SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
-----------------
For the quarterly period ended June 30, 1998
LATIN AMERICAN CASINOS, INC.
Commission File Number 33-43423
A Delaware Corporation 65-0159115
(IRS Employer
Identification Number)
3941 N.E. 163rd Street (305) 945-9300
North Miami Beach, FL 33160 (Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common
equity, as of June 30, 1998: 3,300,000 shares of common stock $.00067 par value
per share
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
REVIEW REPORT
AS OF JUNE 30, 1998
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONTENTS
Accountants' Review Report 1
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997 2
Consolidated Statements of Changes in Stockholder's
Equity for the Six Months Ended June 30, 1998 and
the Year Ended December 31, 1997 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements as of June 30,
1998 and December 31, 1997 6-13
<PAGE>
Accountants' Review Report
To the Board of Directors of:
Latin American Casinos, Inc. and Subsidiaries
We have reviewed the accompanying consolidated balance sheet of Latin American
Casinos, Inc. and Subsidiaries as of June 30, 1998, and the related consolidated
statements of operations, changes in stockholder's equity and cash flows for the
three and six months ended June 30, 1998 and 1997, in accordance with the
Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Latin
American Casinos, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope that an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
The balance sheet for the year ended December 31, 1997 was audited by us and we
expressed an unqualified opinion on it in our report dated March 24, 1998, but
we have not prepared any auditing procedures since that date.
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
August 7, 1998
1
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 2,406,900 $ 3,224,665
Accounts Receivable, Less
$149,814 of Allowance for Doubtful Accounts
in 1998 and 1997 1,508,150 1,168,794
Inventory 377,970 --
Prepaid Expenses and Other Current Assets 151,664 162,008
----------- -----------
Total Current Assets 4,444,684 4,555,467
----------- -----------
PROPERTY AND EQUIPMENT - NET 4,947,709 4,428,109
----------- -----------
OTHER ASSETS
Financing Arrangement Receivable 94,624 114,460
Deposits 4,935 8,813
Note Receivable - Stockholder 125,000 125,000
Other Assets -- 182,601
----------- -----------
Total Other Assets 224,559 430,864
----------- -----------
TOTAL ASSETS $ 9,616,952 $ 9,414,440
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 140,503 $ 253,238
Foreign Income Tax Payable 30,000 23,280
----------- -----------
Total Current Liabilities 170,503 276,518
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
Total Liabilities 170,503 276,518
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 7,500,000
Shares Authorized, 3,300,000 Shares Issued
and Outstanding 2,211 2,211
Additional Paid-In Capital 9,919,557 9,919,557
Cumulative Translation Adjustments (240,147) (125,179)
Deficit (229,937) (653,432)
Treasury Stock, at cost (5,235) (5,235)
----------- -----------
Total Stockholders' Equity 9,446,449 9,137,722
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,616,952 $ 9,414,440
=========== ===========
</TABLE>
Read accountants' review report and notes to financial statements.
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<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number Par Additional Translation Retained
of Value Paid-In Ad- Earnings Treasury
Shares $.00067 Capital justments (Deficit) Stock
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE
JANUARY 1,1997 3,300,000 $ 2,211 $9,919,557 $ 4,003 ($ 828,069) --
ACQUISITION OF 3,400
SHARES OF TREASURY
STOCK, AT COST -- -- -- -- -- $ 5,235
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS -- -- -- (129,182) -- --
DIVIDENDS PAID -- -- -- -- (87,189) --
NET INCOME FOR
THE YEAR ENDED
DECEMBER 31, 1997 -- -- -- -- 261,826 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE -
DECEMBER 31, 1997 3,300,000 2,211 9,919,557 (125,179) (653,432) 5,235
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATION -- -- -- (144,968) -- --
NET INCOME FOR THE
SIX MONTHS ENDED
JUNE 30, 1998 -- -- -- -- 423,495 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE -
JUNE 30, 1998 3,300,000 $ 2,211 $9,919,557 ($ 240,147) ($ 229,937) $ 5,235
========== ========== ========== ========== ========== ==========
Read accountants' review report and notes to financial statements.
- 3 -
</TABLE>
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Rental Income $ 731,853 $ 480,878 $ 1,398,661 $ 906,686
Selling, General &
Administrative Expenses 465,334 449,786 904,584 812,502
Depreciation 67,138 38,500 121,200 75,000
----------- ----------- ----------- -----------
Income (Loss) from Operations Before
Interest Income, Income Taxes
Extraordinary Item 199,381 (7,408) 372,877 19,184
Interest Income 39,374 58,623 80,618 118,044
----------- ----------- ----------- -----------
Income from Operations Before
Income Taxes and Extraordinary Item 238,755 51,215 453,495 137,228
Income Taxes 67,000 (6,000) 149,000 41,000
----------- ----------- ----------- -----------
Income from Operations
Before Extraordinary Item 171,755 57,215 304,495 96,228
Utilization of Net Operating Losses and
Foreign Tax Credits 57,000 14,000 119,000 41,000
----------- ----------- ----------- -----------
Net Income $ 228,755 $ 71,215 $ 423,495 $ 137,228
=========== =========== =========== ===========
Earnings Per Common Share and
Common Share Equivalent
Common Share Equivalent Outstanding 3,296,000 3,300,000 3,296,600 3,300,000
=========== =========== =========== ===========
Net Income (Loss) $ .07 $ .02 $ .13 $ .04
=========== =========== =========== ===========
</TABLE>
Read accountants' review report and notes to financial statements.
- 4 -
<PAGE>
LATIN AMERICAN CASINOS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 423,495 $ 137,228
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation 121,200 75,000
Changes in Assets - (Increase) Decrease:
Accounts Receivable (339,356) (254,637)
Prepaid Expenses and Other Current Assets (185,025) (70,341)
Deferred Income Tax -- (7,500)
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses (112,735) (4,120)
Foreign Income Tax Payable 6,720 (49,485)
---------- ----------
Net Cash (Used In) Operating
Activities (85,701) (173,855)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment (640,800) (303,639)
Other Assets 23,704 (24,403)
---------- ----------
Net Cash (Used In) Investing
Activities (617,096) (328,042)
---------- ----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (114,968) (14,752)
---------- ----------
NET (DECREASE) IN CASH (817,765) (516,649)
CASH AND CASH EQUIVALENTS - BEGINNING 3,224,665 4,492,198
---------- ----------
CASH AND CASH EQUIVALENTS - ENDING $2,406,900 $3,975,549
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest $ -- $ --
========== ===========
Income Taxes, Foreign $ 23,280 $ 49,485
========== ===========
Read accountants' review report and notes to financial statements.
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<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 1. Summary of Significant Accounting Policies
A Business and Organization
Latin American Casinos, Inc. (formerly Repossession Auction, Inc.)
is a Delaware corporation incorporated on September 19, 1991. The
Company started a new business in 1994 in the gaming and casino
business primarily in Peru and other Latin American countries,
initially renting casino slot machines.
In 1994, the Company formed a Peruvian subsidiary, in late 1995 the
Company formed a Colombian subsidiary and in 1997 the Company formed
a subsidiary in Nicaragua that are in the gaming and casino business
in Latin America. These operations include the renting of casino
slot machines to operators. The Company had allocated $5,000,000 for
the purchase of machines and equipment. As of June 30, 1998 the
Company had acquired approximately 8,000 slot machines, 2,000 of
which have been acquired for parts, and other related equipment at a
cost of $4,858,522, including applicable costs for transportation,
duty and refurbishing.
B Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Latin
American Casinos, Inc., SA, a Peruvian corporation, Latin American
Casinos of Colombia LTPA a Colombian Corporation and Latin American
Casinos of Nicaragua. Effective September 23, 1997 the Company
incorporated World's Best Rated Cigar Company (World's) as a wholly
owned subsidiary to distribute quality cigars. In addition, Premium
Cigar Manufactures (Premium) is presently being incorporated as a
wholly-owned subsidiary. It is intended that World will market
premium cigars at "off price" whereas it is anticipated that Premium
will acquire premium cigars from six South American producers and
market them through large retail chains, initially on a consignment
basis. Operations of these subsidiaries have not commenced; however,
as of June 30, 1998 the company has expended approximately $482,000
primarily for start up costs and initial inventory acquisitions.
Such pre-operating expenditures have been included and $113,000 as
prepaid and other current assets; and $378,000 as inventory in the
accompanying financial statements. World Best Rated Cigar Company
has committed with a cigar producer in South America to acquire at a
minimum 100,000 cigars per month. The arrangement extends for twenty
years; however, the purchase commitment can be cancelled with a
cancellation fee of $125,000. It is anticipated that cigar
operations will commence in the latter part of 1998.
All material intercompany transactions, balances and profits have
been eliminated.
- 6 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 1. Summary of Significant Accounting Policies (Continued)
C Property and Equipment
Property and Equipment are stated at cost. Depreciation is provided
on accelerated and straight-line methods over the estimated useful
lives of the respective assets. Maintenance and repairs are charged
to expense as incurred; major renewals and betterments are
capitalized. When items of property or equipment are sold or
retired, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is included in the results of
operations.
D Revenue Recognition
Effective January 1, 1995, the Company began renting casino slot
machines in South America. Revenue is recognized monthly as the
casino slot machines are placed in service.
E Statement of Cash Flows
For purposes of this statement, the Company considers all liquid
investments purchased with an original maturity of three months or
less to be cash equivalents. Marketable securities of $2,000,000 as
of June 30, 1998 are considered a cash equivalent.
F Income (Loss) Per Common Share
Earnings per common share and common share equivalents were computed
by dividing net income (loss) by the weighted average number of
shares of common stock and common stock equivalents outstanding
during the period. The incentive stock options granted (see note 6)
have been considered to be the equivalent of common stock when the
market price of the common stock exceeds the exercise price of the
options. The increase in the number of common shares was reduced by
the number of common shares that are assumed to have been purchased
with the proceeds from the exercise of the options; those purchases
were assumed to have been made at the average price of the common
stock during the period. During 1997 and 1998 all warrants, stock
options and underwriter's options were anti-dilutive.
- 7 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 1. Summary of Significant Accounting Policies (Continued)
G Significant Concentration of Credit Risk
The Company has concentrated its credit risk for cash by maintaining
deposits in banks located within the same geographic region. The
maximum loss that would have resulted from risk totalled $259,000
and $3,094,000 as of June 30, 1998 and December 31, 1997 for the
excess of the deposit liabilities reported by the bank over the
amounts that would have been covered by federal insurance.
H Use of 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, the disclosure of contingent assets and liabilities at
the date of the financial statements, and revenues and expenses
during the period reported. Actual results could differ from those
estimates. Estimates are used when accounting for uncollectible
accounts receivable, obsolescence, equipment depreciation and
amortization, taxes, among others.
I Foreign Currency Translation
For most international operations, assets and liabilities are
translated into U.S. dollars at year-end exchange rates, and
revenues and expenses are translated at average exchange rates
prevailing during the year. Translation adjustments, resulting from
fluctuations in exchange rates, are recorded as a separate component
of shareholders' equity.
- 8 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30 1998 AND DECEMBER 31, 1997
Note 2. Property and Equipment
Property and equipment are summarized as follows:
June 30, December 31,
1998 1997
---------- ----------
Leased Property $ 346,881 $ 346,881
Rental Equipment 4,858,522 4,229,873
Leasehold Improvements 8,222 8,222
Furniture, Fixtures & Office Equipment 225,223 216,728
Transportation Equipment 157,655 143,948
---------- ---------
Total 5,596,513 4,945,652
Less: Accumulated Depreciation 648,804 517,543
---------- ----------
Property and Equipment - Net $4,947,709 $4,428,109
========== ==========
Depreciation expense for the three and six months ended June 30, 1998
was $67,138 and $121,200, respectively.
Rent expense for the three and six months ended June 30, 1998 was
$24,058 and $45,074 respectively.
Effective April 1, 1996, the Company leased the land and building owned
by the Company for $1,500 per month to an unrelated party for a three
year period. Effective February 1, 1998 the lease was rewritten for a
new tenant with similar terms.
Note 3. Cash and Cash Equivalents
As of June 30, 1998, cash and cash equivalents included commercial
paper in the amount of $2,000,000, due July 22, 1998 at an annual
interest rate of 5.54%. At December 31, 1997 there were no investments
in short-term commercial paper.
Note 4. Note Receivable - Stockholder
The Company advanced $150,000 to one of the stockholders in 1993. The
stockholder repaid $21,000 during 1994 and $4,000 during 1997. All
interest charged through 1997 has been paid by the stockholder. The
Company expects that the balance of the note will be repaid in 1998 or
1999. Interest is being charged at a rate of prime plus 1% per annum.
Included in the statement of operations is $5,600 of interest income
accrued for 1998 on this note.
- 9 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 5. Warrants and Options
As of June 30, 1998, the Company has outstanding 1,500,000 five year
warrants to purchase one share of the Company's common stock at an
exercise price of $7.25 by December 11, 1998.
Note 6. Investment Banker Warrants
Effective June 5, 1998 the Company contracted with an investment banker
to provide on a non-exclusive basis to the Company assistance in
possible mergers, acquisition and internal capital structuring. The
duration of the contract is for five years. In consideration for these
services Latin American Casinos, Inc. granted warrants to purchase an
aggregate of 225,000 shares of common stock at the closing bid price of
$1.875 as of June 5, 1998 which can be exercised through June 5, 2003.
These warrants vest and become irrevocable as follows: 75,000 warrants
with signing of the agreement, 75,000 warrants 180 days after the
signing of the agreement and an additional 75,000 warrants 365 days
after the signing of the agreement.
Note 7. Incentive Stock Option Plan
On September 30, 1991, the Company adopted the 1991 Incentive Stock
Option Plan in which the aggregate number of shares for which options
may be granted under the plan shall not exceed 450,000 shares. On June
13, 1994, the Board of Directors adopted the 1994 Stock Option Plan in
which the aggregate number of shares for which options may be granted
under the plan shall not exceed 1,000,000 shares. The term of each
option shall not exceed ten years from the date of granting (five years
for options granted to employees owning more than 10% of the
outstanding shares of the voting stock of the Company). The 1991 plan
became effective on September 30, 1991 and will terminate on September
30, 2001. The 1994 plan became effective on June 13, 1994 and will
terminate in June 2004 unless terminated earlier by action of the Board
of Directors. In December, 1995, the Company authorized the issuance
under the 1994 Stock Option Plan of 492,500 options at an exercise
price of $2.50 per share to various officers and employees. On March 6,
1997 the Company authorized the issuance of an additional 415,000
options at an exercise price of $2.50 to various officers and
employees.
- 10 -
<PAGE>
LATIN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 8. Provision for Income Taxes
The provision for income taxes consisted of the following for the six
months ended June 30:
1998 1997
--------- -------
Current
Federal $ 119,000 $41,000
State -- --
Foreign 30,000 13,000
--------- -------
149,000 54,000
--------- -------
Deferred
Federal -- --
State -- --
Foreign -- (13,000)
--------- -------
-- (13,000)
--------- -------
Income Tax Provision $ 149,000 $41,000
========= =======
Deferred income taxes resulting from differences between accounting for
financial statements purposes and accounting for tax purposes, were as
follows.
1998 1997
-------- -------
Revenue Recognition $ -- ($13,000)
--------- --------
Tax Effects of Timing Differences $ -- ($13,000)
========= ========
The differences between the provision for income taxes and income taxes
computed using the federal income tax rate were as follows.
1998 1997
--------- -------
Amount Computed Using the Federal
statutory rate $119,000 $41,000
Foreign Taxes 30,000 --
Net Operating Losses and Tax Credits (19,000) --
--------- -------
Income Tax Provision, Net $ 30,000 $41,000
========= =======
As of June 30, 1998, the Company had available for income tax purposes
unused net operating loss carry forwards which may provide future tax
benefits expiring as follows:
December 31, 2009 $ --
December 31, 2010 281,000
--------
Total $281,000
========
In addition the Company has available approximate foreign tax credit to
offset future federal income tax of $312,000.
- 11 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 9. Commitments and Contingencies
A Litigation
The Company is a defendant from time to time in claims and lawsuits
arising out of the normal course of its business, none of which are
expected to have a material adverse effect on its business or
operations.
B Employment Agreements
In January 1997 the company entered into a new five year employment
agreement with the Chief Executive Officer which provides for an
annual salary commencing January 1997 of $275,000 and increasing
$25,000 per annum plus commencing January 1, 1998. The agreement
provides for an adjustment in salary to reflect increases, but not
decreases, in the consumer price index. The agreement further
provides that in the event of either a merger, consolidation sale or
conveyance of substantially all the assets of the Company which
results in the discharge of the Chief Executive Officer he would be
entitled to 200% of the balance of payments remaining under the
contract. Further, the agreement provides that an annual bonus shall
be at the discretion of the Board of Directors.
C Environmental Liability
The Company had received notice from the Dade County Environmental
Resources Management Department indicating that there has been a
discharge on the property owned by the Company. The Company is
cooperating with the Department, and preliminary evaluation by
outside professionals hired by the Company indicates there is not a
severe contamination problem. The Company maintains that the
discharge was not a result of the Company's ongoing activities at
the location, but the result of prior usage of the property. The
Company has incurred approximately $120,000 in costs and believes
the problems have been remedied. These cost have been capitalized to
the cost of the land.
- 12 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
Note 9. Commitments and Contingencies (Continued)
D Foreign Assets
The accompanying consolidated balance sheet for the period ended
June 30, 1998, includes assets relating to the Company's slot
machine operations in Peru, Colombia and Nicaragua, of $4,278,000,
$1,604,000 and $345,000, respectively. Although, these countries are
considered politically and economically stable, it is possible that
unanticipated events in foreign countries could disrupt the
Company's operations. In that regard the Company has been informed
that in Peru an excise tax has been instituted effective October 1,
1996 on the lessees of gaming equipment. The Company with others in
the industry have been negotiating with the appropriate governmental
agencies to have the excise tax significantly curtailed. In
addition, a significant portion of the Company's inventory in Cigars
is being stored in South America awaiting finalization of the
corporate marketing and distribution plan.
Note 10 Sublease Agreement and Financing Arrangement
In 1994, the Company had subleased the used car and truck lot and a
portion of the office space in Miami, Florida to an unrelated party
for the operation of a used car business. The Company is owed
$114,460. The outstanding balance was collateralized by inventory,
equipment, accounts receivable and was personally guaranteed by the
sublessee's stockholder. As of May 1, 1995, the sublessee abandoned
the property without notice. Management anticipates recovery of the
amounts due under the financing arrangement in full. The Company has
indicated the proceedings may take more than twelve months to
resolve. The receivable is shown as long term in the accompanying
financial statements. In February 1998 approximately $19,000 has
been collected on the amounts due.
Note 11 Dividend Payment
On April 15, 1997 The Board of Directors declared a $.05 per share
dividend to shareholders of record on May 30, 1997, payable
September 1, 1997. Simultaneously, the Company's officers and
directors waived their rights to the payment of such dividend. The
company disbursed $87,189, in 1997 pursuant to this dividend
declaration.
- 13 -
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
General
The Company entered the gaming and casino industry in Peru in 1994.
Since January 1995, the Company has been engaged in the renting of slot machines
to licensed gaming establishments in various cities through its wholly-owned
subsidiaries in South and Central America. In 1994, the Company formed its
Peruvian subsidiary, in late 1995, the Company formed its Colombian subsidiary,
and in 1997, the Company formed a subsidiary in Nicaragua. As of June 30, 1998,
the Company had approximately 2,200 machines under rental contracts in Peru and
Colombia and approximately 1,350 machines under participation contracts with
various entrepreneurs throughout Colombia and Nicaragua.
The Company concentrates its efforts on the rental of used five reel
slot machines. These machines are purchased at a fraction of the cost of new
machines and are refurbished for use in South and Central America. Whereas a new
slot machine would cost approximately $6,000 plus additional duty charges, the
used slot machines purchased by the Company cost approximately $600 each
including freight, duty, and refurbishing expenses.
In March of 1997, the Company expanded its slot machine operations in
Colombia and Nicaragua to include gaming slot route operations. Under the slot
route operations, the Company places machines into various businesses on a
participation basis with the owners or managers of the location. After deducting
expenses for taxes and jackpot payouts, the Company divides any remaining
winnings of the machine on a 30% participation to the business owner and 70%
participation to the Company. The Company believes that this change will
increase cash flow and reduce the Company's risk associated with the collection
of accounts receivable, thereby reducing allowances for doubtful accounts.
Results of Operations
Revenues from the rental of slot machines in Peru, Colombia and
Nicaragua for the six months ended June 30, 1998 increased by $491,975 (54.26%)
to $1,398,661 from $906,686 for the six months ended June 30, 1997 and increased
by $250,975 (52%) to $731,853 for the three months ended June 30, 1998 from
$480,878 for the comparable period in 1997. The principal reason for the
increase in revenues was the increase in market penetration of the Company's
slot machine operations in Peru, Colombia and Nicaragua.
- 14 -
<PAGE>
Selling, general and administrative expenses incurred in the operation
of the Company's gaming and casino business for the six months ended June 30,
1998 increased $92,082 (11.33%) to $904,584 from $812,502 for the same period in
1997 and increased $15,548 (3%) to $465,334 for the three month period ended
June 30, 1998 from $449,786 for the comparable period in 1997. The increase in
expenses reflects an increase in the commissions of the Company's salespersons
necessary to increase the number of the Company's slot machines on location in
Peru and Colombia. The increase was also due to an increase in executive
compensation and the continuing legal fees incurred in seeking to enjoin the
Peruvian government from implementing a 200% excise tax on lessees of gaming
equipment. As a percentage of revenues, selling, general and administrative
expenses decreased 24.94% for the six month period ended on June 30, 1998 and
decreased 30% of the three month period ended June 30, 1998.
Net income from continuing operations increased to $423,495 or $0.13
per share, for the six months ended June 30, 1998, from $137,228 or $0.04 per
share, for the six months ended June 30, 1997. The $286,267 (209%) increase in
net income is primarily attributed to the 11.33% increase in the Company's
revenues and the 24.94% decrease in selling, general and administrative expenses
as a percentage of revenues for the six months ended June 30, 1998. For the
three month period ended June 30, 1998, net income increased $157,540 from
$71,215 or $.02 per share to $228,755 or $.07 per share. This increase is also
primarily attributable to the increase in revenues and a decrease in selling,
general and administrative expenses as a percentage of revenues during the
comparable periods.
The Company has temporarily enjoined the Peruvian Government from
implementing an excise tax on slot machine revenues. The case is now on appeal
before a panel of three judges. If the injunction is upheld, the government will
continue to be enjoined, unless new legislation is passed by Congress. The
Company is optimistic about the outcome because two other gaming companies have
succeeded in obtaining similar injunctions against the government. In the event
the panel rules against the Company, the Company can appeal to a higher court
and eventually, if necessary, to the World Court.
It has not been determined to what extent, if any, the excise tax will
have on the future operations of the Company in Peru. As of June 30, 1998, the
Company has approximately 1,200 slot machines under rental agreements in Peru.
In addition, the Peruvian government has imposed regulations regulating
the number of slot machines in each gaming parlor. The Company and four other
gaming companies have enjoined the Peruvian
- 15 -
<PAGE>
federal government from implementing these regulations on the grounds that (i)
such regulations were implemented arbitrarily without consulting the Peruvian
gaming commission and (ii) gaming issues are within the jurisdiction of Peruvian
municipalities and not the Peruvian government. The Company's attorneys in Peru
believe the injunction will remain in effect for approximately two years.
Liquidity and Capital Resources
Cash and cash equivalents decreased $817,765 (25.36%) to $2,406,900 for
the six month period ended June 30,1998 from $3,975,549 for the same period in
1997. The decrease is attributed to the Company's purchase of an additional
2,300 slot machines from its vendors in Australia plus the freight charges and
custom fees involved in shipping 1,000 slot machines from Peru to Columbia to
supply the Company's new offices in Medellin and Barranquilla. The decrease was
also due to start-up costs in the amount of approximately $355,000 of the
Company's subsidiary, World's Best Rated Cigar Company.
On September 23, 1997 the Company incorporated World's Best Rated Cigar
Company ("World's Best") as a wholly-owned subsidiary to distribute cigars. In
September 1997, the Company entered into a joint venture agreement with a cigar
producer in Santiago, Dominican Republic. Operations of Worlds' Best have not
yet commenced; however as of June 30, 1998, the Company had expended
approximately $482,000, $378,000 of which the Company expended on initial cigar
inventory acquisitions, $64,000 on construction of a cigar factory in Santiago,
Dominican Republic and $17,000 on other prepaid expenses associated with the
start-up of World's Best. The Company anticipates operations of World's Best
will commence in the latter part of 1998 with full operations in 1999.
The Company's balance sheet for the six months ended June 30, 1998
includes assets relating to the Company's slot machine operations in Peru,
Colombia and Nicaragua of $4,278,000, $1,604,000 and $345,000, respectively.
Although these countries are considered to be politically and economically
stable, it is possible that unanticipated events in foreign countries could
disrupt the Company's operations. Additionally, the Company has concentrated its
credit risk for cash by maintaining deposits in banks located within the same
geographic region of its operations. The maximum loss that would have resulted
from such risk for the quarter ended June 30, 1998 totaled approximately
$259,000 for the excess of the deposit liabilities reported by the bank over the
amounts that would have been covered by federal insurance.
- 16 -
<PAGE>
As of June 30, 1998, the Company had invested approximately $4,858,000
in the business of renting slot machines in Latin America and had acquired
approximately 8,000 slot machines, 2,000 of which have been acquired for parts.
The Company's investment in the gaming business included the acquisition of slot
machines at an approximate cost of $600 per machine. The Company anticipates
that its cash flow from operations, interest on investments and the remaining
proceeds from the Company's public offering will be sufficient to meet its cash
needs for the next twelve months.
The Company does not have any commitments for material capital
expenditures.
- 17 -
<PAGE>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters To a Vote of Security Holders
Annual Meeting of Shareholders held on June 29, 1998
(i) Election of Directors
For Against Abstain
--- ------- -------
Lloyd Lyons 2,894,247 95,616 --
Donald D. Schiffour 2,894,247 95,616 --
Jose A. Caballero 2,894,247 95,616 --
Angel Garcia 2,894,247 95,616 --
Ronald Zaid 2,894,247 95,616 --
(ii) The approval of the appointment of Shubitz Rosenbloom &
Co., P.A. as the independent certified public accountants for 1998 was approved
by an affirmative vote of 2,893,622 shares to a negative vote of 96,201 shares,
with no shares abstaining.
Item 6 - Exhibits and Reports on Form 8-K
None
- 18 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LATIN AMERICAN CASINO, INC.
(Registrant)
Dated: August 13, 1998 By: /s/ Lloyd Lyons
---------------------------------
Lloyd Lyons
President and Chief
Executive Officer
By: /s/ Donald D. Schiffour
---------------------------------
Donald D. Schiffour
Chief Financial Officer
- 19 -
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<NAME> LATIN AMERICAN CASINOS, INC.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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