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
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For the quarterly period ended September 30, 1998
LATIN AMERICAN CASINOS, INC.
Commission File Number 33-43423
A Delaware Corporation 65-0159115
(IRS Employer
Identification Number)
2000 N.E. 164th Street (305) 945-9300
North Miami Beach, FL 33162 (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 September 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 SEPTEMBER 30, 1998
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONTENTS
Accountants' Review Report 1
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 2
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30, 1998 and
the Year Ended December 31, 1997 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements as of September 30,
1998 and December 31, 1997 6-13
<PAGE>
SHUBITZ ROSENBLOOM & CO., P.A.
CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS
AMERICAN AND FLORIDA INSTITUTES OF CERTIFIED PUBLIC ACCOUNTATNS
AICPA . PRIVATE COMPANIES PRACTICE SECTION
AICPA - TAX DIVISION
HOWARD ROSENBLOOM, C.P.A., M.B.A. SABAL CHASE PROFESSIONAL CENTER
LEONARD ALAN SHUBITZ, C.P.A. 11428 SOUTHSWEST 109TH ROAD
---- MIAMI, FLORIDA 33176
JERRY L. FEINGOLD, C.P.A. -------
TELEPHONE (305) 596 -CPAS
FAX (305) 595-2309
EMAIL [email protected]
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 September 30, 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the three and nine months ended September 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 than 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 performed any auditing procedures since that date.
/s/ SHUBITZ ROSENBLOOM & CO.
- ----------------------------------
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
November 9, 1998
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
September 30, December 31,
1998 1997
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 1,851,831 $ 3,224,665
Accounts Receivable, Less
$149,814 of Allowance for Doubtful Accounts
in 1998 and 1997 1,613,827 1,168,794
Inventory 688,770 --
Prepaid Expenses and Other Current Assets 267,903 162,008
----------- -----------
Total Current Assets 4,422,331 4,555,467
----------- -----------
PROPERTY AND EQUIPMENT - NET 4,970,900 4,428,109
----------- -----------
OTHER ASSETS
Financing Arrangement Receivable 94,624 114,460
Deposits 20,435 8,813
Note Receivable - Stockholder 120,000 125,000
Other Assets -- 182,601
----------- -----------
Total Other Assets 235,059 430,864
----------- -----------
TOTAL ASSETS $ 9,628,290 $ 9,414,440
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 216,790 $ 253,238
Foreign Income Tax Payable 43,000 23,280
----------- -----------
Total Current Liabilities 259,790 276,518
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
Total Liabilities 259,790 276,518
----------- -----------
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 (447,055) (125,179)
Deficit (100,978) (653,432)
Treasury Stock, at cost (5,235) (5,235)
----------- -----------
Total Stockholders' Equity 9,368,500 9,137,922
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,628,290 $ 9,414,440
=========== ===========
Read accountants' review report and notes to financial statements.
- 2 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
Number Par Additional Other Retained
of Value Paid-In Comprehensive Earnings Treasury
Shares $.00067 Capital Income (Loss) (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 -- -- -- (321,876) -- --
NET INCOME FOR THE
NINE MONTHS ENDED
SEPT. 30, 1998 -- -- -- -- 552,454 --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE -
SEPT. 30, 1998 3,300,000 $ 2,211 $9,919,557 ($447,055) ($100,978) $ 5,235
========== ========== ========== ========== ========== ==========
Read accountants' review report and notes to financial statements.
</TABLE>
- 3 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Rental Income $ 667,561 $ 559,104 $2,063,171 $1,465,790
Selling, General &
Administrative Expenses 466,912 501,832 1,371,496 1,314,335
Depreciation 81,996 48,500 203,196 123,500
---------- ---------- ---------- ----------
Income (Loss) from Operations Before
Interest Income, Income Taxes
Extraordinary Item 118,653 8,772 488,479 27,955
Interest Income 23,306 56,927 106,975 174,971
---------- ---------- ---------- ----------
Income (Loss) from Operations Before
Income Taxes and Extraordinary Item 141,959 65,699 595,454 202,926
Income Taxes 38,000 29,156 187,000 71,894
---------- ---------- ---------- ----------
Income from Operations
Before Extraordinary Item 103,959 36,543 408,454 131,032
Utilization of Net Operating Losses and
Foreign Tax Credits 25,000 17,000 144,000 58,000
---------- ---------- ---------- ----------
Net Income (Loss) $ 128,959 $ 53,543 $ 552,454 $ 189,032
========== ========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
Common Share Equivalent Outstanding 3,296,600 3,300,000 3,296,600 3,300,000
========== ========== ========== ==========
Net Income (Loss) $ .04 $ .02 $ .17 $ .06
========== ========== ========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 552,454 $ 189,032
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation 203,196 123,500
Changes in Assets - (Increase) Decrease:
Accounts Receivable (445,033) (374,078)
Prepaid Expenses and Other Current Assets (105,895) 31,268
Inventory of Cigars (688,770) --
Deferred Income Tax -- (7,500)
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses (36,448) (18,327)
Foreign Income Tax Payable 19,720 (97,266)
----------- -----------
Net Cash (Used In) Operating
Activities (500,776) (153,374)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment (745,987) (475,641)
Other Assets 195,805 (44,342)
Dividend Payments
-- (87,189)
----------- -----------
Net Cash (Used In) Investing
Activities (550,182) (607,172)
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents (321,876) (64,913)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,372,834) (825,459)
CASH AND CASH EQUIVALENTS - BEGINNING 3,224,665 4,492,198
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 1,851,831 $ 3,666,739
- ---------------------------------- =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid During the Year for:
Interest $ -- $ --
=========== ===========
Income Taxes, Foreign $ 23,280 $ 97,266
=========== ===========
Read accountants' review report and notes to financial statements.
- 5 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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,
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 casino operators. The Company had allocated
$5,000,000 for the purchase of machines and equipment. As of
September 30, 1998 the Company had acquired approximately 8,000 slot
machines, approximately 2,000 of which have been acquired for parts
and other related equipment, at a total cost of $4,879,460,
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 of Latin American Casinos, Inc., to distribute
quality cigars. In addition, Premium Cigar Manufactures (Premium)
was incorporated in 1988 as a wholly-owned subsidiary of Latin
American Casinos, Inc. It is intended that World will market premium
cigars at "off price" where as 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
September 30, 1998 the company has expended approximately $811,000
primarily for start up costs and initial inventory acquisitions.
Such pre-operating expenditures have been included as $29,000
prepaid and other current assets, $697,000 as inventory and $10,000
as fixed assets 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 cigar operations will commence in the latter part of
1998.
All material intercompany transactions, balances and profits have
been eliminated.
Read accountants' review report.
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<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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
Revenue is recognized monthly on the rental of slot machines as the
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 $1,500,000 as
of September 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 notes 6
and 7) 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 all 1998 warrants,
stock options and underwriter's options were anti-dilative.
Read accountants' review report.
- 7 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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 $145,000
and $3,094,000 as of September 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, as other comprehensive income (loss).
Read accountants' review report.
- 8 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30 1998 AND DECEMBER 31, 1997
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
September 30, December 31,
1998 1997
---------- ---------
Leased Property $ 346,881 $ 346,881
Rental Equipment 4,879,460 4,229,873
Leasehold Improvements 8,222 8,222
Furniture, Fixtures & Office Equipment 296,958 216,728
Transportation Equipment 153,703 143,948
---------- ---------
Total 5,685,224 4,945,652
Less: Accumulated Depreciation 714,324 517,543
---------- ----------
Property and Equipment - Net $4,970,900 $4,428,109
========== ==========
Depreciation expense for the three and nine months ended September
30, 1998 was $81,996 and $203,196, respectively.
Rent expense for the three and nine months ended September 30, 1998
was $20,889 and $45,274 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 September 30, 1998, cash and cash equivalents included
commercial paper in the amount of $1,500,000, due October 21, 1998
at an annual interest rate of 5.53%. 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, $4,000 during 1997 and
$5,000 in 1998. All interest charged through June 1998 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 $8,788 of interest income for 1998 on this note.
Read accountants' review report.
- 9 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
NOTE 5. WARRANTS AND OPTIONS
As of September 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, acquisitions 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.
Read accountants' review report.
-10-
<PAGE>
LATIN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
NOTE 8. PROVISION FOR INCOME TAXES
The provision for income taxes consisted of the following for the
nine months ended September 30:
1998 1997
--------- ---------
Current
Federal $ 144,000 $ 70,156
State -- 1,738
Foreign 43,000 28,000
--------- ---------
187,000 99,894
--------- ---------
Deferred
Federal -- --
State -- --
Foreign -- (28,000)
--------- ---------
-- (28,000)
--------- ---------
Income Tax Provision $ 187,000 $ 71,894
========= =========
Deferred income taxes resulting from differences between accounting
for financial statements purposes and accounting for tax purposes,
were as follows.
1998 1997
-------- --------
Revenue Recognition $ -- ($28,000)
-------- --------
Tax Effects of Timing Differences $ -- ($28,000)
======== ========
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 $ 144,000 $ 58,000
Assessment of prior years taxes -- 13,894
Foreign Taxes 43,000 --
Net Operating Losses and Tax Credits (144,000) (58,000)
--------- ---------
Income Tax Provision, Net $ 43,000 $ 13,894
========= =========
As of September 30, 1998, the Company had available for income tax
purposes unused net operating loss carryforwards which may provide
future tax benefits of $197,000, expiring in year 2010.
In addition the Company has available approximate foreign tax credit
of $325,000 to offset future federal income tax.
Read accountants' review report.
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<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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 as a result of the Company's ongoing activities at
the location, but as a 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.
Read accountants' review report.
- 12 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
NOTE 9. COMMITMENTS AND CONTINGENCIES (Continued)
D FOREIGN ASSETS
The accompanying consolidated balance sheet for the period ended
September 30, 1998, includes assets relating to the Company's slot
machine operations in Peru, Colombia and Nicaragua South America, of
$4,067,000, $1,850,000 and $372,000, 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. In October 1998, Nicaragua suffered the effects of hurricane
"Mitch". The effect of this hurricane on future operations in
Nicaragua cannot at the present be determined.
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 had
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.
Read accountants' review report.
- 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 September 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 three months ended September 30, 1998 increased by $108,457
(19.4%) to $667,561 from $559,104 for the comparable period in 1997. Revenues
for the nine month period ended September 30, 1998 increased $597,381 (40.75%)
to $2,063,171 from $1,465,790 for the comparable period in 1997. The primary
reason for the increase in revenues was the increase in market penetration of
the Company's slot operations in Peru, Colombia and Nicaragua. Selling, general
and administrating expenses incurred in the operation of the Company's gaming
and casino business for the three months ended September 30, 1998 decreased
$34,920 (7%) to $466,912 from $501,832 for the comparable period in 1997.
Similar expenses for the nine month period ended September 30, 1998 increased
$57,161
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<PAGE>
(4.3%) to $1,371,496 from $1,314,335 for the comparable period in 1997. The
increase in expenses reflects an increase in the commissions paid to the
Company's salespersons necessary to increase the number of the Company's slot
machines on location in Peru and Colombia. This 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% increase in
the excise tax on lessees of gaming equipment. As a percentage of revenues,
selling, general and administrative expenses decreased 20% for the three month
period ended September 30, 1998 and decreased 24% for the nine month period
ended September 30, 1998 from comparable periods in 1997.
Net income from continuing operations increased to $128,959 or $0.04
for the three months ended September 30, 1998 from $53,543 or $0.02 per share
for the comparable period in 1997. Net income for the nine month period rose to
$522,454 or $0.17 per share from $189,032 or $0.06 per share for the comparable
period in 1997. This increase is primarily attributable to the increase in
revenue derived from expanded operations in Peru and Colombia and a reduction in
selling, general and administrative expenses as a percentage of revenue.
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, an implementation of
an excise tax will have on the future operations of the Company in Peru. As of
September 30, 1998, the Company had approximately 1,000 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 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.
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 World's
Best have not yet commenced; however as of September 30, 1998, the Company had
expended approximately $811,000,
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<PAGE>
$697,000 of which the Company expended on initial cigar inventory acquisitions,
$64,000 on construction of a cigar factory in Santiago, Dominican Republic and
$29,000 on other prepaid expenses associated with the start-up of World's Best.
The Company anticipates operations of the cigar business will commence in the
latter part of 1998 with full operations in 1999.
The Company's balance sheet for the nine months ended September 30,
1998 includes assets relating to the Company's slot machine operations in Peru,
Colombia and Nicaragua of $4,067,000, $1,850,000 and $372,000 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 September 30, 1998 totalled 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.
In October 1998, Hurricane Mitch caused severe damage in Nicaragua.
However, inasmuch as revenues from this country account for less than 5% of the
total revenues of the Company, it is not anticipated that Hurricane Mitch will
have a material adverse affect on the Company's business results of operations
or financial condition.
The Company has reviewed issues associated with its computer system and
its ability to operate effectively as the millennium (year 2000) approaches, as
well as the potential effect of year 2000 on key suppliers and customers. The
Company believes that its year 2000 transition will not have a material adverse
affect on its business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $1,372,834 (42.5%) to $1,851,831
for the nine month period ended September 30, 1998 from $3,224,663 for the
comparable period in 1997. This decrease is attributed to the Company's purchase
of 2,300 additional 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 $811,000 of the Company's subsidiaries, World's Best Rated Cigar
Company and Premium Cigar Manufacturers, Inc.
As of September 30, 1998, the Company had invested approximately
$4,880,000 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
- 16 -
<PAGE>
operations and interest on investments will be sufficient to meet its cash needs
for the next twelve months.
The Company does not have any commitments for material capital
expenditures.
Item 6 Exhibits and Reports on Form 8-K
None
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.
LATIN AMERICAN CASINO, INC.
(Registrant)
Dated: November 13, 1998 By: /s/ LLOYD LYONS
-----------------------------------
Lloyd Lyons
President and Chief
Executive Officer
By: /s/ DONALD D. SCHIFFOUR
-----------------------------------
Donald D. Schiffour
Chief Financial Officer
- 17 -
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