U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________.
Commission File Number 33-43423
LATIN AMERICAN CASINOS, INC.
----------------------------
(Exact name of small business issuer as
specified in its charter)
DELAWARE 65-0159115
- --------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2000 N.E. 164 Street
North Miami Beach, Fl 33162
----------------------------------------
(Address of principal executive offices)
(305) 945-9300
---------------------------
(Issuer's 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 August 18, 1999: 3,300,000 shares of common stock, $0.00067 par
value per share.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Accountants' Review Report 1
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 2
Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended June 30, 1999
and Year Ended December 31, 1998 3
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements as of June 30, 1999
and December 31, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<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, 1999, and the related consolidated
statements of operations, changes in stockholder's equity and cash flows for the
three and six months ended June 30, 1999 and 1998, 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, 1998 was audited by us and we
expressed an unqualified opinion on it in our report dated April 2, 1999, but we
have not performed any auditing procedures since that date.
/s/ Shubitz Rosenbloom & Co., P.A.
- ----------------------------------
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
August 11, 1999
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<CAPTION>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,1999 AND DECEMBER 31,1998
ASSETS
June 30, December 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 1,272,647 $ 1,567,773
Accounts Receivable, Less
$150,000 of Allowance for Doubtful Accounts
in 1999 and 1998 1,428,659 1,322,130
Inventory 801,921 725,609
Prepaid Expenses and Other Current Assets 262,889 189,513
----------- -----------
Total Current Assets 3,766,116 3,805,025
----------- -----------
PROPERTY AND EQUIPMENT - NET 5,696,222 5,497,734
----------- -----------
OTHER ASSETS
Financing Arrangement Receivable 94,624 94,624
Deposits 11,320 22,275
Note Receivable - Stockholder 115,000 117,000
Other Assets 14,911 16,248
----------- -----------
Total Other Assets 235,855 250,147
----------- -----------
TOTAL ASSETS $ 9,698,193 $ 9,552,906
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 252,531 $ 247,126
Foreign Income Tax Payable 19,000 28,707
----------- -----------
Total Current Liabilities 271,531 275,833
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
Total Liabilities 271,531 275,833
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, $.00067 Par Value 15,000,000
Shares Authorized, 3,300,000 Shares Issued
3,296,600 Shares Outstanding and 3,400 Shares
held as Treasury Stock 2,211 2,211
Additional Paid-In Capital 9,919,557 9,919,557
Cumulative Other Comprehensive Income (Loss) (492,492) (517,151)
Retained Earnings (Deficit) 2,621 (122,309)
Treasury Stock, at cost (5,235) (5,235)
----------- -----------
Total Stockholders' Equity 9,426,662 9,227,073
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,698,193 $ 9,552,906
=========== ===========
Read accountants' review report and notes to financial statement.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998
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 1,1998 3,300,000 $ 2,211 $ 9,919,557 $ (125,179) ($653,432) 5,235
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS -- -- -- (391,972) -- --
DIVIDENDS PAID -- -- -- -- -- --
NET INCOME FOR
THE YEAR ENDED
DECEMBER 31, 1998 -- -- -- -- 531,123 --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE -
DEC. 31, 1998 3,300,000 2,211 9,919,557 (517,151) (122,309) 5,235
ADJUSTMENT FOR
FOREIGN CURRENCY
TRANSLATIONS -- -- -- 24,659 -- --
NET INCOME FOR THE
SIX MONTHS ENDED
JUNE 30, 1999
BALANCE -
JUNE 30, 1999 3,300,000 $ 2,211 $ 9,919,557 ($492,492) ($2,621) $ 5,235
=========== =========== =========== =========== =========== ===========
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $ 434,437 $ 731,853 $1,043,857 $1,398,661
Selling, General And
Administrative Expenses 418,804 465,334 872,539 904,584
Depreciation 44,500 67,138 97,000 121,200
---------- ---------- ---------- ----------
Income (Loss) from Operations Before
Interest Income, Income Taxes And
Extraordinary Item (28,867) 199,381 74,318 372,877
Interest Income 27,969 39,374 58,076 80,618
---------- ---------- ---------- ----------
Income (Loss) from Operations Before
Income Taxes and Extraordinary Item (898) 238,755 132,394 453,495
Income Taxes (14,536) 67,000 42,464 149,000
---------- ---------- ---------- ----------
Income from Operations
Before Extraordinary Item 13,638 171,755 89,930 304,495
Utilization of Net Operating Losses
And Foreign Tax Credits (5,000) 57,000 35,000 119,000
---------- ---------- ---------- ----------
Net Income (Loss) $ 8,638 $ 228,755 $ 124,930 $ 423,495
========== ========== ========== ==========
EARNINGS PER COMMON SHARE AND
COMMON SHARE EQUIVALENT
BASIC
Common Equivalent Shares Outstanding 3,296,600 3,296,000 3,296,600 3,296,600
========== ========== ========== ==========
Net Income Per Share $ .00 $ .07 $ .04 $ .13
========== ========== ========== ==========
FULLY DILUTED
Common Equivalent Shares Outstanding 3,296,600 3,296,600 3,296,600 3,481,432
========== ========== ========== ==========
Net Income Per Share $ .00 $ .07 $ .04 $ .13
========== ========== ========== ==========
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 124,930 $ 423,495
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Depreciation 97,000 121,200
Changes in Assets - (Increase) Decrease:
Accounts Receivable (106,529) (339,356)
Prepaid Expenses and Other Current Assets (73,376) (185,025)
Inventory of Cigars (76,312) --
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses 5,405 (112,735)
Foreign Income Tax Payable (9,707) 6,720
---------- -----------
Net Cash Provided by (Used In) Operating
Activities (38,589) (85,701)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment (295,488) (640,800)
Other Assets 14,292 23,704
---------- -----------
Net Cash (Used In) Investing
Activities (281,196) (617,096)
---------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 24,659 (114,968)
---------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (295,126) (817,765)
CASH AND CASH EQUIVALENTS - BEGINNING 1,567,773 3,224,665
---------- -----------
CASH AND CASH EQUIVALENTS - ENDING $1,272,647 $ 2,406,900
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ 13,902 $ --
========== ===========
Income Taxes, Foreign $ 28,707 $ 23,280
========== ===========
Read accountants' review report and notes to financial statement.
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<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
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. In
1994, the Company started 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 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
$5,650,000 for the purchase of machines and equipment. As of June
30, 1999, 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 net cost of $5,644,713 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 Del Peru S.A. (formally known as Latin American
Casinos, Inc. S.A.) 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) as a wholly-
owned subsidiary of Latin American Casinos, Inc., to distribute
quality cigars. In addition, Premium Cigar Manufacturers (Premium)
was incorporated in 1998 as a wholly-owned subsidiary of Latin
American Casinos, Inc. It is intended that World will market premium
cigars at "off price" whereas Premium will acquire quality 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, 1999 the
Company has expended approximately $1,000,000 primarily for start up
costs and initial inventory acquisitions. Such pre-operating
expenditures have been included as $77,000 prepaid and other current
assets, $802,000 as inventory and $143,000 as fixed assets in the
accompanying financial statements. World's Best Rated Cigar Company
had committed with a cigar manufacturer in South America to acquire
a minimum number of cigars per month. The arrangement had extended
for twenty years; however, with the delay in the commencement of the
cigar operations, the purchase commitment was cancelled. It is
anticipated that cigar operations will commence in mid to late 1999.
All material intercompany transactions, balances and profits have
been eliminated.
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
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.
F INCOME (LOSS) PER COMMON SHARE
Basic earnings per common share were computed by dividing net income
by the weighted average number of shares of common stock outstanding
during the period. Fully diluted earnings per share was calculated
based on the assumption that the increase in the number of common
shares assumed outstanding on conversion are reduced by the number
of common shares that are assumed to be purchased with the proceeds
from the exercise of the incentive stock options. During 1999, all
other warrants, stock options and underwriter's options (Notes 4 and
5) are anti-dilutive. During 1998, all warrants, stock options, and
underwriter's options were anti-dilutive.
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
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 $1,138,000
and $1,411,000 as of June 30, 1999 and December 31, 1998,
respectively, 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).
J INVENTORIES
Inventory of cigars, and related material are stated at the lower of
average cost or market.
Read accountants' review report and notes to financial statements.
-8-
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
June 30, December 31,
1999 1998
----------- ------------
Land & Building $ 421,882 $ 421,882
Rental Equipment 5,644,713 5,580,705
Leasehold Improvements 26,027 26,027
Furniture, Fixtures & Office Equipment 203,683 153,930
Transportation Equipment 157,504 149,876
----------- ----------
Total 6,453,809 6,332,426
Less: Accumulated Depreciation 757,587 834,686
----------- ----------
Property and Equipment - Net $ 5,696,222 $5,497,734
=========== ==========
Included in Rental Equipment is approximately $1,500,000 of parts
and supplies purchased or obtained from other machines previously
disassembled for parts.
Depreciation expense for the three months and six months ended June
30, 1999 was $44,500 and $97,000, respectively.
Rent expense for the three months ended and six months ended June
30, 1999 was $17,100 and $38,299, respectively.
Effective April 1, 1996, the Company leased the land and building it
owns for $1,500 per month increased to $1,900 per month in 1999 to
an unrelated party for a three year period. The lease is presently
on a month to month basis with similar terms.
NOTE 3. 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,
$8,000 in 1998 and $2,000 in 1999. All interest charged through
March 31, 1999 has been paid by the stockholder. Interest is being
charged at a rate of prime plus 1% per annum. Included in the
statement of operations is $5,120 of interest income accrued in 1999
on this note.
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
NOTE 4. WARRANTS AND OPTIONS
As of June 30, 1999, 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 $3.00 by December 11, 2001.
NOTE 5. 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 6. 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
was terminated in March 1999. 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. In June 1999, the Company increased
the shares allocated to the plan to 1,500,000. Effective December
31, 1998 the Company ratified the repricing of 872,000 of employee
stock options to $1.00 per share and simultaneously authorized the
issuance of 85,000 options at an exercise price $1.00 per share and
cancelled 10,000 options issued in 1995 at $2.50 per share.
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
NOTE 7. PROVISION FOR INCOME TAXES
The provision for income taxes consisted of the following for the
six months ended June 30:
1999 1998
--------- ---------
Current
Federal $ 23,464 $ 119,000
State -- --
Foreign 19,000 30,000
--------- ---------
42,464 149,000
--------- ---------
Deferred
Federal -- --
State -- --
Foreign -- --
--------- ---------
-- --
--------- ---------
Income Tax Provision $ 42,464 $ 149,000
========= =========
The differences between the provision for income taxes and income
taxes computed using the federal income tax rate were as follows:
1999 1998
--------- ---------
Amount computed using the Federal
statutory rate $ 35,000 $ 119,000
Foreign Taxes 19,000 30,000
Refund Prior Year Taxes (11,536) --
Net Operating Losses and Tax Credits (35,000) (119,000)
--------- ---------
Income Tax Provision, Net $ 7,464 $ 30,000
========= =========
As of June 30, 1999, the Company had available for income tax
purposes unused net operating loss carryforwards which may provide
future tax benefits of $34,000, expiring in the year 2010. No
valuation allowance has been provided for unremitted foreign
profits.
In addition, the Company has available approximate foreign tax
credits of $329,000 to offset future Federal Income Taxes.
Read accountants' review report and notes to financial statements.
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
NOTE 8. 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 at
$25,000 per annum commencing January 1, 1998. The 1999 increase has
been waived. 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 FOREIGN ASSETS
The accompanying consolidated balance sheets for the period ended
June 30, 1999, includes assets relating to the Company's slot
machine operations in Peru, Colombia and Nicaragua, South America of
$4,244,000, $2,127,000 and $362,000, 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 leases 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 Company has ceased operations in Nicaragua and it is
anticipated that all of the assets in Nicaragua will be transferred
to other South American subsidiaries.
Read accountants' review report and notes to financial statements.
-12-
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LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
D LEASE COMMITMENT
The Company's Miami office is obligated for a three year lease for
its premises which expires in September 2001 and requires monthly
rent of $2,200. In addition, the Company is obligated for two year
lease for warehouse space at a monthly rent of $1,400.
NOTE 9. 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 was 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 continues to pursue the
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.
Read accountants' review report and notes to financial statements.
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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, 1999,
the Company had approximately 2,200 machines under rental contracts in Peru and
Colombia and approximately 250 machines under participation contracts with
various entrepreneurs throughout Colombia.
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 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 and Colombia for the
three months ended June 30, 1999 decreased by $297,416 or 41%, to $434,437 from
the comparable period in 1998. The principal reasons for the decrease in
revenues were the overall sluggishness of the economy in South America and the
bureaucratic delays in Colombia for obtaining permits to open new slot machine
parlors. The Company believes the backlong is over and anticipates the rental of
more machines in the third quarter.
Selling, general, and administrative expenses incurred in the operation
of the Company's gaming and casino business for the quarter ended June 30, 1999
decreased by $46,530 or 10%, to $418,804 from $465,334 for the same period in
1998.
Net income for the three month period ended June 30, 1999 decreased to
$8,638 from $228,755 or $0.07 per share for the same in period 1998.
-14-
<PAGE>
Revenues from the rental of slot machines in Peru and Colombia for the
six months ended June 30, 1999 decreased $354,804 or 25%, to $1,043,857 from the
comparable period in 1998.
Selling, general, and administrative expenses incurred in the operation
of the Company's gaming and casino business for the six month period ended June
30, 1999 decreased $32,045 or 4%, to $872,539 from the same period in 1998.
Net income for the six month period ended June 30, 1999 decreased to
$124,930 or $0.04 per share from $423,495 or $0.13 per share for the same period
1998.
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
June 30, 1999, 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 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 addition, in 1998, Premium Cigar Manufacturers ("Premium") was
incorporated as a wholly-owned subsidiary of the Company. Operations of World's
Best and Premium have not yet commenced; however, as of June 30, 1999, the
Company had expended approximately $1,000,000, primarily for the start-up and
initial inventory acquisitions for World's Best and Premium. These costs have
been allocated $77,000 to prepaid expenses, $802,000 to inventory and $143,000
to fixed assets.
The Company's balance sheet for the three months ended June 30, 1999
includes assets relating to the Company's slot machine operations in Peru,
Colombia and Nicaragua of $4,244,000, $2,127,000 and $362,000, 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, 1999 totaled approximately
$1,411,000 for the excess of the deposit liabilities reported by the bank over
the amounts that would have been covered by federal insurance.
-15-
<PAGE>
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 $295,126 or 18.8%, to $1,272,647 on
June 30, 1999 from $1,567,773 on December 31, 1998. The decrease is attributed
to the Company's investment in inventory and related cost of the cigar business.
It is anticipated that the cigar operation will commence and be fully
operational and profitable by the latter part of 1999.
The Company anticipates that its cash flow from 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.
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, new products and certain other matters. The words "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify such forward looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause its actual
results and experience to differ materially from anticipated results and other
expectations that may effect the operations, performance, development and
results of the Company's business, including the following:
1. Changes in government regulations of gaming, such as the excise
tax imposed by Peru, could have an effect on the Company's operations and
business.
2. Political factors affecting South and Central America,
particularly as they pertain to currency valuation, could affect the Company's
business in ways which are difficult to predict.
3. The agreements which the Company has with five of its cigar
manufacturers are cancelable upon 60 days written notice. One or more such
cancellations could have a material adverse effect on the Company's cigar
operations.
4. The Company's cigar operations are in its initial stages. This
business is subject to all the risks and uncertainties associated with the
commencement of a new enterprise. There can be no assurances that the Company
-16-
<PAGE>
will be able to successfully penetrate the market, or that its cigar operations
will become profitable.
5. The Company may be required to raise additional funds to expand
its business operations, particularly the cigar business, if it proves
successful. There can be no assurances that the Company will be able to raise
such funds, either through the sale of equity or debt securities or through
commercial sources. The inability to acquire needed capital could have a
material adverse effect on the Company's ability to expand.
6. The Company may be required to expand its infrastructure,
including the hiring of additional personnel in its executive offices. There can
be no assurances that the Company will be able to attract and retain qualified
personnel who will be successful in managing the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders (the "Annual
Meeting") was held on Monday, June 28, 1999 at the
Thunderbird Resort Hotel, 18401 Collins Avenue, Miami
Beach, FL 33160.
(b) DIRECTORS VOTED FOR AT THE ANNUAL MEETING
The following individuals were elected directors
until the annual meeting of stockholders to be held
in the year 2000 or until their successors are
elected and qualified:
Abstentions and
Votes for Votes Against or Withheld Broker Non-votes
--------- ------------------------- ----------------
Llyod Lyons 2,929,532 52,225 --
Donald Schiffour 2,929,532 52,225 --
Angel Garcia 2,929,532 52,225 --
Jose Caballero 2,929,532 52,225 --
Dennis Barry 2,929,532 52,225 --
All of the members of the Board of Directors will continue their terms.
(c) OTHER MATTERS VOTED ON AT THE ANNUAL MEETING.
(1) The stockholders also voted on a proposal to
amend the Company's certificate of incorporation to
increase the number of authorized shares of Common
Stock from an aggregate of 7,500,000 shares to an
aggregate of 15,000,000 shares.
Abstentions and
Votes for Votes Against or Withheld Broker Non-votes
--------- ------------------------- ----------------
2,887,532 89,600 4,625
(2) The stockholders also voted on a proposal to
amend the Company's 1994 Stock Option Plan to
increase the number of shares of the Common Stock
reserved for issuance from an aggregate of 1,000,000
shares to an aggregate of 1,500,000 shares.
Abstentions and
Votes for Votes Against or Withheld Broker Non-votes
--------- ------------------------- ----------------
1,529,181 89,720 1,560,856
-17-
<PAGE>
(3) The stockholders also voted to appoint Shubitz,
Rosenbloom & Co., P.A. as the Company's independent
auditors for the 1999 fiscal year.
Abstentions and
Votes for Votes Against or Withheld Broker Non-votes
--------- ------------------------- ----------------
2,969,637 11,000 1,120
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended June 30, 1999, the Company
did not file any reports on Form 8-K.
-18-
<PAGE>
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 CASINOS, INC.
(Registrant)
Dated: August 20, 1999 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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