<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
F O R M 10QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission file number 0-9099
FLORIDA GAMING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 59-670533
------------ -------------
(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
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5,782,250 shares of the issuer's Common Stock were outstanding as of the
latest practicable date, May 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 March 31, 1998 (unaudited) and December 31, 1997... 3
Statements of Operations (unaudited)
Three Months ended March 31, 1998 and 1997.............................. 5
Statements of Cash Flows (unaudited)
Three Months ended March 31, 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............................................. 23
SIGNATURES.............................................................. 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
FLORIDA GAMING CORORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
------ ----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 1)............................ $533,196 $1,042,110
Accounts receivable & current portion of notes receivable (Note 6).. 1,368,054 1,174,837
Inventory Note 2)................................................... 146,619 142,257
Prepaid and other expense .......................................... 142,992 75,643
----------- -----------
Total current assets 2,190,861 2,434,847
PROPERTY AND EQUIPMENT:
Land (Notes 2 and 7).............................................. 12,366,434 12,451,389
Buildings and Improvements......................................... 11,359,024 11,313,654
Furniture, fixtures and equipment.................................. 2,136,370 2,136,270
----------- -----------
25,861,828 25,901,313
Less accumulated depreciation.....................................(1,414,251) (1,188,054)
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24,447,577 24,713,259
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REAL ESTATE DEVELOPMENT................................................. 6,390,278 6,451,444
OTHER ASSETS............................................................ 425,837 413,819
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$33,454,553 $34,013,369
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----------- -----------
</TABLE>
continued
3
<PAGE>
FLORIDA GAMING CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ------------------------------------- ------------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accrued expenses (Note 2)...................... $8,119,086 $ 8,074,406
Short-term borrowing and current portion of long-term debt.......... 6,221,482 6,845,381
------------- --------------
Total current liabilities........................ 14,340,568 14,919,787
LONG-TERM LIABILITIES
Long-term portion note payable ..................................... 1,777,007 1,779,915
STOCKHOLDER'S 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 March 31,
1998 and December 31, 1997 ......................................... 3,443 3,443
Class B convertible preferred stock; convertible
to common stock, 5,000 shares authorized; 400
shares issued and outstanding at March 31, 1998
and 445 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively .............. 40 45
Class C 8% cumulative convertible preferred stock,
convertible to common stock, 5,000 shares authorized;
100 shares issued and outstanding at March 31, 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 March 31,1998 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; 2,084 shares issued and
outstanding at March 31, 1998 and December 31, 1997................ 208 208
Class G 5% cumulative convertible preferred stock,
5,000 shares authorized; 3,000 shares issued and
outstanding at March 31, 1998 and December 31, 1997............... 300 300
Common stock, $.10 par value, authorized 15,000,000 shares,
5,696,054 issued and outstanding at March 31, 1998, and
5,620,057 shares issued and outstanding at
December 31, 1997................................................... 569,605 562,006
Capital in excess of par value...................................... 39,379,585 43,184,670
Accumulated deficit................................................. (22,616,408) (26,437,219)
------------- --------------
Total stockholders equity.................................. 17,336,978 17,313,668
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Total liabilities and stockholders equity.................. $33,454,553 $34,013,370
------------- --------------
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</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FLORIDA GAMING CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
HANDLE:
Jai-Alai. $ 25,724,524 $29,189,610
Inter- Track Wagering (ITW) 16,736,017 14,690,520
-------------- --------------
Total Pari-Mutuel Handle 42,460,541 43,880,130
-------------- --------------
-------------- --------------
REVENUE::
Jai-Alai Mutuel Revenue, Net of
Pari-Mutuel taxes to State of Florida $ 4,224,861 $ 4,878,415
Inter-Track Guest Commissions 1,564,472 1,366,829
-------------- --------------
Net Pari-Mutuel Revenue 5,789,333 6,245,244
Card room Income
Admissions Income 253,416
136,326 176,775
Programs, Food, Beverage and Other 1,338,400 1,263,897
-------------- --------------
Total Operating Revenue $ 7,517,475 $ 7,685,916
-------------- --------------
-------------- --------------
COSTS AND EXPENSE:
Operating $ 5,392,694 $ 5,134,468
General and Administrative 2,390,918 2,410,114
-------------- --------------
Total Costs and Expense 7,783,612 7,544,582
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Net Income (Loss) From Operations ($ 266,137) $ 141,334
-------------- --------------
OTHER INCOME (EXPENSES)
Interest and Other Income 353,239 67,169
-------------- --------------
Net Income $ 87,102 $ 208,503
-------------- --------------
-------------- --------------
Earnings (loss) per Common Share $0.02 $0.05
Earnings (loss) per Common Share (fully diluted) $ $0.01 $0.03
Weighted Avg. Common Shares Outstanding 5,683,993 4,458,166
</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
--------------------------
March 31, March 31,
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (loss)....................................................... $ 87,102 $ 208,503
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................................. 246,996 218,011
Loss on sale of assets......................................... 0 0
Realized gain on sale of marketable securities................. (351,258) 0
Accounts receivable, net....................................... (193,216) (373,422)
Prepaid expenses and other current assets...................... (67,349) (96,989)
Other assets................................................... (32,373) 318
Inventories............................................................. (4,362) 18,752
-0-
Accounts payable and accrued expenses........................... 841,826 367,329
---------- ----------
Total adjustments...................................... 440,264 133,999
Net cash provided (used) by operating activities............ $ 527,366 $ 342,502
Investing activities:
Loan to affiliated company.................................. 0 (244,892)
Proceeds from sales of property.............................. 450,613 0
Capital Expenditures ........................................ 852 (652,943)
---------- ----------
Net cash provided from (used in) investing activities........ $ 451,465 $ (897,835)
Financing activities:
Net proceeds from borrowing/Repayment of Borrowings (Note 8). 0 0
Repayment of borrowings...................................... (626,807) (6,244)
Stockholders Equity:
Dividends Preferred Stock, .................................. (63,791) 448,089
---------- ----------
Net cash provided (used) from financing activities........... $(690,598) $ 441,845
NET INCREASE (DECREASE) IN CASH.......................................... $ 288,233 $ (113,488)
CASH AND EQUIVALENT AT BEGINNING OF YEAR................................. $ 244,963 $ 907,527
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF QUARTER.............................. $ 533,196 $ 794,039
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest................................................................. 62,000 153,000
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
FLORIDA GAMING CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 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 frontons in Ft. Pierce, Miami, Tampa and Ocala, Florida. The
Company also conducts intertrack wagering (ITW) on jai alai, horse racing and
dog racing from its Tampa and Ocala Jai Alai facilities. On November 26,
1997, the Company acquired Tara Club Estates ("Tara"), a residential and
commercial real estate development in Walton County, Georgia. The Company
intends to complete the development and market the property for sale.
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
March 31, 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
7
<PAGE>
returned to winning bettors, a portion paid to the State of Florida and a
portion retained by the Company. ITW wagers are also accepted and forwarded
to the "host" facility after retention of the Company's commissions.
INCOME TAXES: The Company utilizes the asset and liability approach to
accounting for income taxes. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for temporary differences
between the financial reporting and the tax bases of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts
are realized or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
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
discussed in Note D was considered a change in ownership under the "deemed
exercise rule" of IRC Section 382. As a result, only the net operating
losses attributable to the period after the "change in ownership"
(approximately $5,000,000) are not subject to the Section 382 limitation.
The Company has unused general business tax credits of approximately $137,000
to offset any future tax liabilities of the Company. These credits expire at
various dates through the year 2001. Any deferred tax assets arising from
differences from taxable income and financial reporting income are deemed to
be offset by an allowance in an equal amount due to the uncertainty of future
taxable income.
(4) INCOME PER COMMON SHARE
The income per common share was calculated based upon net income and the
weighted average number of outstanding common shares (5,683,993 and 4,458,166
for the three months ended March 31, 1998, and 1997, respectively). Options
and convertible securities were included in the computations of income per
share on a fully diluted basis for the period ended March 31, 1997.
Weighted average equivalent shares on a fully diluted basis for the three
months ended March 31, 1997 were 7,473,089 shares, consisting of 84,250 options
held by three former directors, 19,000 in options held by a former officer of
8
<PAGE>
the Company, 506,673 shares of equivalent converted Preferred Stock,
1,075,000 in options held by directors and an executive officer under
Qualified and Nonqualified Stock Option Plans, 1,330,000 in options held by
Freedom Financial Corporation, and the 4,458,1666 weighted average common
shares. 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.
Weighted average equivalent shares on a fully diluted basis for the three
months ended March 31, 1998 were 11,140,689 shares, consisting of 4,138,896
shares of equivalent converted Preferred Stock, 1,154,000 in options held by
current and former directors and executive officers under Qualified and
Nonqualified Stock Option Plans, 163,800 in warrants issued to brokers as
fees in preferred stock issuances and the 5,683,993 weighted average common
shares. 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 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 first quarter of 1998, 50 Series B shares
were converted to 27,270 shares of common stock, and subsequent to the first
quarter on April 22, 1998 another 100 Series B shares were converted to
86,196 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
9
<PAGE>
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 first quarter of 1998, 50 Series C shares were converted
to 23,551 shares of common stock.
The Company is authorized to issue 2,000 shares of Series E 8% cumulative
convertible preferred stock, $.10 par value (the "Series E Preferred Stock"),
which provides annual dividends at the rate of 8% of the share's stated
value, payable upon conversion of the Series E preferred stock into common
stock. The stated value per share equals $1,000 (as adjusted for any stock
dividends, combination or splits).
Holders of Series E Preferred Stock may convert all or any such shares to the
Company's common stock (the "Series E Conversion Shares") beginning 120 days
after the issuance of the Series E Preferred Stock. If not converted earlier
by the holder, the Series E Preferred Stock shall be converted automatically
two years from the date of issuance. In general, the number of Series E
Conversion Shares issuable on conversion of each share of Series E Preferred
Stock shall equal the consideration paid for such share together with accrued
and unpaid dividends on such share, if any, divided by the lesser of (i)
$7.50 and (ii) 80% of the average of the closing bid price of the common
stock on the five trading days before conversion. A holder of Series E
Conversion Shares may not sell more than 25% of such shares between 120 and
150 days of his purchase of Series E Preferred Stock converted into each
share, 50% of such shares between 151 and 180 days of his purchase of Series
E Preferred Stock converted into such shares and 75% of such shares 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 first quarter of 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.
10
<PAGE>
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.
The Company is also authorized to issue up to 5,000 shares of Series G 5%
Convertible Preferred Stock (the "Series G Preferred Stock"), which provides
semi-annual dividends at the rate of 5% of the shares' stated value. The
stated value per share equals $1,000 (as adjusted for any stock dividends,
combination or split). At the discretion of the Company's Board of
Directors, such dividends may be paid in shares of the Series G Preferred
Stock.
Holders of Series G Preferred Stock may convert all or any of such shares to
the Company's common stock at any time following the 180th day following the
first date of issuance. If not converted earlier by the holder, the Series G
Preferred Stock shall be converted automatically on September 30, 2002. In
general, the number of Series G Conversion Shares issuable on conversion of
each share of Series G Preferred Stock shall equal the consideration paid for
such share together with accrued and unpaid dividend on such share, if any,
divided by the lesser of (i) 105% of the average of the reported closing
price of the Company's common stock during the fifteen consecutive trading
days immediately preceding the issuance date or (ii) 80% of the closing bid
price of the common stock on the five trading days before conversion.
Upon 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 will
occur. Should a default occur the penalty will be $30,000 for the first 30
days after default and $60,000 per month thereafter until cured.
During 1997, the Company issued 3,000 Series G shares at $1000 per share.
11
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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
three riverboat and dockside casinos located in Mississippi and Louisiana.
If the Joint Venture is formed before passage of an amendment to the Florida
Constitution to permit casino gaming at the Fronton, the Company will
contribute its interest in the Fronton to the Joint Venture with a credit to
its joint venture capital account of $5,000,000. Casino America will
contribute up to $2,500,000, as needed, to construct a 100,000 square foot
indoor facility suitable for a casino or flea market. If casino gaming is
not permitted in Florida by 2000, Casino America has a continuing option to
convert the money contributed to the Joint Venture to a promissory note from
the Joint Venture payable in equal payments over a ten year period with
interest at 8% per annum. If casino gaming is permitted at the Fronton by
2000, the value of the assets contributed by the Company to the Joint Venture
will be adjusted to increase the Company's capital account up to $22,500,000.
Casino America would fund its capital account on an as needed basis up to
$22,500,000. All profits and losses of the Joint Venture will be allocated
between the partners based upon capital accounts.
The Letter of Intent provides that Casino America will be the manager of the
casino and all casino-related improvements. The Company will manage the
operation of the jai-alai fronton, intertrack wagering and all other
non-casino related activities. Each corporation will receive a management
fee based on costs. The Letter of Intent provides that Casino America has
the exclusive right to enter into a Joint Venture with the Company for six
years and Casino America has a right of first refusal to enter into other
potential gaming opportunities in Florida with the Company for such period
and during the term of the Joint Venture. The formation of the Joint
Venture is subject to certain conditions, including the satisfactory
completion of due diligence by Casino America, the receipt of all required
regulatory approvals, the approval of each partner's board of directors, the
execution of a definitive joint venture agreement, and the approval of the
Company's stockholders, if required by law. Either party may terminate
discussions in connection with the Joint Venture and neither party shall have
any liability to the other, except as otherwise specified in the Letter of
Intent.
Freedom Financial Corporation has informed the Company that Casino America
has purchased 22,500 shares of Freedom's 7% Series AA Mandatorily Redeemable
Preferred Stock (the "Series AA Stock"). The Series AA Stock is convertible
into shares of the Company's Common Stock owned by Freedom at prices ranging
from $7.50 per share of Common Stock to $15.00 per share of Common Stock,
depending upon the timing of the conversion and possible passage of an
amendment to the Florida Constitution permitting casino gaming at the
Fronton. The Series AA Stock is convertible into a minimum of 150,000 shares
and a maximum of 300,000 shares of the Common Stock. Casino America is the
sole holder of Series AA Stock. On October 12, 1994, Freedom purchased
300,000 shares of Common Stock from the Company by partial exercise of its
option to purchase up to 1,630,000 shares (at that date) of the Company's
Common Stock at an exercise price of $1.25 per share. In 1997, Freedom
purchased an additional 425,000 shares of common stock pursuant to the same
option. 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 5,696,054 shares of issued
and outstanding Common Stock as of March 31, 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.
12
<PAGE>
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 described in Note J, the Company issued 47,336 shares of its $.10
par value common stock having a quoted market value of $3.10 on the date of
issue. Certain relevant provisions of the real estate purchase agreement
included the Company's guarantee of the appreciation in value of such stock
as follows:
- - If the seller held the stock for at least three years from the date of
closing, (the "$10.00 Guaranty Date") the market value of the stock at
the end of the three year period will be at least $10.00 per share.
- - For the purpose of the agreement, the price per share on the $10.00
Guaranty Date shall be the over the counter bid price, ("Market Value").
On the $10.00 Guaranty Date, Seller shall request in writing to the
Company to reimburse Seller for the difference between the market value
of the shares and the guaranteed price. Seller shall remit with said
request evidence that Seller is still in ownership and possession of
said stock. The Company shall pay the difference to Seller within
ninety (90) days from receipt of Seller's request.
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 it the
stock guarantee payable with the seller and has executed a short- term note
for $249,016 as satisfaction of this obligation.
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.
13
<PAGE>
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 is carrying an account receivable from its SJA partners of $468,372.
The Company believes its lawsuit will be successful and the partners will be
required to contribute their respective shares of the balance due.
(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. (See Note
D). Subsequent to December 31, 1997 a lawsuit was filed against the Company
seeking collection of amounts due under these agreements.
14
<PAGE>
During 1997, the Company discontinued the required payments under the above
consulting agreements because of its working capital deficiencies.
Delinquent payments totaling $96,000 are included in the accompanying balance
sheet as accrued expenses. Management intends to fulfill its contractual
obligations under these agreements as working capital becomes available.
A summary of the WJA assets acquired and consideration therefor is as follows:
<TABLE>
<CAPTION>
Allocated
ASSETS ACQUIRED AMOUNT
--------------- ----------
<S> <C>
Jai Alai Frontons in Miami, Tampa, and Ocala, Florida $17,428,059
Cash 381,997
Notes receivable 167,934
Inventory 134,974
Other assets 308,279
----------
$18,421,243
----------
----------
</TABLE>
Management allocated the purchase price to the basis of the assets acquired
based on available appraisals or other fair value information.
<TABLE>
<CAPTION>
Consideration paid Amount
------------------ -----------
<S> <C>
Cancellation of notes and interest receivable from
WJA at Company carrying value $14,692,298
Accounts payable and other accrued expenses assumed 3,078,647
Assumption of Wheeler-Phoenix note (See Note I) 500,000
Fair value of stock options issued 150,298
-----------
$18,421,243
-----------
-----------
</TABLE>
The three jai alai frontons had a loss from operations in 1996 of $127,000.
Interest expense and compensation of officers and directors of the three
frontons totaling $2,596,000 is not included in this amount.
(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 unimproved properties and a residential real estate
development called Tara Club Estates (collectively, "Tara" or the
"Properties"), all of which are situated in Loganville, Walton county,
Georgia. As consideration for the purchase, the Company paid ICC $6,373,265
as follows: (i) the Company issued to ICC 2,084 shares of Series F 8%
Convertible Preferred Stock (the "Series F Preferred Stock") at a stated
value of $1,000 per share (convertible into the Company's common stock
("Common Stock") on the basis of 296.6689 shares of the Company's Common
Stock for each $1,000 of stated value of the Series F Preferred Stock), (ii)
the Company assumed $1,081,102 of first mortgage promissory notes to certain
lenders by the properties purchased, and (iii) the Company canceled
$3,208,163 owed by Freedom to the Company.
The Company accounted for the acquisition of ICC's assets using the purchase
method of accounting. The total purchase price was $6,373,265 comprising the
above indebtedness cancellation, debt assumption and preferred stock. In
accordance with generally accepted accounting principles, the purchase price
was allocated to the assets acquired based on their fair value at the date of
acquisition. Management estimated fair value using available appraisals or
other cost information with respect to the individual assets.
15
<PAGE>
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 12 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 12, the Company provided working capital advances to Freedom and made
payments to third parties on Freedom's behalf throughout 1997. These third
party payments comprised transfers totaling approximately $582,000 to
Freedom's brokerage margin account, which funds were used by Freedom to cover
"margin calls" made by the brokerage as the value of Freedom's collateral in
the margin account decreased in value. The collateral included Florida
Gaming common stock acquired by Freedom during 1997 pursuant to its exercise
of options. The Company also advanced approximately $118,000 directly to
Freedom through this open account during the year. Freedom made payments to
the Company during 1997 totaling $259,500 as a reimbursement of these
advances and also incurred expenses on behalf of the Company totaling
approximately $207,500 which were likewise credited to Freedom's open
account. The remaining balance in the open account of $233,034 is included
in the accompanying 1997 balance sheet as a non-current advance to a related
party. The inter-company receivable from Freedom Financial has also been
reduced to $180,000 from $233,034 at year- end 1997. Freedom expects to pay
this off within the next sixty (60) days with the proceeds from an insurance
settlement.
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.
(11) NOTES RECEIVABLE
Included in notes receivable in the accompanying 1996 balance sheet is a note
comprising a line of credit granted to Freedom Financial Corporation on
December 15, 1995. The balance of such line was $1,796,860 at December 31,
1996. The credit facility, which was secured by refundable income taxes and
real estate owned by Freedom, was due on demand and bore interest at 2% above
prime. Interest receivable on this line of credit totaled $119,348 at
December 31, 1996. Freedom paid no interest to the Company during 1996.
Freedom Financial is owned substantially by the Company's Chairman. As
described in Note 9, the Company canceled this line as part of the
acquisition of Tara Club Estates from Freedom Financial Corporation in 1997.
16
<PAGE>
During 1996 the Company acquired certain notes of WJA with a face value of
approximately $20,000,000. These notes were ultimately canceled by the
Company in exchange for substantially all of the assets of WJA. The Company
accrued interest income of $1,101,087 on these notes from their date of
acquisition to their date of cancellation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
*The liquidity section paragraph 6 of this item has been amended as
to a related party subsequent event.
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
17
<PAGE>
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.
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.
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.
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 41
pari-mutuels in the State of Florida's fiscal year ended June 30, 1991 was
approximately $109 million. The state-wide
18
<PAGE>
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. 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 certain unimproved properties and a residential real estate
development called Tara Club Estates (collectively, the "Properties"), all of
which are situated in Loganville, Walton County (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 by the properties purchased, and (iii) the Company canceled
$3,208,163 owed by Freedom to the Company.
The Company's real estate development activities will comprise a separate
segment of its operations. Because the development was acquired in late
1997, the Company had virtually no income or expenses attributable to this
segment of its business during 1997. The Company 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.
RESULTS OF OPERATIONS -- FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
During the quarter ended March 31, 1998, the Company's operations reflects
three months' operation of live Jai-Alai performances at the Miami, Tampa,
and Ft. Pierce Frontons. 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 due to its close proximity to other
South Florida pari-mutuels. The Miami facility, however, broadcasts its
jai-alai performances to other gaming facilities in Florida, certain other
states, and Mexico. The Ocala Fronton only operated inter-track wagering
during the first quarter. This facility's live season is scheduled to begin
May 22, 1998 and run through October 31, 1998.
HANDLE ANALYSIS
Total Handle (amount of money wagered) for the three months ended March 31,
1998, and March 31, 1997, were $42,460,541, and $43,880,130, respectively.
The handles consisted of $25,724,524 in live and simulcast jai-alai wagering
and $16,736,017 in ITW guest handle, for the three months ended March 31,
1998, and $29,189,610 in Jai-Alai wagering
19
<PAGE>
and $14,690,520 in ITW guest handle for the three months ended March 31,
1997. The $1,419,589 decrease in total handle consisted of a decrease of
$3,465,086 in live jai-alai handle and a $2,045,497 increase in ITW handle.
REVENUES
The Company's pari-mutuel revenues net of state pari-mutuel taxes, for the
three months ended March 31, 1998 and 1997 were $5,789,333 and $6,245,244,
respectively. Of the $5,789,333, $4,224,861 consisted of commissions earned
on live jai-alai and $1,564,471 was attributable to commissions on
inter-track wagering. Of the $6,245,244, $4,878,415 was attributable to
commissions earned on jai-alai and $1,366,829 was attributable to
commissions on inter-track wagering.
Card room Revenue for the quarter ended March 31, 1998 was $253,416.00.
Direct operating costs totaled $167,846.
Admissions income for the three months ended March 31, 1998 decreased $40,449
to $136,326 from $176,775, for the three months ended March 31, 1998, net of
state taxes. Food, beverage and other revenues for the three months ended
March 31, 1998 and March 31, 1997, were $1,156,481 and $1,263,897
respectively. Revenue from the food, beverage and other income decreased
$107,416 (8.5%). The decrease in this area and admissions corresponds to the
decrease in attendance (approximately 23,000 or 6%) and the drop in live
handle.
During the first quarter of 1998, the Company had $181,919 in revenues from
lot sales the recently acquired Tara Club Estates residential development.
Lot costs attributable to this revenue totaled approximately $62,000, while
operating expenses totaled approximately $38,000.
GENERAL AND ADMINISTRATIVE EXPENSES
Company's general and administrative expenses were $2,390,918 and
$2,410,114 for the three months ended March 31, 1998 and March 31, 1997,
respectively. Executive salaries were $160,931 for the first quarter of 1998
compared to $328,963 for 1997 (see consulting fees). Advertising decreased
$198,672 to $177,965. Professional fees were $136,598 compared to $65,664
for the same three month period in 1997. Consulting fees increased from
$87,900 to $214,758. 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.
Interest expense totaled $214,597 and $153,151 for the three months periods
ended March 31, 1998 and March 31, 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. Travel and entertainment
expense totaled $68,102 compared to $91,537 for the first quarter of 1997.
Another significant cost included is approximately $349,094 in payroll taxes.
Insurance decreased slightly to $161,575, compared to $163,172, while
property taxes increased to $202,972 compared to $174,666.
OPERATING EXPENSES
The Company's operating expenses for the three months ended March 31, 1998
and March 31, 1997, were $5,145,699 and $5,134,468 respectively.
Depreciation and amortization expenses for the three months ended March 31,
1998, and March 31, 1997, was $246,996 and $218,011, respectively.
Depreciation and amortization for the quarter ended March 31, 1998, consisted
of depreciation of $226,642 and $20,354 of amortization of organization costs
associated with financing, while 1997's costs were associated solely with
asset acquisition and the existing Ft. Pierce assets. Player costs, which
include salaries, benefits, and support staff, represent a significant
portion of operational expenses. Player costs for the three months ending
March 31, 1998 and March 31, 1997, were $1, 703,778 and $1,677,298,
respectively, reflecting the operation of two year round schedules in Miami
and Tampa. These costs should drop significantly with the closing of live
jai-alai games at the Tampa facility. Rental and service costs for
totalizator wagering equipment and satellite receiving/television equipment
also represent a significant portion of operating expenses. These expenses
totaled $590,388 for the three months ended March 31, 1998, compared to
$566,796 for three months ended March 31, 1997. The components of the 1998
total were $85,539 in ITW tote, interface, and telephone charges; $230,039 in
totalizator equipment rental, $143,575 in satellite charges and $131,234 in
camera/television rental. The components of the 1997 total were $67,219 in
ITW tote, interface, and telephone charges; $230,679 in totalizator equipment
rental, $141,000 in satellite charges and $127,898 in camera/television
rental. Utility expense totaled $226,980 and $237,545 respectively, for
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the three months periods ended March 31, 1998 and March 31, 1997. Program
costs totaling $145,997 and $167,065, respectively, are also included in the
total operating expenses for the three month periods ended March 31, 1998 and
1997. Operating expenses, including payroll costs for the bar, restaurant and
concessions were $690,587 and $722,415 for the three-month periods, which
ended March 31, 1998 and March 31, 1997, respectively. Operating payrolls and
related costs totaled $1,056,567 and $1,080,298 for the three month periods
ended March 31, 1998 and March 31, 1997, respectively, excluding player costs
and payroll costs included in the bar, restaurant and concessions areas.
Also contract services for maintenance and security totaled $131,518 and
$50,646, respectively, for the quarter ended March 31, 1998 versus $133,980
and $59,112, respectively for the quarter ended March 31, 1997.
OTHER INCOME
Company had net interest and other income of $353,239 and $67,169 for the
three months ended March 31, 1998 and March 31, 1997,respectively. The bulk
of this income for 1998 period was generated from the sale of the North Miami
Amateur facility ($351,258).
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 income of $87,102 or $0.02 per common share ($0.01 per
share on a fully diluted basis) for the three months ended March 31, 1998 and
$208,503 or $0.05 per common share ($.03 per share on a fully diluted basis),
for the three months ended March 31, 1997. Total costs and expenses
increased approximately $239,000 for the first quarter of 1998 as compared to
1997. Total revenues declined $350,360 excluding revenues generated from the
Tara Club real estate development. Lower attendance and the resulting
decline in live handle and commission caused this decline. This decline was
only partially offset by increased ITW handles and commissions in that the
net commission rate on the ITW product is approximately 50% that of the live
jai-alai commission rate.
LIQUIDITY AND CAPITAL RESOURCES
The balance of the Company's cash and cash equivalents at March 31, 1998 was
$533,196. At March 31, 1998, the Company had a increase in working capital of
approximately $335,233 from December 31, 1997. The increase was primarily
the result of a decrease in the current portion of long-term debt as a result
of pay downs to the Bank of Oklahoma.
During the three months ended March 31, 1998, net cash provided by in the
Company's operating activities was $527,366. 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 three months ended March 31, 1998, cash flow provided by investing
activities was $451,465 of which $450,613 was attributable to the sale of
the North Miami property which closed in early March.
During the three months ended March 31, 1998, cash flow used in financing
activities was $690,598. 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.
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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 10KSB that it was two payments in arrears on the Bank
of Oklahoma obligation. The Company and the bank signed a modification
agreement in April, 1998, and as of the date of this report the Company is
current on its obligation to the Bank of Oklahoma. The modification amends
the payment schedule to monthly payments of interest only until such time as
the Tampa facility transaction has been closed or the loan matures in
September. 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 March 31, 1998, the inter-company
receivable from Freedom Financial has also been reduced to $180,000 from
$233,000 at year- end 1997. In late April of 1998, this balance increased to
approximately $400,000. The Company has been informed by Freedom that it
intends to payoff this obligation within sixty (60) days with the proceeds of
an insurance settlement and has indicated to the Company that it will execute
a Note and give the Company a security interest in the insurance proceeds.
The 1996 real estate taxes of approximately $458,000 were past due as of
March 31, 1998. Other tax payments and a 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'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 facility in Hillsborough County, Florida. On
April 20, 1998 the Company received a non-refundable $200,000 deposit from
MPG on this property. There can be no assurances that the transaction with
MPG will be consummated, since it is still contingent upon financing.
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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. 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. 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 January 14,1998, the Company issued 27,270 shares of
Common Stock upon the conversion of 50 shares of Series B
Preferred Stock. Also on January 14,1998, the Company
issued 25,176 shares of Common Stock upon the conversion
of an aggregate of 50 shares of Series E Preferred Stock.
On January 15, 1998, the Company issued 23,551 shares of
Common Stock upon the conversion of 50 shares of Series C
Preferred Stock. Subsequent to the end of the first quarter
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.
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, 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 see Item #6, Exhibit #1 of this filing which
shows the Modification Agreement in its entirety.
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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.
(a) LIST OF EXHIBITS FILED.
Exhibit 1 - Bank of Oklahoma Modification Agreement dated
May 1, 1998.
Exhibit 2 - Amendment to Monroe Prestige Group Purchase
Agreement dated April 20, 1998.
Exhibit 3.1- Graham Road Mortgage Modification dated
April 22, 1998.
Exhibit 3.2- Graham Road Mortgage Note dated
April 22, 1998.
Exhibit 27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K.
During the quarter ended March 31, 1998, the Company
filed a Form 8-K/A Current Report dated February 9,
1998,. amending a Form 8-K Current Report dated
November 26, 1997, as amended, concerning Item 2,
ACQUISITION OR DISPOSITION OF ASSETS and Item 5, OTHER
EVENTS.
As amended by Form 8-K/A Current Report dated November
26, 1997 and filed with the Commission on February 9,
1998, the following financial statements were filed as a
part of these Form 8-K Current Reports:
(a) The following historical financial statements of Interstate
Capital Corporation:
Independent Auditors' Report.
Interstate Capital Corporation
Balance Sheet as of December 31, 1996.
Interstate Capital Corporation
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Statement of Operations for the year ended December 31,
1996.
Interstate Capital Corporation
Statement of Changes in Stockholder's Equity for the
year ended December 31, 1996.
Interstate Capital Corporation
Statement of Cash Flows for the year ended December 31,
1996.
Interstate Capital Corporation
Notes to Financial Statements as of December 31, 1996.
(b) The following pro forma financial information:
Florida Gaming Corporation and Interstate Capital Corporation Pro
Forma Combined Balance Sheet as of September 30, 1997
(unaudited).
Florida Gaming Corporation and Interstate Capital Corporation Pro
Forma Combined Statements of Operations for the year ended
December 31, 1996 (unaudited).
Florida Gaming Corporation and Interstate Capital Corporation Pro
Forma Combined Statements of Operations for the nine months ended
September 30, 1997 (unaudited).
Florida Gaming Corporation and Interstate Capital Corporation
Notes to Pro Forma Combined Financial Statements (unaudited).
25
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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: May 15, 1998 By: /s/ W. B. Collett
---------------------- --------------------------
W.B. Collett
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 By: /s/ Timothy L. Hensley
---------------------- --------------------------
Timothy L. Hensley
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
