ITW
tote, interface, and telephone charges; $477,229 in totalizator equipment
rental; $192,707 in satellite charges and $237,434 in camera/television
rental. Utilities expense totaled $755,666 and $853,876 respectively, for the
nine months periods ended September 30, 1998 and September 30, 1997. Program
costs totaling $375,510 and $462,406 respectively, are also included in the
total operating expenses for the nine month period ended September 30, 1998
and 1997. Operating expenses, including payroll costs for the bar,
restaurant, souvenir and concessions costs were $672,106 and $825,987 for the
nine month periods which ended September 30, 1998 and September 30, 1997,
respectively. Operating payrolls and contract costs totaled $3,031,384 and
$3,576,805 for the nine month period ended September 30, 1998 and September 30,
1997, respectively, excluding player costs and payroll costs included in
the bar, restaurant, souvenir and concessions areas. Operating payrolls and
contract services for the nine-month period ended September 30, 1998
consisted of $974,048 of mutuels payroll, $971,831 of maintenance payroll,
and $706,897 of security payroll. Maintenance expense for the nine months
ended September 30, 1998, totaled $395,926, compared to $428,265 for the
nine months ended September 30, 1997.
OTHER INCOME
The Company had net interest and other income of $325,959 and $959,141 for the
three and nine month period ended September 30, 1998, respectively, as compared
to ($266,676) and ($55,114) for the three and nine month periods ended
September 30, 1997. The bulk of this income for 1998 was generated from the
sale of the Tampa Jai-Alai facility and the sale of the North Miami Amateur Jai-
Alai facility.
OTHER INFORMATION
In August, 1998 the Nasdaq Stock Market, Inc. informed the Company that Florida
Gaming Corporation common stock no longer qualifies for inclusion in the Nasdaq
Stock Market, and the common stock of the Company was delisted at the close of
business on August 21, 1998. The staff stated that its conclusion was based on
the review of the Company's public filings and the Company's responses to staff
comment letters. The Nasdaq staff was critical of transactions between FGC and
its affiliates. The delisting of the Company's common stock from the Nasdaq
Stock Market will likely make it more difficult to buy or sell shares. However,
the Company has been advised by J.J.B. Hilliard, W.L. Lyons, Inc., an
investment banking firm based in Louisville, Kentucky, that it intends to
continue as a "Pink Sheets" market maker for the Florida Gaming Corporation
common stock.
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.
SUMMARY OF OPERATIONS
The Company had a net loss of $297,982 or .05 per common share, for the three
months ended September 30, 1998, compared to a net loss of $1,711,975 or $0.32
per common share for the three month period ended September 30, 1997. The
Company had a net loss of $1,196,484 or .21 per common share, for the nine
months ended September 30, 1998, compared to a net loss of $2,221,225 or $0.45
per common share for the nine month period ended September 30, 1997. The
decreased loss for the quarter ended September 30, 1998 was primarily caused by
the factors discussed above. These numbers do not include revenues for the
Miami facility for the period May 1,
20
<PAGE>
1998 through September 30, 1998, since the facility is operated by the Summer
Jai-Alai Partnership, of which the Company owns a 21% interest. The
operating results of the Summer Jai-Alai Partnership are recorded as a line
item on the financial statements of the Company. Income for the Summer
Jai-alai partnership interest for the period from May 1, 1998 through
September 30, 1998 was $154,864, compared to a loss of $54,247 for the same
period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The balance of the Company's cash and cash equivalents at September 30, 1998
was $909,871. At September 30, 1998, the Company had an increase in working
capital of approximately $7,886,960 from December 31, 1997. The increase was
primarily the result of the sale of the Tampa Jai-Alai facility. The Company
paid the Bank of Oklahoma $3,084,466 from the proceeds from the sale of the
Tampa Jai-Alai facility, which decreased current liabilities.
The Company's cash flow is not currently adequate to meet its debt and other
obligations as they come due. The Company is currently evaluating its
alternatives to improve its cash flow, including the sale of selected excess
real estate and other assets and additional borrowings and/or the refinancing
of its indebtedness using its real estate holdings as collateral.
During the nine months ended September 30, 1998, net cash used by in the
Company's operating activities was $2,696,119. The Company's continuing
operating expenses consists principally of office expenses, general and
administrative expenses, and costs associated with Jai-Alai Fronton operations.
Principal revenues were from net pari-mutuel wagering commissions on live Jai-
Alai performances and ITW events.
During the nine months ended September 30, 1998, cash flow provided from
investing activities was $8,482,204.
During the nine months ended September 30, 1998, cash flow used by financing
activities was $5,121,177. Most of these funds represent principal pay downs
on the Bank of Oklahoma first mortgage, retirement of convertible preferred
stock and payments of past-due taxes.
During the prior year the working capital needs of the Company had been met
primarily through its financing activities, including the issuance of
convertible preferred stock and the exercise of options previously granted to
Freedom Financial Corporation.
On March 11, 1998, the Company sold certain excess property in North Miami for
$487,000, most of which was paid to Bank of Oklahoma for past-due interest and
principal payments.
As of March 31, 1998, the related-party receivable from Freedom Financial
Corporation had been reduced to $180,000 from $233,000 at year- end 1997. In
late April of 1998, this balance increased to approximately $400,000. On
June 22, 1998, Freedom Financial paid off the receivable in full plus
interest at 2% over prime. Freedom paid $357,122.56 in cash and contributed
back to the Company $84,000 in face amount of the Series F Preferred Stock.
The Company has discontinued its consulting payments to Mr. Wheeler and Mr.
Donovan. 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. Both Mr. Wheeler and Mr. Donovan have filed
suit in Dade County, Florida, relative to payments, which they contend are due
pursuant to the consulting agreements, and the note with respect to Mr.
Wheeler. The Company is presently defending these suits.
During 1997, the Company issued 3,000 Series G shares at $1000 per share or
$3,000,000 face amount. During the period from August 25, 1998 to November 4,
1998, the Company repurchased all $3,000,000 face amount of the Series G shares
in exchange for approximately $1,560,000 in cash and a two-year unsecured
promissory note for $2,000,000 bearing interest at twenty percent (20%) per
annum. There are no principal payments due on the note for twenty-four (24)
months unless certain properties are sold or re-financed by the Company.
Interest on the note is payable monthly.
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<PAGE>
On September 8, 1998, the Company sold the Tampa Jai-Alai facility for $8.3
million. The sale was pursuant to an agreement dated January, 1998, between
the Company and Monroe's Prestige Group, Inc. ("MPG"), a real estate
development company unaffiliated with the Company and based in Tampa,
Florida. The terms of the sale were determined through arms-length
negotiations with MPG. The sale did not include the Company's Tampa gaming
permit which remains available for possible use at the Company's option at a
different Florida facility.
The proceeds of the Tampa sale were used as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Payment to Bank of Oklahoma ............. 3,084,466
(b) Brokerage Commissions ................... 300,000
(c) Real Estate Taxes ....................... 1,037,529
(d) Other Sale-Related Costs ................ 55,883
(e) Repurchase of Series "G" Convertible
Preferred Stock.......................... 1,560,000
(f) Payment of Taxes ........................ 300,000
(g) Repurchase of Series "B" Convertible
Preferred Stock.......................... 128,000
(h) Payoff of Unsecured Notes ............... 160,000
(i) Pay-Off Mortgage on Ft. Pierce Property.. 280,000
(j) Paid on various trade accounts payable... 1,394,122
----------
Total ............................... $8.300,000
----------
----------
</TABLE>
The Company received an additional $125,000 for vacating the property by
November 1, 1998.
For further information regarding the sale, please refer to the Form 8-K dated
September 8, 1998.
This report contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. Although the Company believes that the forward-looking
statements are based upon reasonable assumptions, there can be no assurance
that the forward-looking statements will prove to be accurate. Factors that
could cause actual results to differ from the results anticipated in the
forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets in which
the Company operates); competition for the company's customers from other
providers of entertainment and gaming opportunities; government legislation
and regulation (which changes from time to time and over which the Company
has no control); material unforeseen complications related to addressing the
Year 2000 Problem experienced by the Company, its suppliers, and governmental
agencies; and other risks detailed in the Company's filings with the
Securities and Exchange Commission, all of which are difficult to predict
and many of which are beyond the control of the Company. The Company
undertakes no obligation to republish forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events .
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. 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. 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 filed an Answer to the Complaint and the trial is
currently scheduled for January 1999. The Company and Mr. Donovan are
currently engaged in discussions concerning these issues. The Company is
presently defending this suit.
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. TheCompany has filed an
Answer and the trial is currently scheduled for January 1999. 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. The Company is presently defending this suit.
Item 2. CHANGES IN SECURITIES.
a) Not applicable.
b) Not applicable.
c) On April 22, 1998, the Company issued an additional 86,196
shares of Common Stock upon the conversion of 100 shares of
Series B Preferred Stock. No underwriters were used in any of
these conversions. The shares were issued in accordance with
Section 3(a)(9) of the Securities Act of 1933.
d) Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None at date of filing.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
23
<PAGE>
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) EXHIBITS
Exhibit 10.1 - Promissory Note to Millennium Partners, dated As
of October 1, 1998, for $2,000,000
Exhibit 27 - Financial Data Schedule.
b) REPORTS ON FORM 8-K.
During the quarter ended September 30, 1998, the Company filed
a Form 8-K Current Report dated September 8, 1998 concerning
Item 2, ACQUISITION OR DISPOSITION OF ASSETS and Item 7,
Financial Statements, Pro Forma Financial Information and
Exhibits.
c) The following pro forma financial information :
Florida Gaming Corporation Pro Forma Consolidated Balance Sheet
as of June 30, 1998 (unaudited)
Florida Gaming Corporation Pro Forma Consolidated Statement of
Operations for the year ended December 31, 1997 (unaudited)
Florida Gaming Corporation Pro Forma Consolidated Statement of
Operations for the six months ended June 30, 1998 (unaudited)
Florida Gaming Corporation Notes to Pro Forma Consolidated
Financial Statements (unaudited)
24
<PAGE>
FLORIDA GAMING CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FLORIDA GAMING CORPORATION
(Registrant)
Date: November 13, 1998 By: /s/ W. B. Collett
----------------- -------------------------
W.B. Collett
Chairman of the Board and Chief
Executive Officer
(Principal Financial Officer)
25
<PAGE>
SENIOR NON-NEGOTIABLE PROMISSORY NOTE
$2,000,000 As of October 1, 1998
Miami, Florida
For value received, Florida Gaming Corporation, a Delaware Corporation (the
"Maker"), promises to pay Millennium Partners, L.P., (the "Payee"), the
principal sum of Two Million Dollars ($2,000,000), together with interest on
the principal of this note (the "Note") from time to time outstanding at the
rate set forth below. All capitalized terms used, but not defined herein
shall have the meanings assigned to them in a Stock Redemption Agreement
(the "Agreement") dated as of October 1, 1998, between the Maker and the
Payee.
1. INTEREST RATE. The annual rate of interest to be paid on unpaid
principal by the Maker with respect to each successive twelve-month
period of this Note shall be twenty percent (20%). Each payment on
this Note shall be applied first to accrued but unpaid interest and
then to reduction of principal.
2. PAYMENTS. On November 1, 1998, and the first day of each month
thereafter through and including October, 2000, the Maker shall pay
Payee interest only in the amount of $33,333.33. The Maker shall
pay the Payee all remaining interest and principal of this Note on
October 1, 2000. In addition, to the extent that funds are
available after providing for the discharge of any liens on the
real property being sold as set forth in this sentence, ten (10)
days after the closing of a sale on all of the parcels of real
property which are the subject of a Real Estate Sales Agreement
dated July 30, 1998 by and between Florida Gaming Centers, Inc.
and City National Bank of Florida, as Trustee under Land Trust No.
503471, and Alvaro L. Adrian, such excess funds shall be paid to
the Payee until satisfaction of the Note in full. In addition, to
the extent that funds are available after providing for the
discharge of any liens on the real property referenced in this
sentence, ten (10) days after the closing of a refinancing
transaction concerning real property which is used for gaming
purposes owned by the Maker located in Miami, Ft. Pierce and Ocala,
Florida, such excess funds shall be paid to the Payee until
satisfaction of this Note in full. Notwithstanding the foregoing,
all or any part of the outstanding principal amount of this note
may be prepaid at any time without penalty. All prepayments shall
be applied first to accrued but unpaid interest on this note and
then to the unpaid principal amount of this Note. Any interest
which is in default will be added to the principal balance of the
Note for purposes of calculating interest due.
3. EVENTS OF DEFAULT. It shall be a default under this Note if the
Maker fails to pay any installment payment of interest on this
Note, within thirty (30) calendar days of the due date thereof, or
if Maker fails to pay the principal payment on October 1, 2000,
within thirty (30) calendar days of the due date thereof.
4. TIME. Time shall be of the essence of payment of all payments of
interest and principal on this Note.
<PAGE>
5. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws (including the conflicts of law rules) of
the State of Florida.
6. NON-NEGOTIABILITY OF NOTE. This Note is not a negotiable
instrument and may not be sold, pledged, assigned or otherwise
disposed of unless this note is subsequently registered under the
Securities Act and under the applicable securities laws of such
states or unless an exemption from such registration is available
in the opinion of counsel for the Payee, which counsel and opinion
are reasonably satisfactory to counsel for the Maker.
7. RANKING. In case of a liquidation of the Maker, or to the extent
agreed to by other creditors, in writing, this Note is senior to
and has priority status over all trade accounts payable of the
Maker.
This Note is made as of the date hereof but is actually signed on behalf
of the Maker on the date set forth below.
FLORIDA GAMING CORPORATION
By W. Bennett Collett, Chairman & Co.
--------------------------------------
W. Bennett Collett, Chairman & Co.
Date October 30, 1998
---------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 910
<SECURITIES> 0
<RECEIVABLES> 998
<ALLOWANCES> 0
<INVENTORY> 53
<CURRENT-ASSETS> 2,140
<PP&E> 18,388
<DEPRECIATION> 1,538
<TOTAL-ASSETS> 25,763
<CURRENT-LIABILITIES> 6,738
<BONDS> 0
578
4
<COMMON> 0
<OTHER-SE> 14,662
<TOTAL-LIABILITY-AND-EQUITY> 25,763
<SALES> 0
<TOTAL-REVENUES> 14,523
<CGS> 0
<TOTAL-COSTS> 16,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 596
<INCOME-PRETAX> (1,196)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,196)
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<EPS-PRIMARY> (.21)
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</TABLE>
