BINGO & GAMING INTERNATIONAL, INC.
11006 Metric Boulevard
Austin, Texas 78758
(512) 490-0065
__________________
ANNUAL REPORT TO SECURITY HOLDERS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
__________________
This Annual Report is being provided to the stockholders of record of
Bingo & Gaming International, Inc., an Oklahoma corporation (the "Company"),
as of September 2, 1997, in connection with the solicitation of proxies by the
Company's Board of Directors.
Item 1. Description of Business.
The Company, through its wholly-owned subsidiaries, Monitored
Investments, Inc. ("Monitored"), a Texas corporation; Meridian Enterprises,
Inc. ("Meridian"), a Mississippi corporation; Red River Bingo, Inc. ("Red
River"), a Louisiana corporation; and Tupelo Industries, Inc. ("Tupelo"), a
Mississippi corporation (collectively "Monitored and its affiliated companies"
or the "subsidiaries") is engaged in the business of owning and operating, as
commercial lessors, charity bingo locations of their own and, in some
instances, has operated similar locations for other owners. All of the
Company's bingo operations at the present time are in Mississippi. In
addition, the Company distributes electronic pre-paid phone card dispensers in
Texas.
Charity bingo provides a significant and generally stable source of
funds for charitable organizations who wish to engage in charity bingo
operations. Compared with many other fund raising activities, bingo offers
the opportunity to raise larger amounts of money with limited risk to the
charitable organization. The business risk to a charity is mitigated by
leasing the use of bingo facilities from commercial lessors such as the
Company, particularly since most charitable organizations have neither the
capital nor the risk tolerance to invest in the establishment of a charity
bingo facility.
The Company obtains, from the applicable state or locality, all
necessary permits and licenses to operate a charity bingo location, then buys
or leases the subject premises and equipment. The Company then leases or
subleases such premises and equipment to one or more charitable organizations
for the operation of bingo games as fundraising activities for the charities.
The total revenue to the charity operator is the result of the bingo
players "buying" the cards with which they "play" the games, and in some
states, such revenue will also include revenue from other games of chance.
Many players buy multiple cards for each game, thereby increasing their odds
of winning, and in Mississippi and elsewhere, computer bingo provides a method
to play even more cards. In a typical situation, approximately 75% of total
revenue is paid out as prize money, and approximately 25% is retained by the
charity as its gross revenue. The charity operator pays the commercial lessor
a previously agreed upon amount per playing session or per month as lease
expense and then pays its other operating expenses out of its remaining net
revenue, which should generally result in an operating profit. The commercial
lessor pays its operating expenses out of its gross revenue, which includes
its lease revenue and, in some cases, concession income and/or vending income,
which should also result in an operating profit. The commercial lessor then
pays its general and administrative expenses, interest expense, if any, and
applicable income taxes.
In well-managed and well-promoted operations, both the charity
operator and the commercial lessor should have substantial operating profits,
the charity operator's operating profit being approximately 20% to 40% of its
net revenue and the commercial lessor's operating profit being approximately
20% to 40% of its gross revenue.
The charity bingo business is regulated by the states. Charity
operators and commercial lessors must be licensed, and the amount that can be
paid by charity operators to commercial lessors as lease expense is
established by the states. Specifically, such lease expense is the result of
a certain amount per session times a certain number of sessions per day times
a certain number of days per week.
In Mississippi where the Company operates, commercial lessor
licenses are one-year renewable licenses. There are no assurances that the
Company's licenses will be continually renewed; however, the applicable
regulatory authorities seem to prefer commercial lessor continuity,
particularly where such operations are well-managed and operated within the
applicable rules and regulations.
Additionally, commercial lessors, including the Company, are subject
to the same laws, rules and regulations, and ordinances to which other
businesses are subject. The Company believes that it is in substantial
compliance with all of such laws, rules and regulations, and ordinances.
There is, however, no assurance that such laws, rules and regulations, and
ordinances will not be changed, and there is no assurance that additional
competitive forms of gaming will not be authorized and/or permitted by the
states in which the Company operates. Such changes, if any, could have a
material adverse effect on the Company's business.
The Company presently owns and operates as a commercial lessor,
three locations: one in Meridian, Mississippi, one in Iuka, Mississippi, and
one in Tupelo, Mississippi.
The gaming industry is highly competitive because all of the
businesses in the industry compete for the amounts that can or will be
wagered, and many of the businesses in the industry have far greater financial
and other resources than does the Company. The charity bingo niche of the
industry, in which the Company operates, can, however, be characterized as
fragmented and unconsolidated. While there are competitive pressures in
certain markets from time to time, the Company does not believe that
competition is a significant factor in its current business locations.
In May 1996, the Company began distributing the Lucky Shamrock
Emergency Phone Card Dispenser ("The Dispenser), a video enhanced pre-paid
phone card dispenser, under an exclusive distribution agreement with Diamond
Game Enterprises. The Dispenser is an exciting method of marketing pre-paid
phone cards. The Dispenser itself resembles a Las Vegas style machine with a
video screen and chrome housing; however, the equipment is simply a vending
machine of pre-printed phone cards. To further enhance the sales of the phone
cards, the Company utilizes a Promotional Sweepstakes offering cash prizes
from $1 to $500, which are paid at the retail location of the dispenser.
The Promotional Sweepstakes portion of the phone card contains nine
symbols or numbers, which are covered by a peel-apart covering. A winning
portion contains three like symbols or numbers in a row or nine like symbols
or numbers. When the phone card is dispensed, the Dispenser, through barcode
technology, displays this same arrangement of icons on the video
screen and indicates visually and with a musical jingle, whether the game
piece contains a winning combination.
As with all promotional sweepstakes (e.g., McDonald's Monopoly
Game), no purchase is necessary to enter the sweepstakes. The Company offers
three methods of obtaining free entries: from the retail location, from the
Company by sending a self-addressed envelope and from the Company utilizing a
Business Return Mail post card. The Lucky Shamrock machines currently vend
two-minute emergency phone cards for the price of $1.00.
The Company leases the machines, which it provides at no cost to
the retail location, and purchases the phone cards from Diamond Game
Enterprises. The long distance time, accessed through a 1-800 number and PIN
number, is supplied by a third party reseller. The Company sells the Lucky
Shamrock Emergency Phone Cards to the retail location on terms of net 30 or
whenever a new supply is needed, whichever comes first. The exclusivity
portion of the Company's Distribution Agreement with Diamond Games has been
terminated by Diamond Games; however, the Company remains its primary customer
and may continue to operate under the remaining portions of the Distribution
Agreement. Negotiations are currently under way to distribute other types of
pre-paid phone card dispensers and to offer 30 and 60 minute phone cards.
Currently, 110 dispensers are in use throughout the state of Texas.
Most are located in bingo halls or in game rooms associated with bingo halls,
but some are located in bars, restaurants, convenience stores and truck stops.
As of August 31, 1997, the Company had seven full-time employees.
The Company's relationship with all of its employees is believed to be
satisfactory. No employee of the Company is represented by a labor union or
is subject to a collective bargaining agreement.
The Company intends to expand and further develop its business. It
will, however, need to obtain additional financial wherewithal in order to be
able to do so.
Item 2. Management's Discussion and Analysis and Plan of Operations.
Selected Financial Information
The following selected financial information has been derived from the
financial statements of Bingo & Gaming International, Inc. and its affiliated
companies and the consolidated financial statements of the Bingo & Gaming
International, Inc. and its affiliated companies. The following information
should be read in conjunction with such financial statements and the notes
thereto.
Year ended Year ended
December 31, December 31,
1996 1995
Statement of Income:
Total revenues $1,151,158 $623,760
Cost of revenues (597,441) (249,134)
Other expenses (576,406) (582,959)
Operating loss (22,689) (208,333)
Net loss (48,155) (217,837)
Net loss per common share (.01) (.03)
December 31, December 31,
1996 1995
Balance Sheet:
Current assets $324,671 $146,118
Current liabilities 233,229 237,235
Total Assets 541,249 471,808
Long-term debt 176,002 82,801
Stockholders' equity 132,018 151,772
Plan of Operation
During the year ended December 31, 1995, Bingo & Gaming
International, Inc. and its affiliated companies operated up to four charity
bingo facilities for themselves and managed two other such facilities for
other corporations (McAllen, Texas and Columbus, Mississippi), which share
some common stockholders with the Company. The Red River facility in
Shreveport, Louisiana commenced business in November 1991. However, in
October 1995, the Company closed it due to competitive pressures from
riverboat casinos. The Meridian facility in Meridian, Mississippi, commenced
business in June 1992. The Tupelo facility in Tupelo, Mississippi, commenced
business in June 1992. During the year ended December 31, 1995, the Company
opened two additional charity bingo centers: one in Kosciusko, Mississippi in
April 1995 and one in Iuka, Mississippi in June 1995. In July 1995, the
Company closed its Kosciusko location, because of less than expected
attendance.
In April 1996, the Company transferred two management agreements
(McAllen, Texas and Columbus, Mississippi) to a former director as more fully
described in the "Termination of Employment and Change of Control Arrangement"
discussion of the Company's Annual Report on Form 10-KSB for the calendar year
ended December 31, 1996. Also in April 1996, the Company executed an exclusive
Distribution Agreement for the state of Texas for the Lucky Shamrock Emergency
Phone Card Dispenser, a video enhanced pre-paid phone card dispenser.
Utilizing the Lucky Shamrock Promotional Sweepstakes as a marketing tool, the
Company sold over two million phone cards in the first six months of this new
business venture. The Company will soon sell 30 and 60 minute pre-paid calling
cards, as well as an international calling card to service neighboring Mexico,
at very competitive rates.
The Company intends to further develop and substantially expand its
business, principally by continuing its operation and expansion of the
distribution of the video enhanced phone card dispensers, and to a lesser
extent by acquiring existing bingo facilities (for cash or for notes or for
its own stock or in combination thereof) or by establishing new bingo
facilities. Its ability to do so will be limited by its available liquidity
and other capital resources, as to which no assurance can be given.
Results of Operations
Year ended December 31, 1996
Compared with Year ended December 31, 1995
Revenues include rental income from charitable organizations which
lease the Company's bingo facilities, related concession and vending income,
management fees from managing similar facilities for others, and beginning in
1996, phone card sales related to the video enhanced dispensers. Phone card
sales were $566,764 for the year ended December 31, 1996 due to the
distribution of approximately 110 phone card dispensers from June 1996 through
December 1996. Management advisory fees and related concession income
decreased to $18,000 and $63,006 in fiscal 1996 from $72,000 and $99,795 in
fiscal 1995, respectively. Such decreases were due to the transfer of the
management agreements to a former director and officer, as previously
mentioned. Rental income increased by $51,423 or 11.4%. This increase was due
to an increase in rental income earned in 1996 from the Company's newest
location in Iuka, Mississippi (opened June 1, 1995).
Cost of revenues represent expenses directly attributable to the
operations of the phone card dispensers and operations of the bingo
facilities. In total, such cost was $597,441 and $249,134 for the years ended
December 31, 1996 and 1995, respectively. Cost of revenue specifically
related to the phone card dispensers includes phone card and royalties cost,
machine and location rental and prizes paid. Such cost was $149,404, $108,375
and $162,281, respectively, for the years ended December 31, 1996 and was due
to the distribution of such dispensers beginning in June 1996, as previously
mentioned. Cost of revenue specifically related to the operations of the bingo
facilities represents the rental cost of such facilities. Such cost decreased
by $71,753 or 28.8% as a result of the Shreveport, Louisiana facility being
closed in October 1995, as previously mentioned.
Other expenses include salaries and wages, indirect operating costs,
and other general and administrative expenses. In total, such expenses were
$576,405 and $582,959 for the year ended December 31, 1996 and 1995,
respectively. Salaries and wages decreased by $52,768 or 20.6% as a result of
a decrease in salaries related to the former director relinquishing his
management position with the Company as previously mentioned. Indirect
operating costs increased by $39,621 or 21.1% and this increase was due to the
increase in operations with regards to the distribution of the phone card
dispensers. General and administrative expenses increased by $6,594 or 4.8%.
This increase was mostly attributed to the Company writing off approximately
$25,000 in bad debts related to a charity which ceased conducting bingo in the
current year. Such increase was partially offset by an overall decrease in
overhead due to management's concerted efforts to reduce such cost in the
current year.
Principally for the reasons set forth in the three preceding
paragraphs, the Company had a net loss of $48,155 for the year ended December
31, 1996 compared with a net loss of $217,837 for the year ended December 31,
1995. Included in the net loss for 1996 and 1995 is interest expense of
$25,750 and $18,402, respectively.
Financial Position
The Company's financial position changed significantly during the
year ended December 31, 1996. The most significant changes were:
(1) During 1996, the Company increased borrows by $193,400 to fund
the initial distribution of the phone card dispensers. However, the Company
reduced the amount of its accounts payable, paid off a $20,000 note and made
scheduled payments of other-long term debt of an additional $74,890. Related
to the service of this debt, the Company renegotiated its $89,000 line of
credit with a local financial institution by making a $15,000 payment and
placing the balance of $74,000 on a ten-year note at prime plus 2% with a
balloon payment due December 30, 2000. A second note of $60,000, which had
also been an interest only instrument, was converted on January 10, 1996, to
payments of $1,000 principal per month plus interest at 10.5%. Overall, the
Company increased its long term-debt by approximately $99,000.
(2) In October of 1996, the Company issued 55,400 shares of common
stock. These shares were issued in consideration of deposits for phone card
dispensers and in consideration of various advertising services rendered.
Furthermore, in October and November of 1996, a former director exercised
options to purchase 10,000 shares of common stock. These options were
originally issued in return for services rendered and release of the
director's employment contract as more fully described in "Termination of
Employment and Change of Control Arrangement".
(3) Approximately $45,000 was spent and capitalized as property and
equipment and deferred charges and intangible assets during 1996 in connection
with the expansion of the distribution of the phone card dispensers.
(4) Adopting FAS 109 resulted in a net deferred tax asset at
December 31, 1996 and 1995 of approximately $86,000 and $74,000, respectively,
which was offset by recognition of a 100% valuation allowance since management
could not determine that it was more likely than not that it would realize
that asset.
(5) For information on the impact of future changes in accounting
principles, see Summary of Significant Accounting Policies in the Notes to the
Consolidated Financial Statements, appearing elsewhere herein.
Liquidity
The Company's cash position at December 31, 1996 decreased
approximately $21,000 from what it was at December 31, 1995. The Company used
cash flows from operations of $173,890 in fiscal 1996 as a result of the
further expansion of the distribution of the phone card dispensers. The
Company provided cash flow from financing activity of $136,911 in fiscal 1996,
primarily from the Company's additional borrows from individuals.
The Company has plans to further develop its business by continuing
to expand the distribution of Lucky Shamrock Emergency Phone Card Dispensers
in Texas which has generated additional cash flows for the Company.
The Company will, however, need to obtain additional financing to
achieve substantial expansion and there is no assurance that the Company will
be able to obtain such additional financing.
Item 3. Identification of Directors and Executive Officers.
Please see Proposal 1 of the accompanying Proxy Statement for
identification of the Company's current directors and executive officers.
Item 4. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the Company's two most recent calendar years, and as of the date
of this Annual Report to Stockholders, neither the Company's principal
independent accountant nor the principal independent accountant of any of its
subsidiaries resigned, declined to stand for re-election or was dismissed.
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Company's Common Stock, $.001 par value, is traded on the NASD
OTC Electronic Bulletin Board under the symbol "BING". The following table
shows the range of reported high and low closing bid quotations for the
Company's Common Stock, for the fiscal periods indicated, as reported on the
NASDAQ Regular Market System through the National Quotation Bureau and NASDAQ
Monthly Reports.
Common Stock
High Low
Fiscal 1996:
First Quarter 1.25 0.50
Second Quarter 1.50 0.50
Third Quarter 1.375 0.625
Fourth Quarter 1.625 0.8125
Fiscal 1997:
First Quarter 1.375 0.75
Second Quarter 0.9375 0.25
Holders
The number of record holders of the Company's common stock as of
December 31, 1996 was approximately 337; such number does not include an
indeterminate number of stockholders whose shares were held by brokers in
street name. As of August 29, 1997, there were approximately 332
stockholders.
Dividends
There are no present material restrictions that limit the ability of
the Company to pay dividends on its common stock or that are likely to do so
in the future. The Company has not paid any dividends with respect to its
common stock and does not intend to pay dividends in the foreseeable future.
Item 6. Financial Statements.
The following financial statements of the Company are attached as an
exhibit to this Annual Report:
Consolidated Financial Statements for the calendar years ended
December 31, 1996 and 1995
Independent certified public accountants' report
Balance sheets
Statements of loss
Statements of changes in stockholders' equity
Statements of cash flows
Summary of significant accounting policies
Notes to consolidated financial statements
The Company will provide without charge to each person from whom a proxy
is solicited, upon the written request of any such person, a copy of the
Company's Annual Report on Form 10-KSB for the calendar year ended December
31, 1996, which has been filed with the Securities and Exchange Commission,
including the audited financial statements and financial data schedule
thereto. Written requests may be directed to the following address:
George Majewski, Secretary
Bingo & Gaming International, Inc.
11006 Metric Boulevard
Austin, Texas 78758
The Company's Form 10-KSB may also be accessed at the internet address
of the Securities and Exchange Commission: http:\\www.sec.gov or through the
Company's website at luckyshamrock.com.
Bingo & Gaming International, Inc.
Consolidated Financial Statements
Years Ended December 31, 1996 and 1995
Independent Certified Public Accountants' Report
Bingo & Gaming International, Inc.
Austin, Texas
We have audited the accompanying consolidated balance sheets of Bingo & Gaming
International, Inc. (the "Company") as of December 31, 1996 and 1995 and the
related consolidated statements of loss, changes in stockholders' equity and
cash flows for each of the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Bingo & Gaming International, Inc. at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
years then ended in conformity with generally accepted accounting principles.
March 26, 1997
<TABLE>
Bingo & Gaming International, Inc.
Consolidated Balance Sheets
<CAPTION>
December 31, 1996 1995
<S> <C> <C>
Assets
Current
Cash and cash equivalents (Note 11) $ 53,307 $ 74,062
Accounts receivable - net of
allowance of $-0- for
possible losses 175,804 43,606
Inventory 54,327 -
Note receivable (Notes 2 and 11) 40,813 -
Deferred offering costs (Note 7) - 25,510
Prepaid expenses 420 2,940
Total current assets 324,671 146,118
Property and equipment, at cost - net
of accumulated depreciation and
amortization (Note 4) 115,524 167,737
Other assets
Note receivable (Notes 2 and 11) - 83,000
Organizational costs and intangible
asset - net of accumulated
amortization (Note 3) 37,505 56,187
Deposits 63,549 18,766
Total other assets 101,054 157,953
$ 541,249 $ 471,808
Liabilities and Stockholders' Equity
Current
Accounts payable and accrued expenses $ 110,866 $ 120,181
Current maturities of long-term debt
(Notes 1, 5 and 11) 122,363 117,054
Total current liabilities 233,229 237,235
Long-term debt (Notes 1, 5 and 11) 176,002 82,801
Total liabilities 409,231 320,036
Commitments and contingencies (Notes 6 and 7)
Stockholders' equity (Note 7)
Common stock, $.001 par; 70,000,000
shares authorized; 8,414,600 and
8,349,200 shares outstanding 8,415 8,349
Additional paid-in capital 391,539 363,204
Deficit (267,936) (219,781)
Total stockholders' equity 132,018 151,772
$ 541,249 $ 471,808
</TABLE>
<TABLE>
Bingo & Gaming International, Inc.
Consolidated Statements of Loss
<CAPTION>
Year ended December 31, 1996 1995
<S> <C> <C>
Revenue
Phone card sales $ 566,764 $ -
Management advisory fees (Note 1) 18,000 72,000
Rental income (Note 6) 503,388 451,965
Concession income (Note 1) 63,006 99,795
Total revenue 1,151,158 623,760
Cost of revenue
Phone cards and royalties 149,404 -
Machine and location rental 108,375 -
Prizes paid 162,281 -
Hall rental 177,381 249,134
Total cost of revenue 597,441 249,134
Gross margin 553,717 374,626
Operating expenses 227,384 187,763
Salaries 203,614 256,382
General and administrative expenses 145,408 138,814
Total expenses 576,406 582,959
Operating loss (22,689) (208,333)
Other income 284 8,898
Interest expense (Note 2) (25,750) (18,402)
Net loss $ (48,155) $ (217,837)
Net loss per common share $ (.01) $ (.03)
Weighted average shares outstanding 8,360,433 8,153,633
</TABLE>
<TABLE>
Bingo & Gaming International, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<CAPTION>
Additional Total
Common Paid-In Stockholders'
Stock Capital Deficit Equity
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 8,050 $148,871 $ (1,944) $154,977
Net loss for the year ended
December 31, 1995 - - (217,837) (217,837)
Issuance of stock (Note 7) 299 214,134 - 214,433
Sale of warrants (Note 7) - 199 - 199
Balance at December 31, 1995 8,349 363,204 (219,781) 151,772
Net loss for the year ended
December 31, 1996 - - (48,155) (48,155)
Issuance of stock (Note 7) 66 28,335 - 28,401
Balance at December 31, 1996 $ 8,415 $391,539 $(267,936) $132,018
</TABLE>
<TABLE>
Bingo & Gaming International, Inc.
Consolidated Statements of Cash Flow
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Year ended December 31, 1996 1995
<S> <C> <C>
Operating Activities:
Net loss $ (48,155) $ (217,837)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 62,526 61,545
Loss on disposal of assets 5,059 -
Provisions for bad debt 22,000 10,000
Changes in current assets and
liabilities:
Accounts receivable (154,198) (9,189)
Inventories (54,327) -
Prepaid expenses 2,520 1,150
Accounts payable and accrued
expenses (9,315) 40,551
Net cash used for operating
activities (173,890) (113,780)
Investing Activities:
Purchase of property and equipment (25,690) (59,608)
Proceeds from sale of equipment 19,000 -
Increase in deferred charges and other
assets (19,273) (20,378)
Additions to notes receivable - (83,000)
Payments received on notes receivable 42,187 -
Cash provided by (used for) investing
activities 16,224 (162,986)
Financing Activities:
Payments on long-term debt (84,890) (35,891)
Proceeds from long-term debt 193,400 149,000
Issuance of common stock 28,401 214,433
Sale of option/warrants - 199
Cash provided by financing activities 136,911 327,741
Net increase (decrease) in cash and
cash equivalents (20,755) 50,975
Cash and cash equivalents at beginning
of year 74,062 23,087
Cash and cash equivalents at end of
year $ 53,307 $ 74,062
Supplemental disclosures of cash flow information:
Taxes paid $ 8,776 $ 1,982
Interest paid $ 9,499 $ 18,402
Supplemental disclosure of non-cash investing
and financing activities:
Reduction of long-term debt from
sale of asset $ 10,000 $ -
Deferred offering costs included in
accounts payable $ - $ (25,510)
</TABLE>
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
Bingo & Gaming International, Inc.
Summary of Significant Accounting Policies
Nature of Business and Basis of Presentation
Bingo & Gaming International, Inc. (the "Company") was formed in
1981 and was dormant from 1984 to November 1994.
In December 1994, the Company merged with Monitored Investment, Inc. and
Affiliates (Monitored Investment, Inc., Red River Bingo, Inc., Tupelo
Industries, Inc. and Meridian Enterprises, Inc., hereinafter referred to
collectively as "Monitored"). Monitored's principal operations consist of
developing, acquiring, managing and operating charity bingo entertainment
centers. Monitored is a commercial lessor of bingo facilities to the charity
lessee which utilize bingo events as a means of fund raising. The
stockholders of Monitored became the controlling stockholders of the
consolidated company in a transaction viewed as a "reverse acquisition",
whereby each of the corporations comprising Monitored became wholly-owned
subsidiaries of the Company. As a result, the merger was accounted for as an
"equity restructuring" of Monitored and a purchase by Monitored of the
Company.
In May 1996, the Company began distributing the Lucky Shamrock Emergency Phone
Card Dispenser, a video enhanced pre-paid phone card dispenser, under an
exclusive distribution agreement with Diamond Game Enterprises (Note 12).
Utilizing the Lucky Shamrock Promotional Sweepstakes as a marketing tool, the
Company sold over two million phone cards in its first six months of this new
business venture. The Company will soon sell 10, 20 and 30 minute pre-paid
calling cards, as well as an international calling card to service neighboring
Mexico, at very competitive rates.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in
consolidation.
Inventories
Inventories, which consist solely of phone cards, are valued at the
lower of cost or market using the first-in, first-out method.
Cash Equivalents
Cash equivalents consist primarily of funds invested in short-term
interest-bearing accounts. The Company considers all highly liquid
investments purchased with initial maturities of three months or less to be
cash equivalents.
Organizational Costs and Intangible Asset
Significant expenses of bringing new locations into operation are
recorded as organizational costs and amortized over periods of not
more than five years. The costs include the cost of a noncompete
agreement which is being amortized over five years.
Property, Equipment and Depreciation and Amortization
Property and equipment is stated at cost, net of accumulated
depreciation and amortization. For financial statement purposes,
depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the term of the related lease or the useful life of the leasehold
improvements. Accelerated depreciation methods are used for tax purposes.
Maintenance and repairs are charged to expense as incurred. The cost
of betterments and renewals are capitalized. Gains or losses upon
disposal of assets are recognized in the period during which the
transaction occurs.
New Accounting Pronouncements
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS No. 128"). This pronouncement provides a different
method of calculating earnings per share than is currently used in
accordance with APB No. 15, "Earnings Per Share". SFAS No. 128
provides for calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity similar to fully diluted earnings per
share. The Company will adopt SFAS No. 128 in 1997 and its implementation is
not expected to have a material effect on the
consolidated financial statements.
The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued
to Employees". The Company follows FASB Statement 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") for financial statement disclosure
purposes and issuance of options and warrants to non-employees for services
rendered.
In accordance with FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
management reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be fully recoverable. As part of
this assessment, management prepares an analysis of the undiscounted
cash flows for each product that has significant long-lived or intangible
asset values associated with it. This analysis for the asset values as of
December 31, 1996 indicated there was no impairment to these assets' carrying
values.
Taxes on Income
The Company uses the liability method of accounting for income taxes
as prescribed by the Financial Accounting Standard Board Statement
No. 109.
Revenue Recognition
Phone card sales and rental income are recognized when earned.
Management advisory fees are recognized when services are
performed.
Loss Per Share
Net loss per share is based upon the weighted average number of
common shares outstanding during the period. All options and
warrants are considered to be antidilutive.
Reclassification
Certain amounts previously reported have been reclassified to conform
to the current year presentation.
Accounting Estimates
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.
Bingo & Gaming International, Inc.
Notes to Consolidated Financial Statements
1. Related Party Transactions
The Company had $52,158 and $30,855 in notes payable to a present
officer and stockholder at December 31, 1996 and 1995, respectively
(Note 6). Interest paid to the present officer and stockholder was
$5,689 and $3,959 in 1996 and 1995, respectively.
The Company also had transactions with Columbus Investments, Inc.
and Sharm, Inc., affiliated companies with common stockholders.
Management advisory fees and concession income earned from these
companies totaled $24,198 and $89,717 in 1996 and 1995, respectively.
2. Note Receivable
The note receivable at December 31, 1996 represents advances to a
company. The unsecured note is non-interest bearing. Although due
on demand, the Company does not intend to make such demand and the note will
be reduced by consulting services performed and royalties due to the company.
During the year ended December 31, 1996, reductions in the note balance
resulted from consulting services performed by the company.
Additional reductions in the note balance resulted from royalties due tothe
company under an agreement whereby the Company pays a 10% royalty on the gross
profit from phone card sales (as defined in the
agreement).
3. Organizational Costs and Intangible Asset
Organizational costs and an intangible asset at December 31 consist of
the following:
<TABLE>
<S> <C> <C>
1996 1995
Organization costs $ 24,415 $ 30,415
Noncompete agreement 63,678 63,678
Total 88,093 94,093
Less accumulated amortization 50,588 37,906
Net organizational costs and
intangible asset $ 37,505 $ 56,187
</TABLE>
Amortization expense was $18,483 and $16,171 for the years ended
December 31, 1996 and 1995, respectively.
4. Property and Equipment
Property and equipment at December 31 consist of the following:
<TABLE>
Lives
(Years) 1996 1995
<S> <C> <C> <C>
Furniture and equipment 10 $ 109,141 $ 158,054
Leasehold improvements 5 109,817 126,106
Total 218,958 284,160
Less accumulated depreciation
and amortization 103,434 116,423
Net property and equipment $ 115,524 $ 167,737
</TABLE>
Depreciation and amortization expense was $44,043 and $45,374 for
the years ended December 31, 1996 and 1995, respectively.
In October 1995, the Company closed a bingo facility due to competitive
pressures. The net book value of the assets of the facility totaling
approximately $29,000 were sold during 1996 at a loss of approximately $5,000.
5. Long-Term Debt
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Note payable to officer and stockholder;
due in monthly installments of $1,654
including interest at 10%; matures
August 19, 1997; unsecured $ 13,301 $ 30,855
Note payable to a bank, due on demand or
in monthly installments of $1,000 including
interest at 10.5%; collateralized by the
outstanding stock held by the stockholders;
matures July 5, 1997 48,000 60,000
Non-interest bearing note payable to an
individual; matured January 24, 1996 - 20,000
Note payable to a bank, due in monthly
installments of $1,005 including interest
at 10.5%; collateralized by the outstanding
stock held by the stockholders; maturing
with an additional lump sum payment of
$46,531 in the year 2000 68,918 89,000
Note payable to officer and stockholder,
due on demand or in full at December 31,
1997; interest at 15%; unsecured 21,987 -
Note payable to individuals; principal is
due in full in various dates in the year
2000; interest at 18% due in monthly
installments; unsecured 135,000 -
Other notes payable to banks 11,159 -
Total 298,365 199,855
Less current maturities 122,363 117,054
Long-term debt $ 176,002 $ 82,801
Future maturities of long-term debt
are as follows:
Year ending December 31, Amount
1997 $ 122,363
1998 10,668
1999 6,792
2000 158,542
Total $ 298,365
</TABLE>
6. Commitments and Contingencies
The Company leases its principal facilities and certain equipment under
operating leases which expire at various dates through 1999. Future minimum
lease payments under these operating leases are as follows:
Year ending December 31, Amount
1997 $ 560,786
1998 501,197
1999 343,300
2000 330,000
2001 82,500
Total minimum payments required* $ 1,817,783
The following schedule shows the composition of total rental expense:
Year ending December 31, 1996 1995
Minimum rentals $ 297,633 $ 249,134
Less: sublease rentals 15,795 -
$ 281,838 $ 249,134
* Minimum payments have not been reduced by minimum sublease rentals
of $31,320 due in the future under noncancellable subleases.
The Company subleases bingo facilities under operating subleases which expire
at various dates in 1997. These subleases are cancelable by either party at
any time.
The Company has guaranteed the lease payments of facilities operated
by an associated company expiring in February 1998. At December 31, 1996, the
aggregate amount of guaranteed lease payments was $102,000.
The Company has been assessed civil penalties totaling $25,000 for
alleged gaming law violations. Management is vigorously contesting
this claim and believes the outcome will not have a material adverse
effect on the Company's financial position, income, or cash flows.
The Texas Lottery Commission requested an Opinion from the Office
of the Attorney General, State of Texas, "Re: Whether the offer for
sale of a sweepstakes ticket combined with a long distance telephone
card constitutes an illegal lottery". On February 20, 1997, the Office of the
Attorney General issued Letter Opinion No. 97-008, which sets forth facts
which must be determined before the Lucky Shamrock sweepstakes can be
determined to be an illegal lottery. The Company and its legal counsel
believe that the Lucky Shamrock sweepstakes meets all of the requirements to
be considered a legal sweepstakes.
7. Stockholders' Equity
In October 1995, the Company completed limited offerings of 199,200
shares of common stock pursuant to Regulation D and Regulation S of
the Securities Act of 1933. Net proceeds of approximately $207,000
were primarily used for general corporate needs and to develop and
expand the Company's business.
The Company agreed to sell to the sales agent of the limited offering,
a warrant to purchase one share of the Company's common stock for
each ten (10) shares sold during the offering. These agent warrants
may be exercised for a period of five years from issuance at an
exercise price of 110% of the sales price of the shares. The warrants
contain provisions providing for adjustment of the exercise price and
the type of securities issuable upon exercise thereof upon the occurrence of
certain events, and grant to the holder piggy-back
registration rights for a five year period. In 1995, 19,920 of these
warrants were sold at $.01 a warrant.
During 1994, Monitored executed a Share Purchase Option for $2,000
with an individual to purchase 177.18 shares of its common stock.
The Share Purchase Option was subsequently amended to an option to
purchase 100,000 shares of the Company's common stock for $7,000
on or before August 31, 2004. In October 1995, this option was
exercised for $7,000.
The Company, as part of certain employment contracts, will grant
options to purchase common stock of the Company to key employees.
The employment contracts were adopted in January 1995. The options, when
granted, will vest at least 20% per year on the five anniversaries
consecutively following the date of the employment
agreements. The options are exercisable for a period of 10 years from
the date of vesting, at a price equal to the offering price of the Company's
common stock pursuant to the Disclosure Statement, plus
10% per share. As of December 31, 1996, no options have been granted.
During 1996, the Company issued options to purchase 110,000 shares
of the Company's common stock to individuals as part of certain note
agreements. These options are exercisable at $1.00 per share, which
was the approximate fair market value at the dates of issuance. These
options expire on various dates in the year 2000.
In October 1996, the Company issued 50,000 shares of common stock at $.35 per
share to a corporation in consideration of deposits for the phone card
dispensers. Also in October 1996, the Company issued 5,400 shares of common
stock at $1.00 per share to a corporation in consideration of various
advertising services rendered.
In April 1996, a director of the Company divested himself of over
1,000,000 shares of common stock thereby reducing his holdings in
the Company to less than 10% and relinquished his management and
director's position in the Company. In return for services rendered
and release of the director's employment contract, the Company issued
225,000 stock options and transferred two management agreements to
the director. These options are exercisable at $.55 per share and
expire in April 2000. In October and November 1996, 10,000 of
these options were exercised for $5,500.
Deferred offering costs recorded at December 31, 1995 were written-
off in the year ended December 31, 1996 due to the Company not
proceeding with a proposed public offering.
8. Stock Options and Warrants
A summary of the status of the Company's stock options as of December 31, 1996
is presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
<S> <C> <C>
1996 Price
Options outstanding at January 1 - $ -
Options granted 335,000 0.70
Options exercised (10,000) 0.55
Options canceled - -
Options outstanding and exercisable at
December 31 325,000 0.70
</TABLE>
The following table summaries the information about the stock options
as of December 31, 1996.
<TABLE>
<CAPTION>
Weighted
Average
Number Remaining Weighted Number Weighted
Range of Outstand- Contractual Average Exercisable Average
Exercise ing at Life Exercise at Exercise
Price Dec 31 (Years) Price Dec 31 Price
<C> <C> <C> <C> <C> <C>
$ 0.55 215,000 4 $ 0.55 215,000 $ 0.55
$ 1.00 110,000 4 $ 1.00 110,000 $ 1.00
$0.55-
1.00 325,000 4 $ 0.70 325,000 $ 0.70
</TABLE>
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and loss per
share as if compensation cost for the Company's stock options granted
had been determined in accordance with the fair value based method
prescribed in that Statement.
The Company estimates the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996 as
follows: dividends yield of 0%; expected volatility of 0%; risk-free interest
rates ranging from 5.14% to 6.62%; and expected lives ranging from 0.0833 to 4
years. The weighted average fair value of options granted in 1996 was $0.07.
Under the accounting provisions of SFAS No. 123, the Company's net
loss applicable to common stockholders and loss per share would have
been increased to the pro forma amounts indicated below:
1996
Net loss applicable to common stockholders:
As reported $ (48,155)
Pro forma (72,905)
Loss per share:
As reported $ (.01)
Pro forma (.01)
At December 31, 1996 the Company has 19,920 warrants outstanding
which were issued in connection with the Company's limited offering
in 1995 (see Note 7). These warrants are unregistered and are
exercisable at any time at $1.37 prior to expiration on October 1,
2000. No value has been attributed to these outstanding warrants at
December 31, 1996.
9. Income Taxes
Temporary differences between the financial statement carrying amounts and the
tax bases of assets and liabilities that give rise to significant portions of
the net deferred tax asset (liability) relate to the following:
December 31, 1996 1995
Net operating loss carryforward $ 74,096 $ 68,217
Depreciation 11,886 5,911
Valuation allowance (85,982) (74,128)
Net deferred tax asset $ - $ -
Since management can not determine that it is more likely than not that the
Company will realize the deferred tax asset, a 100% valuation
allowance has been recorded.
The income tax benefit differs from the amount of income tax determined by
applying the applicable statutory federal tax rate to
pretax loss from operations as a result of the following:
1996 1995
Tax benefit at statutory rates $ (16,000) $ (74,000)
Effect of net operating losses
not currently utilizable 16,000 74,000
Tax benefit at effective tax rates $ - $ -
At December 31, 1996 and 1995, the Company had, for tax reporting
purposes, net operating loss carryforwards of approximately $218,000
and $201,000, respectively, available to offset future taxable income.
These net tax operating loss carryforward benefits expire beginning in
the year ending December 31, 2009.
10. Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial
Accounting Standards No. 105, consist primarily of trade accounts
receivable.
The majority of the Company's customer base are charitable
organizations located in Mississippi and retail outlets for its phone
cards located in Texas. Although the Company is directly affected by
the well being of the organizations, management does not believe
significant credit risks existed at December 31, 1996 and 1995.
11. Fair Value of Financial Instruments
Cash and cash equivalents. The carrying amounts at December 31, 1996
and 1995 approximate fair value because of the short maturity of those
instruments.
Note receivable. Based on discounted cash flows, the fair value of the note
receivable approximates its carrying value at December 31, 1996.
Long-term debt. Based on borrowing rates currently available to the
Company for bank loans with similar terms and average maturities, the
fair value of long-term debt, including the current portion thereof,
approximates its carrying value at December 31, 1996 and 1995.
12. Phone Card Agreements
The Company has an exclusive distribution agreement with Diamond Game
Enterprises ("DGE") within the State of Texas. The Company, as the
distributor, has the exclusive right to lease and sublease the Lucky Tab II
dispensers from DGE. The Lucky Tab II phone cards are purchased by the
Company from DGE and sold in the dispensers. The agreement dated April 1, 1996
shall be for a term of five years, subject to early termination by either
party as provided in the agreement. The agreement may be extended for an
additional five year term, provided there are at least 2,000 units in
operation at the end of the initial five year term.
The Company has entered into an agreement with a company to compensate the
company for the assistance in obtaining the distribution agreement with DGE,
via royalty payments. Royalties are calculated at 10% of the Company's net
revenue from the sale of ticket based products sold through the Lucky Tab II
dispenser, outside of Texas charitable bingo. The royalty is calculated
monthly and payable no later than the 25th day of the immediately following
month. The term of the agreement is five years from the effective date of
April, 1996.
The Company has contracted with a phone company for the purchase
of phone time associated with the Lucky Tabs. The term of the
contract expires on December 31, 1998.
