<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 June 30, 1998
Commission file number 0-9099
FLORIDA GAMING CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-670533
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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, AUGUST 14, 1998.
Transitional Small Business Disclosure Format:
YES NO X
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<PAGE>
FLORIDA GAMING
CORPORATION
INDEX TO FORM 10-QSB
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1997. . .3
Statements of Operations (unaudited) for Three Months and Six Months
ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . .5
Statements of Cash Flows (unaudited) Six Months ended June 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. . . . . . . . . . . . . 17
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
FLORIDA GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents (Note 2). . . . . . . . . . . . . . . . . $ 238,831 $ 1,042,110
Accounts receivable & current portion of notes receivable (Note 11). 988,523 1,174,837
Inventory (Note 2).. . . . . . . . . . . . . . . . . . . . . . . . . 74,002 142,257
Prepaid and other expense .. . . . . . . . . . . . . . . . . . . . . 102,936 75,643
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . $ 1,404,292 $ 2,434,847
PROPERTY AND EQUIPMENT:
Land (Notes 2,7 and 8 ) . . . . . . . . . . . . . . . . . . . . . . $12,366,434 $12,451,389
Buildings and Improvements . . . . . . . . . . . . . . . . . . . . . 11,442,634 11,313,654
Furniture, fixtures and equipment. . . . . . . . . . . . . . . . . . 2,146,472 2,136,270
----------- -----------
$25,955,540 $25,901,313
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . (1,640,561) (1,188,054)
----------- -----------
$24,314,979 $24,713,259
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REAL ESTATE DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . 6,288,335 6,451,444
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390,474 413,820
----------- -----------
$32,398,080 $34,013,370
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----------- -----------
</TABLE>
3
<PAGE>
FLORIDA GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note 2). . . . . . . . . . . . $ 8,128,952 $ 8,074,406
Short-term borrowing and current portion of long-term debt. . . . . . 6,344,926 6,845,381
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . $14,473,878 $14,919,787
LONG-TERM LIABILITIES
Long-term portion note payable . . . . . . . . . . . . . . . . . . . 1,674,203 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 June 30, 1998 and December 31, 1997 . . . . . . . 3,443 3,443
Class B convertible preferred stock; convertible to common stock,
5,000 shares authorized; 295 shares issued and outstanding at June 30,
1998 and 445 shares issued and outstanding at December 31, 1997,
respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 45
Class C 8% cumulative convertible preferred stock, convertible to
common stock, 5,000 shares authorized; 100 shares issued and
outstanding at June 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 June 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 June 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 June 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 300 300
Common stock, $.10 par value, authorized 15,000,000 shares, 5,782,250
issued and outstanding at June 30, 1998, and 5,620,057 shares
issued and outstanding at December 31, 1997 . . . . . . . . . . . . . 578,225 562,006
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . 39,514,405 43,184,670
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,846,809) (26,437,219)
----------- -----------
Total stockholders equity. . . . . . . . . . . . . . . . . . 16,249,999 17,313,668
----------- -----------
Total liabilities and stockholders equity. . . . . . . . . . $32,398,080 $34,013,370
----------- -----------
----------- -----------
</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 SIX MONTHS ENDED
---------------------------- ----------------------------
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
HANDLE:
Jai-Alai. $11,641,052 $25,225,117 $37,365,576 $54,414,727
Inter- Track Wagering (ITW) 15,523,448 14,286,418 32,259,465 28,976,938
----------- ----------- ----------- -----------
Total Pari-Mutuel Handle $27,164,500 $39,511,535 $69,625,041 $83,391,665
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
REVENUE:
On Site Mutuel Revenue, Net of
Pari-Mutuel taxes to State of Florida $ 2,061,191 $ 4,100,204 $ 6,286,052 $ 8,978,619
Inter-Track Mutuel Commissions 1,378,684 1,272,672 2,943,155 2,639,501
----------- ----------- ----------- -----------
Net Pari-Mutuel Revenue 3,439,875 5,372,876 9,229,207 11,618,120
Cardroom Income 142,015 99,649 395,431 99,649
Admissions Income 85,598 148,824 221,924 325,599
Programs, Food, Beverage and Other 984,227 1,022,980 2,322,628 2,286,877
----------- ----------- ----------- -----------
Total Operating Revenue $ 4,651,715 $ 6,644,329 $12,169,190 $14,330,245
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
COSTS AND EXPENSE:
Operating $ 3,390,890 $ 5,027,498 $ 8,536,589 $ 9,943,955
General and Administrative 2,124,496 2,382,931 4,515,414 4,793,045
Depreciation & Amortization 246,884 73,711 493,879 291,722
Summer Jai-Alai 36,179 22,334 36,178 22,334
----------- ----------- ----------- -----------
Total Costs and Expense 5,798,449 7,506,474 13,582,060 15,051,056
----------- ----------- ----------- -----------
Net Income (Loss) From Operations $(1,146,734) $ (862,145) $(1,412,870) $ (720,811)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest and Other Income 161,129 144,392 514,368 211,561
----------- ----------- ----------- -----------
Net Income (loss) $ (985,605) $ (717,753) $ (898,502) $ (509,250)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per Common Share $ (0.19) $ (0.15) $ (0.18) $ (0.11)
Earnings per Common Share (fully diluted
See Note 4) N/A N/A N/A N/A
Weighted Avg. Common Shares Outstanding 5,848,555 4,916,825 5,723,801 4,688,763
</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 Six Months Ended
--------------------------
June 30, June 30,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (898,502) $ (509,249)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 493,879 291,722
Loss on sale of assets. . . . . . . . . . . . . . . . . . . . . . . . 0 0
Equity in earnings of Summer Jai-Alai . . . . . . . . . . . . . . . . 36,178 22,335
Realized gain on sale of marketable securities. . . . . . . . . . . . (351,258) 0
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . 186,314 (270,316)
Prepaid expenses and other current assets . . . . . . . . . . . . . . (53,761) (597,945)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,292) (263,201)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,255 20,810
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . 868,023 2,078,218
---------- -----------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . 1,220,338 1,281,623
Net cash provided (used) by operating activities. . . . . . . . . . $ 321,836 $ 772,374
Investing activities:
Loan to affiliated company. . . . . . . . . . . . . . . . . . . . . . 0 (808,466)
Proceeds from sales of property . . . . . . . . . . . . . . . . . . . 450,613
Capital Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . 9,083 (2,194,754)
---------- -----------
Net cash provided from (used in) investing activities . . . . . . . $ 459,696 $(3,003,220)
Financing activities:
Net proceeds from borrowing/Repayment of Borrowings (Note 8). . . . $ (622,498) (265,975)
Stockholders Equity:
Issuance of Preferred and Common Stock . . . . . . . . . . . . . . . (165,166) 2,791,401
---------- -----------
Net cash provided (used) from financing activities. . . . . . . . . $ (787,664) $ 2,525,426
NET INCREASE (DECREASE) IN CASH. . . . . . . . . . . . . . . . . . . . . . $ (6,132) $ 294,580
CASH AND EQUIVALENT AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . $ 244,963 $ 907,527
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER. . . . . . . . . . . . . . . . $ 238,831 $ 1,202,107
---------- -----------
---------- -----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442,994 $ 316,274
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
FLORIDA GAMING CORPORATION
NOTES TO FINANCIAL STATEMENTS
June 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, Tampa and Ocala, Florida.
The Company also conducts intertrack wagering (ITW) on jai alai, horse racing
and dog racing from its Tampa, 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 for
sale.
Approximately 34% of the Company's common stock is controlled by the
Company's Chairman either directly or beneficially through his ownership of
Freedom Financial Corporation (Freedom), a closely held investment company.
CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at
cost. Depreciation is provided using the straight-line and accelerated
methods over the estimated useful life of the related assets.
REAL ESTATE HELD FOR EXPANSION: The Company's investment in undeveloped land
near its existing jai alai frontons ($1,617,495 at December 31, 1997 and
1,532,540 at June 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
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.
7
<PAGE>
INCOME TAXES: The Company utilizes the asset and liability approach to
accounting for income taxes. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for temporary differences
between the financial reporting and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
LOSS PER COMMON SHARE: During 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, Earning Per
Share, ("SFAS 128"), which requires the computation and disclosure of basic
and diluted income (loss) per common share. The Company's 1996 loss per
common share amount has been restated to conform to SFAS 128. Basic income
(loss) per common share is determined by dividing income (loss) by the
weighted average number of shares of common stock outstanding. Diluted
income (loss) per common share is determined by dividing income (loss) by the
weighted average number of shares of common stock outstanding plus the
weighted average number of shares that would be issued upon exercise of
dilutive stock options assuming proceeds are used to repurchase shares
pursuant to the treasury stock method plus the weighted average number of
shares that would be issued if holders of the Company's preferred stock
converted those shares to common stock using the "if converted" method.
Diluted loss per common share is not presented when the resulting calculation
is antidilutive relative to basic loss per common share.
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 Freedom's stock purchase 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 (5,848,555 and 4,916,825 for the three months ended
June 30, 1998, and 1997, respectively). Weighted average outstanding common
shares for the six months ended June 30, 1998, and 1997, were 5,723,801 and
4,688,763, 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 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
8
<PAGE>
dividends totaled $30,971 and $31,040 during 1997 and 1996 respectively.
These dividends were paid by the issuance of 9,577 common shares and $20 cash
in lieu of fractional shares in 1997 and 5,164 common shares and $49 cash in
lieu of fractional shares in 1996.
Each share of Class A preferred is convertible into .225 shares of common
stock at the holder's option. During the years ended December 31, 1997 and
1996, -0-shares and 300 shares of Class A preferred stock were converted into
- -0- shares and 67 shares of common stock, respectively. The Class A
preferred is redeemable at the option to the Company at $10.60 per share. In
the event of dissolution, the holders of Class A preferred shall be entitled
to receive $10.00 per share, plus accrued dividends, prior to any
distribution to holders of common stock.
The Company's Series B convertible preferred stock provides annual cumulative
dividends at the rate of 8% to 10% of the consideration paid for the stock.
Such dividends are payable in shares of the Company's common stock. The
consideration to be received by the Company upon initial issuance of each
share of the Series B stock is $1,000. Holders of Series B shares may
convert all or any of such Series B shares to the Company's common stock
using a ratio based on the consideration paid for the stock and 80% of the
market value of the common stock. On December 15, 1995, the Board of
Directors reserved 600,000 shares of the Company's common stock for issuance
upon conversion of the Series B preferred stock. Upon liquidation, the
holders of Series B preferred shares shall be entitled to be paid $1,000 per
share plus 8% to 10% accrued dividends before any distribution to holders of
common stock. During 1996, the Company issued 2,300 Series B shares at $925
per share and 2,707.5 Series B shares were converted to 473,588 shares of
common stock. During 1997, 1547.5 Series B shares were converted to 295,951
shares of common stock. During the six months ending June 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 six months ending June 30, 1998, 50 Series C shares were
converted to 23,551 shares of common stock.
9
<PAGE>
The Company is authorized to issue 2,000 shares of Series E 8% cumulative
convertible preferred stock, $.10 par value (the "Series E Preferred Stock"),
which provides annual dividends at the rate of 8% of the share's stated
value, payable upon conversion of the Series E preferred stock into common
stock. The stated value per share equals $1,000 (as adjusted for any stock
dividends, combination or splits).
Holders of Series E Preferred Stock may convert all or any such shares to the
Company's common stock (the "Series E Conversion Shares") beginning 120 days
after the issuance of the Series E Preferred Stock. If not converted earlier
by the holder, the Series E Preferred Stock shall be converted automatically
two years from the date of issuance. In general, the number of Series E
Conversion Shares issuable on conversion of each share of Series E Preferred
Stock shall equal the consideration paid for such share together with accrued
and unpaid dividends on such share, if any, divided by the lesser of (i)
$7.50 and (ii) 80% of the average of the closing bid price of the common
stock on the five trading days before conversion. A holder of Series E
Conversion Shares may not sell more than 25% of such shares between 120 and
150 days of his purchase of Series E Preferred Stock converted into each
share, 50% of such shares between 151 and 180 days of his purchase of Series
E Preferred Stock converted into such shares and 75% of such shares between
181 and 210 of his purchase of Series E Preferred Stock converted into each
share; a holder may generally sell all of his Series E Conversion Shares 211
days after his purchase.
Upon liquidation, the holders of Series E Preferred Shares shall be entitled
to be paid $950 per share plus accrued dividends before any distribution to
holders of common stock.
During 1997, the Company issued 2,000 Series E shares at $1,000 per share.
During the six months ending June 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.
The Company is also authorized to issue up to 5,000 shares of Series G 5%
Convertible Preferred Stock (the "Series G Preferred Stock"), which provides
semi-annual dividends at the rate of 5% of the shares' stated value. The
stated value per share equals $1,000 (as adjusted for any stock dividends,
combination or split). At the discretion of the Company's Board of
Directors, such dividends may be paid in shares of the Series G Preferred
Stock.
Holders of Series G Preferred Stock may convert all or any of such shares to
the Company's common stock at any time following the 180th day following the
first date of issuance. If not converted earlier by the holder, the Series G
Preferred Stock shall be converted automatically on September 30, 2002. In
general, the number of Series G Conversion Shares issuable on conversion of
each share of Series G Preferred Stock shall equal the consideration paid for
such share together with accrued and unpaid dividend on such share, if any,
divided by the lesser of (i) 105% of the average of the reported closing
price of the Company's common stock during the fifteen consecutive trading
days immediately preceding the issuance date or (ii) 80% of the closing bid
price of the common stock on the five trading days before conversion.
10
<PAGE>
Upon liquidation, the holders of Series G Convertible Preferred Shares shall
be entitled to be paid $1,000 per share plus accrued dividends before any
distribution to holders of common stock. The affirmative vote of the holders
of a majority of the Series G Preferred Stock is required to approve the
issuance of additional equity financing before January 1, 1999.
The Company is obligated to file a registration statement (the "Series G
Registration Statement") covering the resale of the shares of Common Stock
issuable on conversion of the Series G Preferred Stock (the "Series G
Conversion Shares") and to use its best efforts to cause the Series G
Registration Statement to become effective. In the event of a Registration
Default (as defined below), then the Company shall pay as liquidated damages
to each holder of Series G Preferred Stock an amount equal to 1% of the
liquidation preference of the Series G Preferred Stock for the first 30 day
period after the expiration of 180 days after the First Closing (or pro rata
portion thereof) and 2% of the liquidation preference of the Series G
Preferred Stock for each 30 day period thereafter (or pro rata portion
thereof) that there continues to be a Registration Default, in cash ratably
according to the number of Series G Preferred Stock held by each holder,
immediately payable following the occurrence of such Registration Default. A
"Registration Default" means if (i) the Series G Registration Statement has
not been declared effective within 180 days from the First Closing, (ii)
within the first 30 days following the 180th day after the First Closing, the
Company postpones the filing of the Series G Registration Statement or allows
such Series G Registration Statement not be usable for a reasonable period of
time, but not in excess of 90 days, or (iii) the Series G Registration
Statement is filed and declared effective but shall thereafter cease to be
effective (without being succeeded immediately by an additional registration
statement filed and declared effective) for a period of time exceeding 45
days in the aggregate per year. The Company has not yet filed the Series G
Registration Statement and anticipates that a Registration Default has
occurred. The Company has entered into written agreements with six (6) of
the seven (7)holders of the Series G Preferred Stock covering an aggregate of
$1,000,000 face amount, to repurchase the shares by using a portion of the
proceeds of the anticipated sale of the Tampa Jai-Alai real estate. The
Company is presently negotiating with the one remaining Series G Preferred
Stockholder to repurchase the remaining shares having a face amount of
$2,000,000.
During 1997, the Company issued 3,000 Series G shares at $1000 per share.
The Class A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock, the Series E Preferred Stock,
the Series F Preferred Stock and the Series G Preferred Stock are all equal
in rank with respect to the payment of dividends and the distribution of
assets upon liquidation of the Company.
(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 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 payments over a ten
year period with interest at 8% per annum. If casino gaming is permitted at
the Fronton by 2000, the value of the assets contributed by the Company to
the Joint Venture will be adjusted to increase the Company's capital account
up to $22,500,000. Casino America would fund its capital account on an as
needed basis up to $22,500,000. All profits and losses of the Joint Venture
will be allocated between the partners based upon capital accounts.
The Letter of Intent provides that Casino America will be the manager of the
casino and all casino-related improvements. The Company will manage the
operation of the jai-alai fronton, intertrack wagering and all other
non-casino related activities. Each corporation will receive a management
fee based on costs. The Letter of Intent provides that Casino America has
the exclusive right to enter into a Joint Venture with the Company for six
years and Casino America has a right of first refusal to enter into other
potential gaming opportunities in Florida with the Company for such period
11
<PAGE>
and during the term of the Joint Venture. The formation of the Joint Venture
is subject to certain conditions, including the satisfactory completion of
due diligence by Casino America, the receipt of all required regulatory
approvals, the approval of each partner's board of directors, the execution
of a definitive joint venture agreement, and the approval of the Company's
stockholders, if required by law. Either party may terminate discussions in
connection with the Joint Venture and neither party shall have any liability
to the other, except as otherwise specified in the Letter of Intent.
Freedom Financial Corporation has informed the Company that Casino America
has purchased 22,500 shares of Freedom's 7% Series AA 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, (which 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 June 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 may not be able to
comply with those 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 certain
real estate, 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
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<PAGE>
request evidence that Seller is still in ownership and possession of said
stock. The Company shall pay the difference to Seller within ninety
(90) days from receipt of Seller's request.
In addition to the Company's guarantee, Freedom Financial Corporation
provided a similar guarantee as a further inducement to the seller of the
real estate. Based on the closing price of the Company's common stock at the
end of the three year period in 1997 ($3.00), a payment of $284,016 is due
under the guarantee. This amount is included as an accrued expense in the
accompanying 1997 balance sheet. Of this amount, $217,000 was recorded as
additional purchase price of the subject real estate with the difference
($67,000) charged to interest expense based on the time value of the money
paid over the three years. The seller has made a demand for payment under
this agreement but the Company has been unable to fulfill its obligations due
to its working capital deficiencies. The Company has also settled the
stock guarantee payable with the seller and has executed a short- term note
for $249,016 as satisfaction of this obligation. A verbal agreement was
reached with the Seller to extend all obligations related to the note until
the closing of the sale of the Tampa Jai-Alai property.
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. The Company has declared the partnership terminated and is
currently winding up the partnership's affairs. Because the 1997 SJA summer
season resulted in an additional loss, the Company intends to further amend
its complaint to include its partners' share of that loss, once the annual
independent audit of the partnership is completed. At December 31, 1997, the
Company 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 been exhausted.
13
<PAGE>
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. As a result of
the above settlement agreement, the Company expects to recover its balance
due from Summer Jai-Alai during 1998 through utilization of these tax credits
from prior years.
(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 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 its working capital deficiencies, 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.
A summary of the WJA assets acquired and consideration therefor is as
follows:
<TABLE>
<CAPTION>
Allocated
Assets Acquired Amount
--------------- ------
<S> <C>
Jai Alai Frontons in Miami, Tampa, and Ocala, Florida $17,428,059
Cash 381,997
Notes receivable 167,934
Inventory 134,974
Other assets 308,279
-----------
$18,421,243
-----------
-----------
</TABLE>
14
<PAGE>
Management allocated the purchase price to the basis of the assets acquired
based on available appraisals or other fair value information.
<TABLE>
<CAPTION>
Consideration paid Amount
------------------ ------
<S> <C>
Cancellation of notes and interest receivable from WJA at Company
carrying value $14,692,298
Accounts payable and other accrued expenses assumed 3,078,647
Assumption of Wheeler-Phoenix note (See Note I) 500,000
Fair value of stock options issued 150,298
-----------
$18,421,243
-----------
-----------
</TABLE>
(8) REAL ESTATE DEVELOPMENT
On November 26, 1997, Florida Gaming Corporation (the "Company") acquired
substantially all of the assets of Interstate Capital Corporation (ICC), a
wholly-owned subsidiary of Freedom Financial Corporation (Freedom). The
assets consist of certain partially improved properties and a residential
real estate development called Tara Club Estates (collectively, "Tara" or the
"Properties"), all of which are situated in Loganville, Walton County,
Georgia. As consideration for the purchase, the Company paid ICC $6,373,265
as follows: (i) the Company issued to ICC 2,084 shares of Series F 8%
Convertible Preferred Stock (the "Series F Preferred Stock") at a stated
value of $1,000 per share (convertible into the Company's common stock
("Common Stock") on the basis of 296.6689 shares of the Company's Common
Stock for each $1,000 of stated value of the Series F Preferred Stock), (ii)
the Company assumed $1,081,102 of first mortgage promissory notes to certain
lenders secured by the properties purchased, and (iii) the Company canceled
$3,208,163 owed by Freedom to the Company.
The Company accounted for the acquisition of ICC's assets using the purchase
method of accounting. The total purchase price was $6,373,265 comprising the
above indebtedness cancellation, debt assumption and preferred stock. In
accordance with generally accepted accounting principles, the purchase price
was allocated to the assets acquired based on their fair value at the date of
acquisition. Management estimated fair value using 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 in 1998 to assist with the evaluation of the
market potential, assess competitive factors in the Atlanta/Walton County
market and to develop an advertising and marketing program for the sale of
the developed residential and commercial lots.
(9) 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 and $20,840 during
1997 and 1996, respectively.
(10) RELATED PARTY TRANSACTIONS
Reference is made to Note 11 for details pertaining to the Company's credit
facility with Freedom Financial Corporation, a closely-held corporation owned
substantially by the Company's Chairman.
In addition to loans made to Freedom under the credit facility described in
Note 11, the Company provided working capital advances to Freedom and made
payments to third parties on Freedom's behalf throughout 1997. These third
party
15
<PAGE>
payments comprised transfers totaling approximately $582,000 to Freedom's
brokerage margin account, which funds were used by Freedom to cover "margin
calls" made by the brokerage as the value of Freedom's collateral in the
margin account decreased in value. The collateral included Florida Gaming
common stock acquired by Freedom during 1997 pursuant to its exercise of
options. The Company also advanced approximately $118,000 directly to
Freedom through this open account during the year. Freedom made payments to
the Company during 1997 totaling $259,500 as a reimbursement of these
advances and also incurred expenses on behalf of the Company totaling
approximately $207,500 which were likewise credited to Freedom's open
account. The remaining balance in the open account of $233,034 is included
in the accompanying 1997 balance sheet as a non-current advance to a related
party. Freedom Financial paid off the inter-company receivable and paid
interest at 2% above prime in full 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. During 1997, the Chairman received 8 monthly payments of $30,000
consistent with the Board's directive. In September, 1997, the Company
discontinued the salary payments to the Chairman and began paying $30,000 per
month to Freedom Financial Corporation in lieu of the salary. No written
employment or consulting agreement exists between the Company and Freedom.
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 in lieu of Salary.
(11) NOTES RECEIVABLE
Included in notes receivable in the 1996 balance sheet was a credit line
comprising a line of credit granted to Freedom Financial Corporation on
December 15, 1995. The balance of such line was $1,796,860 at December 31,
1996. The credit facility, which was secured by refundable income taxes and
commercial real estate owned by Freedom, was due on demand and bore interest
at 2% above prime. Interest receivable on this line of credit totaled
$119,348 at December 31, 1996. Freedom paid no interest to the Company
during 1996. Freedom Financial is owned substantially by the Company's
Chairman. As described in Note 9, the Company was repaid this line of credit
and interest at 2% above prime as part of the consideration in the
acquisition of Tara Club Estates from a subsidiary of Freedom Financial
Corporation in November, 1997.
16
<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 four
jai-alai and inter-track pari-mutuel wagering facilities (each, a "Fronton,"
and collectively, the "Frontons") located in South and Central Florida. The
Company's business consists primarily of its operations at the Frontons,
which include, among other things, live jai-alai, 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's Fort Pierce, Tampa 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 changed its name
from Lexicon Corporation to Florida Gaming Corporation on March 17, 1994.
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 acquisition was consummated
as of January 1, 1997. 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., 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 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 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.
17
<PAGE>
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.
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, Tampa 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 Tampa, 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 and Tampa facilities conduct
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 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 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, Tampa and Ocala
facilities) has also demonstrated strong growth in recent years, increasing
from $46.8 million in the year ended December 31, 1995, to approximately
$50.3 million for the year ended December 31, 1996, and to approximately
$55.7 million for the year ended December 31, 1997.
REAL ESTATE DEVELOPMENT. In late 1997, the Company entered into a new
business -- residential real estate development.
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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 certain partially improved properties and a
residential real estate development 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 certain 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 acquired in late
1997, the Company had virtually no income or expenses attributable to this
segment of its business during 1997. The Company has engaged the services of
a professional real estate management and marketing company in 1998 to assist
with the evaluation of the market potential, assess competitive factors in
the Atlanta/Walton County market and to develop an advertising and marketing
program for the sale of the developed residential and commercial lots.
These Properties consist of over 100 fully developed, and 150 partially
developed, single-family residential home sites, a swim and tennis club
facility and 23 acres of commercial property. Over sixty (60) home sites
have already been sold to builders. The sites are presently selling at an
average in excess of $40,000 per site. Before the acquisition of the
Properties by the Company, thirty-nine homes had been constructed and sold at
an average price of $250,000. The Properties are located on the east side of
Georgia Highway 81, approximately 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 in
the three million resident range and is continuing to increase. Gwinnett
County is located in the Northeast section of Metropolitan Atlanta, and is
noted as one of the fastest growing counties in the United States. It has
doubled its population in the last ten years, and now has more than 300,000
residents.
JAI-ALAI TAX LEGISLATION. Major tax legislation which limits the amount of
state handle and admission taxes became law, and will go 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 will result in approximately $144,000 savings each month.
This legislation is expected to have a positive impact on the Company's
future earnings. For example, if this new tax legislation had been in
effect as of January 1, 1998, the Company would have reported net income of
$862,506 or $.19 per share, versus income of $87,102 or $.02 per share, for
the quarter ended March 31, 1998.
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RESULTS OF OPERATIONS - THREE AND SIX MONTHS 1998 COMPARED WITH THREE AND
SIX MONTHS 1997
During the quarter and six months ended June 30, 1998, the Company's
operations reflects six months' operation of live Jai-Alai performances at
the Miami and Tampa. The Ft. Pierce Fronton conducted live jai-alai
performances January through April. A full schedule of inter-track wagering
was also conducted at all facilities with the exception of Miami, which
offers limited ITW product due to blackouts imposed as a result of its close
proximity to other South Florida pari-mutuels. The Miami facility, however,
broadcasts its jai-alai performances to other gaming facilities in Florida,
the rest of the United States, and Mexico. The Ocala Fronton only operated
inter-track wagering during the first quarter and began its live season May
22nd. Also, these numbers do not include the Miami facility for the period
from May 1, 1998 through June 30, 1998, since the facility is operated by the
Summer Partnership. The Summer Partnership began on May 1, 1998 this year,
did not start last year until July 1, 1997, which was the 3rd quarter.
HANDLE ANALYSIS
Total handle for the quarter ended June 30, 1998 was $27,164,500 of which
$11,641,052 was from live jai-alai wagering and $15,523,448 was from inter-track
wagering. Total handle for the six months ended June 30, 1998 was $69,625,041,
of which, $37,365,576 was from live jai-alai wagering and $32,259,465 was from
inter-track wagering. Total Handle (amount of money wagered) for the quarter
ended June 30, 1997 was $39,511,535 of which $25,225,117 was from live and host
jai-alai wagering and $14,286,418 was from inter-track guest wagering. Total
handle for the six months ended June 30, 1997 was $83,391,665, of which
$54,414,727 was from live and host jai-alai wagering and $28,976,938 was from
guest inter-track wagering.
HANDLE DECREASE
Total handle for the quarter ended June 30, 1998 was $27,164,500, a decrease of
$12,347,035 over the same period in 1997. The decrease consisted of a decrease
in live and host jai-alai handle of $13,584,085 and an increase of $1,237,030 in
ITW handle.
Total handle for the six months ended June 30, 1998 was $69,625,041, a decrease
over the same period in 1997 of $13,766,624. This decrease was attributable to a
decrease in live and host jai-alai wagering handle of $17,049,151 and an
increase in inter-track wagering handle of $3,282,527.
These numbers do not include handle for the Miami facility for the period from
May 1, 1998 through June 30, 1998, since the facility is operated by the Summer
Partnership during this time. A significant portion of the handle decrease,
$10,097,102, was attributable to the Summer Jai Alai Partnership.
REVENUES
Pari-mutuel revenues(net of state pari-mutuel taxes) for the quarter ended June
30, 1998 were $3,439,874, compared to pari-mutuel revenues of $5,372,876, for
the same period in 1997. Pari-mutuel revenues for the six months ended June 30,
1998 were $9,229,207 compared to pari-mutuel revenues of $11,618,120 for the
same period in 1997. Revenues for the quarter ended June 30, 1998 ($3,439,874)
consisted of $2,061,191 from jai-alai wagering and $1,378,684 from inter-track
wagering. Revenues for the quarter ended June 30, 1997 ($5,372,876) consisted
of $4,100,204 from live jai-alai wagering and $1,272,672 from inter-track
wagering. Revenues for the six months ended June 30, 1998 ($9,229,207)
consisted of $6,286,052 from live jai-alai and $2,943,155 from inter-track
wagering. Revenues for the six months ended June 30, 1997 ($11,618,120)
consisted of $8,978,619 from live jai-alai and $2,639,501 from inter-track
wagering. These numbers do not include handle for the Miami facility for the
period from May 1, 1998 through June 30, 1998, since the facility is operated by
the Summer Partnership during this time.
Card room Revenue for the six months ended June 30, 1998 was $395,431. Direct
operating costs totaled $260,349.
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Admissions income, net of state taxes, for the three and six months periods
ended June 30, 1998 were $85,598 and $221,924 respectively. This compares
to $148,824 and $325,599 for the three and six month period ended June 30,
1997. Food, beverage and other income for the quarter and six months ended
June 30, 1998 were $984,227 and $2,322,627, respectively. This compares to
the three and six month period ended June 30, 1997 of $1,022,980 and
$2,286,877, respectively. These decreases were primarily the result of
decreases in attendance for live jai-alai performances and ITW performances.
Attendance for live jai-alai performances and ITW performances were
approximately 206,553 and 546,390 for the quarter and six months ended June
30, 1998 compared to 304,053 and 666,316 for the same period in 1997. These
numbers do not include attendance for the Miami facility for the period May
1, 1998 through June 30, 1998, since the facility is operated by the Summer
Partnership during this time.
For the six months ending June 30, 1998, the Company had $315,500 in revenues
from lot sales from the recently acquired Tara Club Estates residential
development. Lot costs attributable to this revenue totaled $168,031.
Operational Expenses totaled $56,685.
GENERAL AND ADMINISTRATIVE EXPENSES
The Company's general and administrative expenses were $2,124,496 and $4,515,414
for the three months and six months ended June 30, 1998, respectively. This
compares to $2,382,931 and $4,793,045 for the three months and six months ended
June 30, 1997, respectively. The decrease of $258,435 for the quarter ended
June 30, 1998 is largely attributable to the Summer Partnership. In 1997, the
Partnership did not start until July 1, 1997, and this year it started May 1,
1998.
GENERAL AND ADMINISTRATIVE 2ND QUARTER
The Company's general and administrative expenses and their comparison to the
second quarter last year are as follows. Executive salaries were $147,748 for
the second quarter of 1998 compared to $213,735 for the quarter ended June 30,
1997 (see consulting fees). Advertising decreased $196,211 to $287,873.
Professional fees were $168,505 compared to $85,065 for the same three month
period in 1997. Consulting fees increased from $86,200 to 211,950. This
increase was primarily the result of the Chairman/CEO and the President of
Florida Gaming salaries' replaced by management fees paid to Freedom Financial
Corporation for their services. Travel and entertainment expense totaled
$71,210 for the second quarter of 1998, compared to $116,451 for the second
quarter of 1997. Another significant cost included is approximately $242,418 in
payroll taxes. Employee benefits increased to $225,260. Property taxes
decreased to $177,746. Insurance also increased significantly to $170,266.
Public company costs including shareholder relations/information and filing fees
decreased to $33,735 from $35,908. Interest expense totaled $228,397 and
$163,123 for the three month period ended June 30, 1998 and June 30, 1997,
respectively. The increase was primarily the result of interest expense on the
development loan at Tara Club Estates and interest charged on property taxes.
GENERAL AND ADMINISTRATIVE FOR SIX MONTHS ENDING JUNE 30, 1998 Significant
categories of general and administrative expenses and their comparison on a
six month period in 1998 versus 1997 are as follows. Executive salaries were
$308,679 for the six months ended June 30, 1998, compared to $542,698 for
1997. Advertising decreased from $860,722 to $465,838. The decrease of
$394,884 is largely attributable to last years large expense in advertising
for the opening of the card rooms. Professional fees were $305,103 compared
to $150,729 for the same period in 1997. This increase was primarily the
result of litigation with Summer Jai Alai prior to settlement. Consulting
fees increased from $174,100 to $426,708. This increase was primarily the
result of the Chairman/CEO and the President of Florida Gaming salaries'
replaced by management fees paid to Freedom Financial Corporation for their
services. Former executives of World Jai-Alai were paid $164,000, pursuant to
the purchase agreement. Travel and entertainment expense totaled $139,313
compared to $207,988 for the first six months of 1997. Travel expenses in
1997 were higher due to the travel associated with the cardroom development
and the potential acquisitions. Another significant cost included is
approximately $591,513 in payroll taxes for the six months ended June 30,
1998. Employee benefits increased to $450,186. Public relations expense
decreased to $134,992. Property taxes decreased to $380,718. Insurance
expense has increased to $331,841 for the six months ended June 30, 1998
compared to $239,243 for 1997. Public company costs including shareholder
relations/information and filing fees increased to $101,524 from $81,471.
This increase is largely attributable to the Preferred Stock issues.
Interest expense totaled $442,994 and $316,274 for the six month period ended
June 30, 1998 and June 30,
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1997, respectively. The $126,720 increase in interest expense was the result
of the higher interest rate with Bank of Oklahoma after renegotiating and
the increase in interest expense on the development loan at Tara Club Estates.
OPERATING EXPENSES 2ND QUARTER
The Company's operating expenses for the three months ended June 30, 1998 and
June 30, 1997 were $3,390,890 and $5,027,498 respectively. Depreciation
and amortization expense for the three months ended June 30, 1998 and June
30, 1997, was $246,883 and $73,711 respectively. Player costs, which include
salaries, benefits, and support staff, represent a significant portion of
operational expenses. Player costs for the quarter ending June 30, 1998 and
June 30, 1997, were $1,579,753 and $1,633,284 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 $367,037 for the three months
ended June 30, 1998, compared to $576,587 for three months ended June 30,
1997. The components of the 1998 total ($367,037) were $61,785 in ITW tote,
interface, and telephone charges; $185,814 in totalizator equipment rental;
$49132 in satellite charges and $70,306 in camera/television rental.
Utilities expense totaled $269,790 and $285,489 respectively, for the three
months periods ended June 30, 1998 and June 30, 1997. Program costs totaling
$139,652 and $188,931, respectively, are also included in the total operating
expenses for the three month periods ended June 30, 1998 and 1997. Operating
expenses, including payroll costs for the bar, restaurant, souvenir and
concessions costs were $511,774 and $703,564 for the three month periods
which ended June 30, 1998 and June 30, 1997, respectively. Operating payrolls
and contract costs totaled $905,042 and $1,253,640 for the three month
periods ended June 30, 1998 and June 30, 1997, respectively, excluding player
costs and payroll costs included in the bar, restaurant, souvenir and
concessions areas. Of the $905,042, $327,642 was mutuels payroll, $337,183
was maintenance payroll and $240,217 was security payroll. Maintenance
expense for the three months ended June 30, 1998, totaled $109,890.
OPERATING EXPENSES SIX MONTHS ENDING JUNE 30, 1998
The Company's operating expenses for the six months ended June 30, 1998 and June
30, 1997 were $8,536,589 and $9,943,955 respectively. Depreciation and
amortization expense for the six month period ended June 30, 1998 and June 30,
1997, was $ 493,879 and $291,722, respectively. Player costs, which include
salaries, benefits, and support staff, represent a significant portion of
operational expenses. Player costs for the six months ended June 30, 1998 and
June 30, 1997, were $3,283,529 and $3,310,563, respectively, reflecting the
expanded operation of two year-round schedules in Miami and Tampa and 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 $957,424, for the six months ended June 30,
1998, compared to $1,143,384 for six months ended June 30, 1997. The
components of the 1998 total were $147,324 in ITW tote, interface, and telephone
charges; $415,853 in totalizator equipment rental; $192,707 in satellite charges
and $201,540 in camera/television rental. Utilities expense totaled $496,770
and $523,004 respectively, for the six months periods ended June 30, 1998 and
June 30, 1997. Program costs totaling $285,649 and $355,996 respectively, are
also included in the total operating expenses for the six month periods ended
June 30, 1998 and 1997. Operating expenses, including payroll costs for the bar,
restaurant, souvenir and concessions costs were $1,248,624 and $1,476,489 for
the six month periods which ended June 30, 1998 and June 30, 1997, respectively.
Operating payrolls and contract costs totaled $2,274,525 and $2,527,031 for the
six month periods ended June 30, 1998 and June 30, 1997, respectively, excluding
player costs and payroll costs included in the bar, restaurant, souvenir and
concessions areas. Of the $2,274,525, $776,703 was mutuels payroll, $704,086
was maintenance payroll, and $490,344 was security payroll. Maintenance expense
for the six months ended June 30, 1998, totaled $270,365, compared to $307,029
for the six months ended June 30, 1997. A significant portion of the decrease
in operating expenses can be attributed to the closing of the Miami Restaurant
and the consolidation of concessions stands.
OTHER INCOME
The Company had net interest and other income of $161,129 and $514,368 for the
three and six month period ended June 30, 1998, respectively, as compared to
$144,392 and $211,561for the three and six month periods ended June 30, 1997.
The bulk of this income for 1998 was generated from the sale of the North Miami
Amateur facility, and $400,000 in non-refundable deposits for the sale of the
Tampa Jai Alai property.
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OTHER INFORMATION
The Nasdaq Stock Market, Inc. has informed the Company that Florida Gaming
Corporation no longer qualifies for inclusion in the Nasdaq Stock Market, and is
scheduled to be 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 register with the NASD OTC Bulletin Board to
continue as a 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 $985,605 or .19 per common share, for the three
months ended June 30, 1998, compared to a net loss of $717,753 or $0.15 per
common share for the three month period ended June 30, 1997. The Company had a
net loss of $898,502 or .18 per common share, for the six months ended June 30,
1998, compared to a net loss of $509,250 or $0.11 per common share for the six
month period ended June 30, 1997. The increased loss for the quarter ended June
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, 1998 through
June 30, 1998, since the facility is operated by the Summer Partnership during
the quarter ended June 30, 1998. In the same period in 1997, the Summer
Partnership did not start until July 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The balance of the Company's cash and cash equivalents at June 30, 1998 was
$238,963. At June 30, 1998, the Company had a decrease in working capital of
approximately $584,646 from December 31, 1997. The decrease was primarily the
result of a decrease in the cash and cash equivalents.
During the six months ended June 30, 1998, net cash provided by in the Company's
operating activities was $321,836. The Company's continuing operating expenses
consisted principally of office expenses, general and administrative expenses,
and costs associated with Fronton operations. Principal revenues were from net
pari-mutuel wagering commissions on live jai-alai and ITW events.
During the six months ended June 30, 1998, cash flow provided by investing
activities was $459,696.
During the six months ended June 30, 1998, cash flow used in financing
activities was $787,664. The bulk of these funds represent principal pay downs
on the Bank of Oklahoma first mortgage.
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.
As indicated above, on March 11, 1998, the Company sold certain excess property
in North Miami for $487,000. The bulk of the proceeds from this sale were paid
to the Bank of Oklahoma. The Company had previously reported with the filing of
its Form 10KSB that it was two payments in arrears on the Bank of Oklahoma
obligation. The Company and the bank signed a modification agreement dated May
1, 1998, and as of the date of this report the Company is current on its
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obligation to the Bank of Oklahoma. The modification amends the payment
schedule to monthly payments of interest only, which have been timely made,
until such time as the Tampa facility transaction has been closed or the loan
matures in September, 1998. The Company has also settled a stock guarantee
payable to Graham Road Holdings ("GRH") by executing a short-term note for
$249,016 as satisfaction of this obligation. As of the date of this filing, a
verbal agreement was reached with the Seller to extend all obligations related
to the note until the closing of the sale of the Tampa Jai-Alai property. As
of March 31, 1998, the inter-company receivable from Freedom Financial 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 and paid interest at 2% over prime.
Freedom paid $357,122.56 in cash and contributed $84,000 in face amount of the
Series F Preferred Stock it held.
The 1996 real estate taxes of approximately $458,000 were past due as of March
31, 1998. Other tax payments, approximately 200,000, and an escheated outs
payment of $109,000 due to the state of Florida are currently in arrears. The
Company has discontinued its consulting payments to Mr. Wheeler and Mr. Donovan.
Real estate taxes totaling approximately $500,000 for 1997 are currently due and
payable. 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.
In November and December of 1997, the Company raised $3.0 million via the
issuance of Series G Preferred Stock. The Company is obligated to file a
registration statement (the "Series G Registration Statement") covering the
resale of the shares of Common Stock issuable on conversion of the Series G
Preferred Stock (the "Series G Conversion Shares") and to use its best
efforts to cause the Series G Registration Statement to become effective. In
the event of a Registration Default (as defined below), then the Company
shall pay as liquidated damages to each holder of Series G Preferred Stock an
amount equal to 1% of the liquidation preference of the Series G Preferred
Stock for the first 30 day period after May 25, 1998 (or pro rata portion
thereof) and 2% of the liquidation preference of the Series G Preferred Stock
for each 30 day period thereafter (or pro rata portion thereof) that there
continues to be a Registration Default, in cash ratably according to the
number of Series G Preferred Stock held by each holder, immediately payable
following the occurrence of such Registration Default. A "Registration
Default" means if (i) the Series G Registration Statement has not been
declared effective by May 25, 1998, (ii) within the first 30 days following
May 25, 1998, the Company postpones the filing of the Series G Registration
Statement or allows such Series G Registration Statement to fail to be
effective and usable, or elects that such Series G Registration Statement not
be usable for a reasonable period of time, but not in excess of 90 days, or
(iii) the Series G Registration Statement is filed and declared effective but
shall thereafter cease to be effective (without being succeeded immediately
by an additional registration statement filed and declared effective) for a
period of time exceeding 45 days in the aggregate per year. The Company has
not yet filed the Series G Registration Statement . The Company has entered
into agreements with six (6) of the seven (7) holders of the Series G
Preferred Stock covering an aggregate of $1,000,000 face amount, to
repurchase the shares by using the proceeds of the anticipated sale of the
Tampa Jai-Alai real estate. The Company is presently negotiating with the
one remaining Series G Preferred Stockholder to repurchase the remaining
shares having a face amount of $2,000,000. There can be no assurance that an
agreement will be reached with the remaining holder, on the terms and
conditions of such agreement.
The Company's cash flow is not currently adequate to meet its debts and other
obligations as they come due. The Company is currently evaluating its
alternatives to improve its cash flow, including the sale of selected excess
real estate and other assets and the refinancing of its indebtedness using
its real estate holdings as collateral. On January 8, 1998, the Company
entered into an agreement with Monroe's Prestige Group, Inc. ("MPG"), a real
estate development company based in Tampa, Florida, which provided MPG with a
ninety day inspection period during which MPG elected to purchase for $8.3
million in cash, the land and improvements where the Company's Tampa,
Florida, gaming operations are located. A copy of this agreement was filed
with the Company's Current Report on Form 8-K/A dated February 9, 1998. MPG
has determined to proceed with the purchase and the closing; if the closing
occurs, it will likely be in the third quarter of 1998. The proposed
transaction does not include the Company's gaming permit which may be
available for use at a different
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facility in Hillsborough County, Florida. On April 20, 1998 the Company
received a non-refundable $200,000 deposit from MPG on this property. In
July and August the Company received another $200,000 in non-refundable
deposits, making a total of $400,000 in non-refundable deposits. The
Company has been informed that the anticipated closing date is sometime
between August 17th, and August 28th, 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.
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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. The
Company 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.
During the quarter the Company was in default on principal and
interest to the Bank of Oklahoma. These defaults were cured with
payments from the proceeds from the sale of the North Miami property,
26
<PAGE>
additional payments and the execution of a Modification Agreement
dated May, 1, 1998. For further detail describing this credit
facility, the default, and the cure of the default as of the filing of
this report refer to the Modification Agreement set forth at Item #
6, Exhibit #1 of the Form 10-QSB for the quarter ended March 31,
1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C>
(a) LIST OF EXHIBITS FILED.
Exhibit 1 - Bank of Oklahoma Modification Agreement dated May 1,
1998. Incorporated by reference to Exhibit 1 of
the Form 10-QSB for the quarter ended March 31,
1998.
Exhibit 2 - Amendment to Monroe Prestige Group Purchase
Agreement dated April 20, 1998. Incorporated by
reference to Exhibit 2 of the Form 10-QSB for the
quarter ended March 31, 1998.
Exhibit 3.1- Graham Road Mortgage Modification dated April 22,
1998. Incorporated by reference to Exhibit 3.1 of
the Form 10-QSB for the quarter ended March 31,
1998.
Exhibit 3.2- Graham Road Mortgage Note dated April 22, 1998.
Incorporated by reference to Exhibit 3.2 of the
Form 10-QSB for the quarter ended March 31, 1998.
Exhibit 27 - Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
No Form 8-K Current Reports were filed during the quarter ended
June 30, 1998.
27
<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: August 14, 1998 By: /s/ W. B. Collett
------------------------- -----------------------------
W.B. Collett
Chairman of the Board and Chief
Executive Officer
(Principal Financial Officer)
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 239
<SECURITIES> 0
<RECEIVABLES> 989
<ALLOWANCES> 0
<INVENTORY> 74
<CURRENT-ASSETS> 1,404
<PP&E> 25,956
<DEPRECIATION> (1,641)
<TOTAL-ASSETS> 32,398
<CURRENT-LIABILITIES> 14,474
<BONDS> 0
578
4
<COMMON> 0
<OTHER-SE> 15,668
<TOTAL-LIABILITY-AND-EQUITY> 32,398
<SALES> 0
<TOTAL-REVENUES> 12,170
<CGS> 0
<TOTAL-COSTS> 13,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 867
<INCOME-PRETAX> (899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (899)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> 0
</TABLE>
