SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999 Commission File #33-43423
LATIN AMERICAN CASINOS, INC.
A Delaware Corporation 65-0159115
(IRS Employer Identification Number)
2000 NE 164th Street (305) 945-9300
North Miami Beach, FL 33162 (Telephone Number)
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, $0.00067 par value
Warrants, exercisable at $3.00 per share
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [_]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $1,879,071.
Aggregate market value of the voting stock held by non-affiliates, computed
by reference to the average bid and asked prices of such stock, as of March
31, 2000: $2,964,324.00.
Number of shares outstanding of the registrant's common stock, as of March 31,
2000: 3,296,600 shares.
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LATIN AMERICAN CASINOS, INC.
FORM 10-KSB
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS...................................................2
ITEM 2. PROPERTIES.................................................6
ITEM 3. LEGAL PROCEEDINGS..........................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.......................................9
ITEM 7. FINANCIAL STATEMENTS......................................12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS.......................................12
ITEM 10. EXECUTIVE COMPENSATION....................................14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS/COMPLIANCE WITH SECTION 16(b)................17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..........................18
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PART I
ITEM 1. BUSINESS
GENERAL
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Latin American Casinos, Inc. (the "Company") operates a slot machine
rental and remanufacturing company in South America and is involved in the
distribution and sale of its own premium brand cigars in the United States. The
Company was initially organized as Repossession Auction, Inc., a Florida
corporation, in 1989. The Company merged into a Delaware corporation bearing the
same name in 1991. In 1994, the Company changed its name to Latin American
Casinos, Inc. to reflect its entrance into the gaming and casino business in
South and Central America. The Company does business under the name Latin
American Industries, reflecting the diversification of the Company with the
introduction of a premium cigar business. The Company maintains its principal
place of business at 2000 NE 164th Street, North Miami Beach, Florida 33162. Its
telephone number is (305) 945-9300.
SLOT MACHINE OPERATIONS
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The Company concentrates its efforts on the rental of used five reel slot
machines. The Company purchases these machines at a fraction of the cost of new
machines, which are then refurbished at facilities in Latin America for use in
South and Central America. Whereas a new slot machine costs approximately
$6,000, plus duty charges, the used slot machines purchased by the Company cost
approximately $600 each, including freight, duty, and limited refurbishing
expenses. The Company has determined that more extensive refurbishing extends
the working life of each slot machine for up to an additional five years.
Currently, the expected useful life of a used slot machine is five years. Such
additional refurbishing increases the cost of each machine by approximately
$100. The Company believes however, that the additional refurbishing results in
lower maintenance and future refurbishing costs and that these savings offset
the additional costs. This refurbishing in no way impacts any government
regulations that could mandate obsolescence.
The Company entered the gaming and casino industry in Peru in 1994. Since
then, the Company has been engaged in the renting of slot machines to licensed
gaming establishments in various major 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.
In February 1997, the Company expanded into gaming route operations in
Colombia and Nicaragua on a participation basis with the owners of various
business establishments. Such arrangements benefit both the Company and those
establishments, which want slot machines, but do not wish to enter into formal
long-term rental agreements. Participation allows the Company to share in the
profits of slot machine operations while minimizing the risks associated with
the collection of accounts receivable pursuant to long-term leases. These
participation arrangements occur primarily in Colombia; however, the majority of
the Company's slot machines are subject to long-term leases.
As of December 31, 1999, approximately 800 slot machines were in operation
in Peru and approximately 1,000 slot machines were in operation in Colombia.
These machines are installed
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in, among other establishments, drug stores, pool halls, bars, restaurants and
nightclubs. The entrance into gaming route operations provides the Company a
broader base as an operational gaming company as well as a rental company. The
Company is committed to enhancing its position for further growth in both
Central and South America. To this end, it will be necessary to upgrade our
current machines, replacing them with newer models, and thereby avoiding any
future government mandated obsolescence regulations. It is anticipated that the
costs associated with upgrading of the equipment will be substantially offset by
the sale of the older equipment.
The Company has offices in Lima, Peru; and Bogota, Barranquilla, and
Medellin, Colombia. Applications to do business have been filed in other Latin
American countries. These applications are still pending final government
approval of gaming laws in these countries. Upon approval, the Company would
then determine whether circumstances warrant the expansion of business into
these jurisdictions. This is not anticipated in the forthcoming year.
Hurricane Mitch adversely affected the Company's operations in Nicaragua,
which were not substantial, in October 1998. The Company is in the process of
distributing the equipment in Nicaragua to other locations.
The Company competes with all the major gaming companies in Latin America,
including IGT, Novomatic and Admiral. Many of the companies are more established
and have greater resources. The Company, through its current relationships with
its existing clients believes that it has created in which the impact of
competition from major companies is limited.
SOURCE OF MACHINES
The Company purchases used slot machines from several vendors in
Australia, including Damlite Pty. Ltd. and Olympic Video Gaming, a subsidiary
of International Gaming Technology. The Company's principal vendor is AJ
Electronics Repairs Pty. Ltd., ("AJ"), an Australian company which services
and disposes of used slot machines. The loss of any of these suppliers,
including AJ, would not have a material adverse effect on the Company's
business due to the existence of other sources.
REFURBISHING PROCESS
All slot machines purchased are delivered to the Company's warehouses in
Lima, Peru or Bogota, Colombia and are refurbished by the Company's technicians.
Each slot machine is electronically tested for 30 minutes to assure that it is
in correct working order. Defective or worn parts are replaced or repaired. Once
the technician is satisfied that the machine is in proper working order, the
machine is thoroughly cleaned inside and out. At that time, a computerized
printed card that translates the rule of play from English to Spanish is placed
inside the machine in such a way that it can be seen and read by the slot
machine player. Refurbished machines are then placed in service in the various
locations. While the refurbishing does extend the useful life of a used slot
machine, this refurbishing in no way impacts the effect of any possible
government regulations that could mandate obsolescence.
RENTAL OF SLOT MACHINES
The slot machines are rented to licensed individual owner operators under
a rental contract usually for a term of one year or longer. The contract
provisions vary depending on, among other things, the number of slot machines
requested by the renter. All contracts are backed by a personal guarantee for
the first four installment payments from the renter to insure against
non-payment of rental fees in the contract's initial stage. The rental contracts
also provide insurance to cover any loss by fire, theft, vandalism or political
unrest.
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SLOT ROUTE OPERATIONS - PARTICIPATION
Under certain circumstances, slot machines are placed into various
business establishments under written agreements that provide for participation
between the Company and the owner of the business establishment. Under such an
agreement, an amount equal to the monthly tax imposed by the government is
deducted from the total winnings of the machine, along with all paid jackpots.
The remaining funds are divided on a weekly basis, 30%-40% to the owner of the
business establishment and 60%-70% to the Company. Although the machines are
calibrated to retain at least 15% of all coins played, at certain times, due to
paid jackpots; there may be no participation funds to be divided.
GOVERNMENT REGULATION
The governments of Peru, Colombia and Nicaragua have regulations governing
gaming activities. Essentially, these regulations establish licensing
requirements for slot machine operations. It is anticipated that new regulations
governing the age and condition of machines will soon be enacted. At that time,
the company will be upgrading its machines to newer equipment, which should have
a useful life of five to seven years. The costs associated with this upgrade
will be substantially financed by the sale the older equipment. The Company
takes appropriate steps to verify the licenses of its customers; particularly
those involved in joint participation agreements.
The Peruvian government, in October 1996, imposed an excise tax of 200% on
lessees of gaming equipment, including slot machines. The excise tax caused many
of the Company's customers to return their slot machines to the Company rather
than pay the higher tax.
In January 1997, the Company obtained a temporary injunction against the
Peruvian government, prohibiting it from implementing the excise tax. The tax
issue has been resolved. The Government has lowered the tax to a more realistic
level. It is anticipated that new regulations governing the age and condition of
machines will be enacted in the coming years. The Company believes by upgrading
to newer machines, we can avoid any new government mandated age restrictions.
The re-imposition of an excise tax in Peru could adversely affect future
earnings. Accordingly, if the Company were not successful in preventing the tax,
it would reevaluate its position in Peru.
PREMIUM CIGAR OPERATIONS
- ------------------------
Beginning in September 1997, the Company directed part of its efforts into
establishing a business of producing, distributing and selling premium cigars
throughout the United States.
World's Best Rated Cigar Company ("World's Best") was formed as a
subsidiary to distribute cigars produced by Claudio Norberto Mercado. Mr.
Mercado resides in Santiago, Dominican Republic, in the Villa Gonzalez region,
the heart of the tobacco-growing valley. In a business arrangement, World's Best
advanced $75,000 to Mr. Mercado to build a cigar factory. World's Best also
advanced the sum of $15,000 to purchase all necessary fixtures to produce
cigars, such as molds, rolling tables, compressors, etc. World's Best holds a
mortgage on the factory to secure these advances. However, the Company
determined that the plan of selling one cigar from one manufacturer was too
limited. Therefore, during the summer of 1998, World's Best entered into
contractual arrangements with five other manufacturers in Nicaragua, Honduras
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and the Dominican Republic. All of the manufacturers produce hand made 100%
Cuban seed, long leaf filler premium cigars. The manufacturers are world renown
and they manufacture cigars for over 20% of the brand name cigars currently on
the market.
These agreements allow the Company to acquire cigars at a fraction over
their cost and will enable them to be sold at a retail price significantly below
the current retail price for brand name premium cigars. The agreements require
that the manufacturers use high grade long leaf tobacco, hand roll the cigars
utilizing high grade filler and parchment wrapping of a grade selected by the
Company and wrap the cigars individually in cellophane and box them for
shipping. They also require the manufacturers to retain a specified amount of
inventory at all times to satisfy the Company's cigar purchase orders. The
cigars will be transported to the Company's facilities in Miami to be placed in
individual containers and delivered to distributors.
The cigars are marketed in a smart looking display case suitable for
counter-top merchandising in a convenience store operation. The display case is
made of clear Lucite and has interior shelves made of mahogany or cedar. Each
display case holds 216 cigars, in six different sizes, in bundles of six, from
the six manufacturers. A color-coded cigar ring identifies each of the products
of the six cigar manufacturers and matching colored row to display their
products. Beside each row will be a sign describing the manufacturer's history,
factories and plantations. Display cases may also be custom designed for a
distributor. Additionally, the Company is in the process of building a web site
that can accommodate both the wholesale trade as well as the retail trade.
Traffic to the web site will be accomplished through advertising in both cigar
and non-cigar magazines. It is anticipated that the web site and advertising
campaign will commence in the middle of year 2000.
Each cigar will be in a clear plastic tube with the Universal Bar Code
label attached to the tube. The cigar tube caps are colored coded to the color
label assigned to each of the manufacturers. The blue label are cigars from
Carlos Oliva; green label are cigars from Tabaco Del Caribe; red label are
cigars from Pedro Ramos; black label are cigars from Claudio Mercado; silver
label are cigars from Tabaco de Oriente; and gold label are cigars from Medardo
Padron. The tubes are air tight to insure the freshness of the cigars for many
months and to protect the cigars from being crushed or broken.
Suggested retail pricing on the cigars range from $1.92 for the panatella
size to $2.49 for the large size presidente. The popular Churchill size has a
suggested retail price of $2.25. These prices are 60% to 80% lower than prices
charged in tobacco shops for cigars of the same quality.
The Company is in the process of establishing relationships with various
distributors in the United States who supply convenience stores, restaurants,
bars and supermarkets with products. While the company has had limited success
with this strategy, It will continue to attempt to establish these relationship
with companies that have various means of distribution. These relationships
require many meetings and conversations over a protracted period of time. The
company is committed to pursing these relationships.
The Company is attempting to place its products on display in these
outlets initially on a consignment basis, at no charge to the distributor or
retailer. Only when the cigars are sold and/or reordered, will payment for the
cigars be required. In this manner, the Company believes distributors and retail
outlets will be more inclined to handle and display the Company's cigar
products, thereby gaining immediate access to the public. Depending upon the
relative success of this strategy and ultimately the acceptance of the products
by the public, the Company will develop the necessary infrastructure to expand
this business further.
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EMPLOYEES
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The Company currently has a total of 65 full-time employees. The reduction
of 19 employees from the previous year was a result of our operations in
Nicaragua, and downsizing of our technical staff in our other locations. The
Company has 5 employees in the Miami office: 2 executives and 3 in clerical
positions. In Lima, Peru, the Company has 7 clerical employees in its business
office, including a general manager and 17 service technicians in its warehouse
and remanufacturing plant. In Colombia, the Company employs a total of 10
clerical employees including a general manager in its three business offices and
26 service technicians in its warehouse and refurbishing facility.
The Company believes its relations with its employees are good.
ITEM 2. PROPERTIES
The Company's executive offices and operating facilities located at 2000
NE 164th Street, North Miami Beach, Florida 33162 are leased for a period of
three years until September 30, 2001, at a monthly rental of $2,500. The
premises consist of approximately 3,300 square feet. The property is in overall
good condition. In addition the company is obligated for a two-year lease
beginning on Feb. 8, 1999 for warehouse space at a rental of $1400 per month.
The Company leases a 2,000 square foot business office in San Isidro, a
municipality in Lima, Peru, for $680 per month. The lease terminates in June
2001, with a renewal option. The Company also leases an 10,000 square foot main
warehouse and refurbishing facility Lima, for $1,200 per month, the lease
terminates on June 2001.
In Bogota, Colombia the Company leases a 4300 square foot combined office
and warehouse facility for $1065 per month. This lease terminates on January 1,
2001. The Company also leases in Bogota an additional 1100 square foot warehouse
for $260 per month. This lease expires May 19, 2000. In Cartago, Colombia the
Company has a 7550 square foot combined office and warehouse with a lease that
expiries September 21, 2000. The rent for this property is $285.00. The Company
has a 3230 square feet combined office and warehouse in Cartagena, Colombia with
a rent of $505. The lease expires on August 10, 2000. In Medellin, Colombia the
Company has rented a 2,700 square foot combined office and warehouse for $465.00
per month. This lease expires on February 1, 2001.
The Company is the lessor of office space and used car lot at 11337 NW 7th
Avenue in Miami currently on a month-to-month basis for $1,200 per month. The
property is leased to an unrelated party. The Company acquired the property as
an office space and used car lot in 1990. This property was converted to a
rental property when the Company exited the used vehicle business and entered
the slot machine business. Over the years, the Company, expended in excess of
$100,000 as a result of environmental concerns on the property. Currently, this
property has a market value of approximately $86,000 less than the recorded
value, which includes all environmental costs. The Company took a charge to
operation to reduce the value of this property to its net realizable value.
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ITEM 3. LEGAL PROCEEDINGS
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 have or are
expected to have a material adverse effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
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From June 20, 1994 until October 30, 1998, the Company's Common Stock and
Warrants were listed on the NASDAQ Stock Market under the symbol "LACI" and
"LACIW", respectively. Beginning in October 31, 1998, the Company's Common Stock
and Warrants were listed on the NASDAQ Small Cap. The table below represents the
quarterly high and low bid prices for the Company's Common Stock and Warrants
for the last two fiscal years as reported by NASDAQ.
COMMON STOCK HIGH LOW
- ------------ ---- ---
1998
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January 1 - March 31 2 5/16 1 17/32
April 1 - June 30 2 9/16 1 3/4
July 1 - September 30 1 15/16 1 3/16
October 1 - December 31 1 11/32 1 3/32
1999
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January 1 - March 31 1 5/8 27/32
April 1 - June 30 1 1/2 1 1/8
July 1 - September 30 1 3/8 1 1/32
October 1 - December 31 1 1/8 1 1/32
WARRANTS HIGH LOW
- -------- ---- ---
1998
- ----
January 1 - March 31 13/32 5/32
April 1 - June 30 3/8 11/32
July 1 - September 30 3/8 1/4
October 1 - December 31 11/32 7/32
1999
January 1 - March 31 1/4 1/4
April 1 - June 30 3/8 1/4
July 1 - September 30 3/8 5/16
October 1 - December 31 5/16 5/16
The closing prices for the Common Stock and Warrants on March 31, 2000
were $1.375 and $.344 respectively.
There were 47 registered owners and approximately 590 beneficial owners of
the Common Stock of the Company as of December 31, 1999. The Company declared a
dividend of $.05 per share for shareholders of record as of May 30, 1997, which
was disbursed on September 1, 1997. The directors and officers of the Company
waived their rights to receive this dividend. A total of $87,189 was disbursed
pursuant to this dividend declaration. The Company did not declare a dividend in
1998 or 1999.
As of December 31, 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 through December 11, 2001.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
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The Company's revenues from the rental of slot machines were $1,851,000
for the year ended December 31, 1999, a decreased of $541,000 (22.6%) from the
year ending December 31, 1998. The decrease was due in part to the concerns over
government mandated obsolescence, political changes, increased competition, as
well as the devaluation of the foreign currency. The Company's revenues from
cigar sales were $28,000 in 1999 and were negligible in 1998.
Selling, General and Administrative Expenses incurred in the operation of
the Company's cigar, gaming and casino business for the year ended December 31,
1999 increased as a percentage of revenues from 72% in 1998 to 94% in 1999 from
$1,727,600 to $1,771,700 in 1999.
As a result of the decrease in revenues, without a significant change in
operating expenses, the effect of the increase in Selling, General and
Administrative Expenses, as well as the revaluation of the company's gaming,
cigar, and real estate assets, the company's net loss was ($1,506,000) and ($
0.46) per share for the year ended December 31, 1999 compared to net income of
$531,000 or $0.16 per share for the preceding year.
Through 1999 the Company expended approximately $1,100,000 on the
establishment of a premium cigar business; additional expenditures for marketing
and personnel are expected in year 2000. The Company expended approximately
$174,000 in 1999 in the cigar business down from $926,000 in 1998 a decrease of
$752,000. The fact that there were no costs associated with acquisitions of
cigars and related inventory in 1999, accounted for the change. In 1999, an
insignificant amount was spent to acquire additional inventory. The Company
anticipates that it will generate significant revenues from this business in
year 2000, although the amount of such revenues is, at this time, impossible to
forecast. The effect that this business will have on the overall profitability
of the Company is uncertain.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
- ---------------------------------------------
The Company's revenues from the rental of slot machines in Peru, Colombia
and Nicaragua for the year ended December 31, 1998 increased $458,000 (23.7%) to
$2,392,000 from $1,933,233 for the year ended December 31,1997. The increase in
revenues for the period described above is primarily due to a greater number of
slot machines on monthly leases in Peru and a 20% increase in rent for all slot
machines lessees in Colombia.
Selling, General and Administrative Expenses incurred in the operation of
the Company's gaming and casino business for the year ended December 31, 1998
decreased as a percentage of revenues from 87% in 1997 to 72% in 1998.
As a result of the decrease in Selling, General and Administrative
Expenses as a percentage of revenues and an increase in revenues, the Company's
net income increased approximately 100% or $269,000 from $261,000 or $.08 per
share, for the year ended December 31, 1997 to $531,000, or $.016 per share, for
the year ended December 31, 1998.
During 1998, the Company spent approximately $926,000 on the establishment
of a premium cigar business; additional expenditures for marketing and personnel
are expected in 1999. The Company anticipates that it will generate significant
revenues from this business in 1999, although the amount of such revenues is, at
this time, impossible to forecast. Also, the
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effect that this business will have on the overall profitability of the Company
is, at this time, unclear.
LIQUIDITY AND CAPITAL RESOURCES
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The Company has financed its slot machine operations, and its premium
cigar business, exclusively through internal sources. The Company's cash
position at December 31, 1999 was approximately $800,200, down from
approximately $1,568,000 at December 31, 1998. The Company anticipates
additional expenditures in connection with the operation of its premium cigar
business in year 2000; however, the Company believes that cash generated from
operations, along with cash on hand, will be sufficient to cover all liquidity
needs over the next 12 months. Thereafter, and depending upon the financial
results of its cigar business, as well as expansion plans, if any, the Company
may seek to finance operations and growth through the utilization of outside
sources of financing, including commercial lending or the sale of equity.
The Company does not have any material commitments for capital
expenditures for the forthcoming year.
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FORWARD LOOKING STATEMENTS
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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 the final stages with
regard to our marketing plan. 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 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.
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ITEM 7. FINANCIAL STATEMENTS
Index to Consolidated Financial Statements Form 10-KSB
-----------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, F-3
1998 and 1999
Consolidated Statements of Operations for the F-4
years ended December 31, 1998 and 1999
Consolidated Statements of Changes in F-5
Stockholders' Equity for years ended
December 31, 1998 and 1999
Consolidated Statements of Cash Flows for the F-6
years ended December 31, 1998 and 1999
Notes to the Consolidated Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The executive officers and directors of the Company are as follows:
Name Age Director Since
- ---- --- --------------
Jeffrey A. Felder 37 2000*
Geraldine Lyons 60 2000*
Jose A. Caballero 42 1994
Angel Garcia 39 1995
Dennis R. Barry 60 1999
- --------
* As of January 26, 2000
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Mr. Felder joined the company as President and chief Operating Officer in
1992. He served in that capacity through June 1995. Mr. Felder rejoined the
company in January of 1999 and was in charge of cigar operations. The Board of
Directors elected Mr. Felder as President and Chief Executive Officer of the
Company on an interim basis and as a director of the company to serve the
un-expired term of Donald D. Schiffour.
Mrs. Lyons has been with the Company since it's the inception in 1991 and
has served as Corporate Secretary since 1991. The Board of Directors elected
Mrs. Lyons as Chief financial Officer of the Company on an interim basis and as
a director of the Company to serve the un-expired term of Lloyd P. Lyons.
Mr. Caballero has served on the Board of Directors since April 1994. Mr.
Caballero is the Vice President of Exfi International Corporation, an
advertising and marketing agency that specializes in doing work for companies
that plan to expand their business into Latin America. Mr. Caballero has been
with Exfi International Corporation since 1987.
Mr. Garcia joined the Company in January 1995 and serves as President of
LACI in Peru. Mr. Garcia was the Marketing Manager of Slot Operations for one of
the largest casinos in Lima, Peru before joining LACI. He was named to the Board
of Directors of the Company in April 1995.
Mr. Dennis R. Barry has been member of the Board of Directors since June
of 1999. Mr. Barry has been employed as a commercial mortgage broker and real
estate salesman for the past 15 years. He was a Vice President with the Mortgage
Corporation of America where he worked from 1997 to 1999.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued during the
last three completed fiscal years ended December 31, 1999 by the Company for
services rendered by the Chief Executive Officer during those years:
Summary Compensation Table
<TABLE>
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Annual Compensation Long Term Compensation
- ---------------- ------------------------------------------------- --------------------------------------------------
Awards Payouts
- ---------------- ------------------------------------------------- -------------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ---------------- ---------- ------------ ------------ ------------ ------------- ------------ --------- -------------
Other
Name and Annual Restricted LTIP All Other
Principal Salary Bonus Compensation Stock Awards Options/SARs Payouts Compen-sation
Position Year $ $ $ $ (#) $ $
- ---------------- ---------- ------------ ------------ ------------ ------------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lloyd Lyons, 1999 348,000 - - - 650,000* - -
Chief 100,000 [42,000] - 650,000* - -
Executive 1998 300,000 - - - 350,000 - -
Officer 1997 275,000 -
================ ========== ============ ============ ============ ============= ============ ========= =============
</TABLE>
*Options which were re-priced from $2.50 to $1.00 per share.
13
<PAGE>
Report on Re-pricing of Options
-------------------------------
The Board of Directors determined that in lieu of awarding a cash bonus
and an increase in his non-accountable expense allowance to Mr. Lyons in
connection with the performance of his duties as the Chief Executive Officer and
Chairman of the Board of the Company, his outstanding stock options would be
re-priced on the same basis as other outstanding stock options which were
similarly re-priced.
The following table sets forth certain information with respect to
outstanding stock options held by the Chief Executive Officer or exercised in
1998.
<TABLE>
<CAPTION>
================== =============== ================ ================================= ===============================
Shares Number of Securities Underlying Value of Un-exercised
Name Acquired on Value Realized Un-exercised Options at In-the-Money Options at
(a) Exercise (#) ($) December 31, 1998 December 31, 1998
- ------------------ --------------- ---------------- --------------- ----------------- ------------- -----------------
Exercisable Un-exercisable Exercisable Un-exercisable
- ------------------ --------------- ---------------- --------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Lloyd Lyons 0 0 650,000 - - -
================== =============== ================ =============== ================= ============= =================
</TABLE>
EMPLOYMENT AGREEMENTS
- ---------------------
In January 1997, the Company entered into a five-year employment agreement
with Lloyd Lyons, the Chief Executive Officer that provides for an annual salary
commencing January 1997 of $275,000 and increasing $25,000 per annum commencing
January 1, 1998. The contract provided for salary continuation for a period of
two years after the death of the officer. In January 2000 the Chief Executive
Officer passed away and at present the estate is receiving $2000.00 monthly (as
per the contract) the balance is being deferred. In addition the Chief Financial
officer's annual contract required upon his death one years salary, which
approximates $45,000 to be paid monthly for the one year period subsequent to
his death. In November 1999 the Chief Financial Officer passed away.
The Company entered into two-year employment contracts with Jeffrey A.
Felder, CEO, Geraldine Lyons, CFO, and Angel Garcia, President of Latin American
Operations on January 27, 2000, calling for salaries of $70,000, $50,000 and
$43,000 respectively for the first year. The contracts call for a ten percent
increase in salary during the second year of each contract.
Other than the incentive bonus plan described above and the stock option
plans described below, as of December 31, 1999, the Company does not have any
contingent forms of remuneration, including any pension, retirement, stock
appreciation, cash or stock bonus, or other compensation plan.
Director Compensation
- ---------------------
Non-Management directors receive $300 for each meeting attended.
14
<PAGE>
1994 STOCK OPTION PLAN
- ----------------------
In June 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "Plan"). The maximum number of shares available for issuance under the Plan
is 1,500,000 shares. The Plan terminates on June 13, 2004. The Plan is designed
to provide additional incentives for Directors and officers and other key
employees of the Company, to promote the success of the business and to enhance
the Company's ability to attract and retain the services of qualified persons.
The Board of Directors administers the Plan. The Plan authorizes the Board of
Directors to grant key employees selected by it, incentive stock options and
non-qualified stock options. The exercise price of shares of Common Stock
subject to options qualifying, as incentive stock options must not be less than
the fair market value of the Common Stock on the date of the grant. The exercise
price of incentive options granted under the Plan to any participant who owns
stock possessing more than 10% of the total combined voting power of all classes
of outstanding stock of the Company must be at least equal to 100% of the fair
market value on the date of grant. Fair market value has been determined to be
the closing sales price for the Company's common stock reported by NASDAQ. To
date, 1,017,500 options have been issued under the Plan, but none have been
exercised.
The Board of Directors may amend the Plan at any time but may not, without
shareholder approval, adopt any amendment, which would materially increase the
benefits accruing to participants, or materially modify the eligibility
requirements. The Company also may not, without shareholder approval, adopt any
amendment, which would increase the maximum number of shares, which may be
issued under the Plans, unless the increase results from a stock dividend, stock
split or other change in the capital stock of the Company. In March 1999, the
Board of Directors authorized an amendment to the Plan increasing the number of
shares to be issued thereunder from 1,000,000 to 1,500,000. This amendment was
submitted for shareholder approval at the 1999 Annual Meeting and was approved.
15
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding shares of the
Common Stock beneficially owned as of March 15, 2000, by (i) each person or a
group, known to the Company, who beneficially owns more than 5% of the Common
Stock, (ii) each of the Company's directors, and (iii) all executive officers
and directors as a group:
- -----------------------------------------------------------------------------
NUMBER OF SHARES
BENEFICIALLY
NAME OWNED(1) PERCENT OF CLASS
- -----------------------------------------------------------------------------
Estate of Lloyd Lyons 1,609612(2) 26.70%
c/o Wayne Pathman Esq.
Personal Representitive
2 South Biscayne Tower, Suite 2400
Miami, FL 33162
- -----------------------------------------------------------------------------
M.H. Meyerson & Co. Inc. 796,101(3) 13.20%
525 Washington Boulevard
Jersey City, NJ 07503
- -----------------------------------------------------------------------------
Geraldine Lyons 241024(4) 4.00%
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
- -----------------------------------------------------------------------------
Angel Garcia 65,000(5) 1.10%
Mariscal Sucre 321 Miraflores
Lima, 18 Peru
- -----------------------------------------------------------------------------
Kenneth Koock 265,250(6) 4.40%
525 Washington Boulevard
Jersey City, NJ 07503
- -----------------------------------------------------------------------------
Jose A. Caballero 5,000(7) 0%
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
- -----------------------------------------------------------------------------
Jeffrey A. Felder 40,092(8) 0%
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
- -----------------------------------------------------------------------------
Dennis R. Barry 5,000(9) 0%
c/o Latin American Casinos, Inc.
200 NE 164th Street
North Miami Beach, FL 33162
- -----------------------------------------------------------------------------
All Executive Officers and 5.90%
Directors as a group (10)
- -----------------------------------------------------------------------------
16
<PAGE>
(1) To the Company's knowledge, all shares of Common Stock are owned
beneficially, with sole voting and investment power, except as otherwise
noted.
(2) Includes options to purchase 650,000 shares of Common Stock of the Company
exercisable at $1.00 per share.
(3) Includes 530,195 of Common Stock purchase warrants, and 50,375 investment
banker warrants exercisable at $1.06 per share.
(4) Includes options to purchase 75,000 shares of Common Stock of the Company
exercisable at $1.00 per share and 41,024 shares of Common Stock held in
trust for grandchildren.
(5) Includes options to purchase 65,000 shares of Common Stock of the Company
exercisable at $1.00 per share.
(6) Includes 100,750 investment banker warrants exercisable at $1.06 per share.
(7) Includes options to purchase 5,000 shares of Common Stock of the Company
exercisable at $1.06 per share.
(8) Includes options to purchase 25,000 shares of Common Stock of the Company
exercisable at $1.06 per share.
(9) Includes options to purchase 5,000 shares of Common Stock of the Company
exercisable at $1.06 per share.
(10) Includes 140,000 options exercisable at $1.00; 35,000 options exercisable
at $1.06.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1999, Mr. Lyons, the Chief Executive Officer is
indebted to the Company for $115,000, pursuant to a loan taken in 1993 in the
amount of $150,000. Mr. Lyons pays interest on the loan at the rate of prime
plus 1%. It is anticipated that upon the disposition of the estate of Mr. Lyons
that the balance will be paid in full.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index of exhibits as required by Item 601 of Regulation S-B.
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Articles of Incorporation (Delaware),
as amended
3.2 Certificate of Merger Merging
Repossession Auction, Inc. (Florida
corporation) and Repossession Auction,
Inc. (Delaware corporation)
3.3 Bylaws
4.3 Form of Warrant Agreement
10.3 Employment Agreement between the
Company and Lloyd Lyons dated January
1, 1997(1)
10.4 1994 Stock Option Plan
10.5 Lease dated September 9, 1998 between
Company and Oska Partnership re:
executive offices.
10.6 Agreement dated July 12, 1998 with
Tabacelera Panamericano Y Del Caribe
S.A. (with certain portions omitted
pursuant to Rule 24b-2)
10.7 Agreement dated July 20, 1998 with
Tabacos DeOriente (with certain
portions omitted pursuant to Rule
24b-2)
10.8 Agreement dated July 20, 1998 with Tabacos
Del Caribe (with certain portions omitted
pursuant to Rule 24b-2)
10.9 Agreement dated July 12, 1998 with
Tacunisa (with certain portions
omitted pursuant to Rule 24b-2)
10.10 Agreement dated July 12, 1998 with
Tabanica, S.A. (with certain portions
omitted pursuant to Rule 24b-2)
27.1 Financial Data Schedule
(1) Incorporated herein by reference from the 10-KSB filed by the Company for
the year ended December 31, 1997.
(b) Reports on Form 8-K
1/27/00 Change in Officers and Directors
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Latin American Casinos, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
LATIN AMERICAN CASINOS, INC.
By: /s/ Jeffrey A. Felder, Chairman and Chief
-----------------------------------------
Jeffrey A. Felder, Chairman and Chief
Executive Officer
Date: _______________, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Latin American Casinos, Inc., and in the capacities and on the ____ day of
_____________, 2000.
/s/ Jeffrey A. Felder, Chairman, Chief
---------------------------------------------
Jeffrey A. Felder, Chairman, Chief
Executive Officer and Director
/s/ Geraldine Lyons, Secretary, Chief
---------------------------------------------
Geraldine Lyons, Secretary, Chief
Financial Officer and Director
/s/ Angel Garcia, President, Latin American
---------------------------------------------
Angel Garcia, President, Latin American
Operations and Director
/s/ Jose A. Caballero, Director
---------------------------------------------
Jose A. Caballero, Director
/s/ Dennis R. Barry, Director
---------------------------------------------
Dennis R. Barry, Director
19
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
AUDIT REPORT
AS OF DECEMBER 31, 1999
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONTENTS
Independent Auditor's Report 1
Consolidated Balance Sheets as of December 31, 1999
and December 31, 1998 2
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1999 and 1998 3
Consolidated Statements of Operations for the Years
Ended December 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 5
Notes to Consolidated Financial Statements as of December 31, 1999
and 1998. 6-13
<PAGE>
INDEPENDENT AUDITOR'S 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 December 31, 1999 and 1998, the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility on the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Latin
American Casinos, Inc. and subsidiaries as of December 31, 1999 and 1998 the
results of their operations and there cash flows for the years then ended, in
conformity with generally accepted accounting principles.
As discussed in note 10 to the financial statements the company reduced its
asset values and has charged current operations with the $1,515,000 asset
impairment cost.
Shubitz Rosenbloom & Co., P.A.
Miami, Florida
March 30, 2000
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS
------
December 31 December 31,
1999 1998
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 800,223 $ 1,567,773
Accounts Receivable, Less $225,000 and
$150,000 of Allowance for Doubtful Accounts
in 1999 and 1998, respectively 1,591,399 1,322,130
Inventory 645,172 725,609
Prepaid Expenses and Other Current Assets 212,429 189,513
----------- -----------
Total Current Assets 3,249,223 3,805,025
----------- -----------
PROPERTY AND EQUIPMENT - NET 4,568,008 5,497,734
----------- -----------
OTHER ASSETS
Financing Arrangement Receivable 94,624 94,624
Deposits 11,609 22,275
Note Receivable - Stockholder 115,000 117,000
Other Assets 25,925 16,248
----------- -----------
Total Other Assets 247,158 250,147
----------- -----------
TOTAL ASSETS $ 8,064,389 $ 9,552,906
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 191,650 $ 247,126
Foreign Income Tax Payable -- 28,707
----------- -----------
Total Current Liabilities 191,650 275,833
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
Total Liabilities 191,650 275,833
----------- -----------
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) (415,193) (517,151)
Retained Earnings (Deficit) (1,628,601) (122,309)
Treasury Stock, at cost (5,235) (5,235)
----------- -----------
Total Stockholders' Equity 7,872,739 9,227,073
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,064,389 $ 9,552,906
=========== ===========
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
- 2 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------
Number Par Additional Cumulative 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 -- -- -- 101,958 -- --
NET LOSS FOR THE
YEAR ENDED
DECEMBER 31, 1999 -- -- -- -- (1,506,292) --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE DECEMBER
31, 1999 3,300,000 $ 2,211 $ 9,919,557 ($ 415,193) ($1,628,601) $ 5,235
=========== =========== =========== =========== =========== ===========
</TABLE>
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
- 3 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
Revenue
Rental Income $ 1,851,062 $ 2,392,142
Sales of Cigars 28,009 --
----------- -----------
Total Revenues $ 1,879,071 $ 2,392,142
----------- -----------
Cost and Expenses
Selling, General & Administration 1,771,763 1,727,686
Depreciation 197,187 258,133
Cost of Cigar Sales 22,407 --
----------- -----------
Total Cost and Expenses $ 1,991,357 1,985,819
----------- -----------
Operating Income (Loss) (112,286) 406,323
----------- -----------
Other Income (Expenses)
Interest Income 109,458 153,507
Restructuring Charges (1,515,000) --
----------- -----------
Net Other Income (Expenses) (1,405,542) 153,507
----------- -----------
Income (Loss) Before Income Taxes
And Extraordinary Item (1,517,828) 559,830
Income Taxes (Provision) Benefit 11,536 (196,707)
----------- -----------
Income (Loss) Before Extraordinary Item (1,506,292) 363,123
Utilization of Net Operating Losses and
Foreign Tax Credits -- 168,000
----------- -----------
Net Income (Loss) ($1,506,292) $ 531,123
=========== ===========
Earnings (Loss) Per Common Share and
Common Share Equivalent
Common Share Equivalent Outstanding 3,296,000 3,296,000
=========== ===========
Net Income (Loss) per share ($ .46) $ .16
=========== ===========
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
- 4 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income ((Loss) $(1,506,292) $ 531,123
Adjustments to Reconcile Net Income (Loss)
to Net Cash Provided by Operating Activities:
Depreciation 197,187 258,133
Restructuring Charges 1,515,963 --
Changes in Assets - (Increase) Decrease:
Accounts Receivable (269,269) (153,336)
Prepaid Expenses and Other Current Assets (21,953) (27,505)
Inventory of Cigars 80,437 (725,609)
Changes in Liabilities - Increase (Decrease):
Accounts Payable and Accrued Expenses (55,476) (6,112)
Foreign Income Tax Payable (28,707) 5,427
----------- -----------
Net Cash (Used In) Operating
Activities (89,073) (117,879)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in Property and Equipment (783,424) (1,357,758)
Other Assets 2,989 180,717
----------- -----------
Net Cash (Used In) Investing
Activities (780,435) (1,177,041)
----------- -----------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 101,958 (391,972)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (767,550) (1,656,892)
CASH AND CASH EQUIVALENTS - BEGINNING 1,567,773 3,224,665
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 800,223 $ 1,567,773
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash Paid During the Period for:
Interest $ -- $ --
=========== ===========
Income Taxes, Foreign $ 28,707 $ 23,280
=========== ===========
See Independent Auditor's Report.
The accompany notes are an integral part of this statement.
- 5 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 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. As of December 31, 1999 the
Company had acquired approximately 8,000 slot machines,
approximately 3,000 of which have been acquired for parts and other
related equipment, at a total cost of $4,715,798 including
applicable costs for transportation, duty and refurbishing (See note
10).
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 was originally 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 only initially commenced this
year. Included in revenues is approximately $28,000 of cigar sales.
As of December 31, 1999 the Company has expended approximately
$1,100,000 primarily for start up costs and initial inventory
acquisitions. Such pre-operating expenditures have been included as
$30,000 prepaid and other current assets, $645,000 as inventory and
$109,000 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
All material intercompany transactions, balances and profits have
been eliminated.
See Independent Auditor's Report.
- 6 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 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 betterment's 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 (See note 10).
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 and
1998 all warrants, stock options and underwriter's options (Notes 4
and 5) were anti-dilutive.
See Independent Auditor's Report.
- 7 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 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 totaled $697,000 and
$1,411,000 as of December 31, 1999 and 1998 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 uncollectable
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.
See Independent Auditor's Report.
- 8 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
Note 2. Property and Equipment
Property and equipment are summarized as follows:
December 31, December 31,
1999 1998
----------- -----------
Land & Buildings (See note 10) $ 335,363 $ 421,882
Rental Equipment (See note 10) 4,715,798 5,580,705
Leasehold Improvements 26,027 26,027
Furniture, Fixtures & Office Equipment 185,327 153,930
Transportation Equipment 158,592 149,876
----------- -----------
Total 5,421,107 6,332,426
Less: Accumulated Depreciation 853,099 834,686
----------- -----------
Property and Equipment - Net $4,568,008 $5,497,734
=========== ===========
Included in Rental Equipment is approximately $2,000,000 of parts and
supplies purchased or obtained from other machines previously
disassembled for parts.
Rent expense for the years ended December 31, 1999 and 1998 was
$113,000 and $92,000, respectively.
The Company leased the land and building it owns for $1,500 per month
had decreased to $1,200 per month on a month to month basis (See note
10).
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 December 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
approximately $11,000 of interest income in both 1999 and 1998 on this
note.
See Independent Auditor's Report.
- 9 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
Note 4. Warrants and Options
As of December 31, 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.
Effective February 8, 1999, the Board of Directors reduced the option
price to $1.06, which was the closing price of the stock at that date.
These warrants vest and had 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 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 canceled 10,000 options issued in
1995 at $2.50 per share.
See Independent Auditor's Report.
-10-
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
Note 7. Provision for Income Taxes
The provision for income taxes consisted of the following for the years
ended December 31:
1999 1998
---------- ----------
Current
Federal $ - $ 168,000
State - -
Foreign - 28,707
---------- ----------
- 196,707
---------- ----------
Deferred
Federal - -
State - -
Foreign - -
---------- ----------
- -
---------- ----------
Income Tax Provision $ - $ 196,707
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 $ - $ 168,000
Foreign Taxes - 28,707
Refund Prior Year Taxes - -
Net Operating Losses and Tax Credits - (168,000)
---------- ----------
Income Tax Provision, Net $ - $ 28,707
========== ==========
As of December 31, 1999, the Company had available for income tax
purposes unused net operating loss carryforwards which may provide
future tax benefits of $1,667,000 expiring through the year 2015. No
valuation allowance has been provided for unremitted foreign profits.
See Independent Auditor's Report.
-11-
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 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 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. The contract provided for salary continuation for a
period of two years after the death of the officer. In January 2000
the Chief Executive Officer passed away and at present the estate of
the officer has deferred it's rights under the contract for salary
continuation. In addition, the Chief Financial Officer's annual
contract required upon his death one years salary, which
approximates $45,000, be paid for the one year period subsequent to
his death. In November 1999 the Chief Financial Officer passed away.
C Foreign Assets
The accompanying consolidated balance sheets for the period ended
December 31, 1999, includes assets relating to the Company's slot
machine operations in Peru, Colombia and Nicaragua, South America of
$4,300,000, $2,000,000 and $300,000, 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 was
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 and have had 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 plans. In
October, 1998 Nicaragua suffered the effects of hurricane "Mitch".
The Company has at present ceased operations in Nicaragua and it is
anticipated that all of the assets in Nicaragua will be transferred
to other South American subsidiaries. (See note 10)
See Independent Auditor's Report.
- 12 -
<PAGE>
LATIN AMERICAN CASINOS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 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 $2,500. 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 a considerable
time 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. A substantial part of
the schedule has been included in the allowance for default
accounts.
Note 10 Restructuring Losses
In the fourth quarter of 1999 as a result of the deaths of both it's
founder and it's Chief Financial Officer the Company initiated a
review of the company's operations, on a country by country basis.
As a result of political change's and government mandated
obsolescence of certain gaming equipment the company revalued
previously recorded cost of gaming equipment to it's anticipated net
realizable value. Additionally, the company reduced the valuation of
certain real estate value in Miami to reflect current market
conditions and adjusted it's investment in the cigar operations to
account for the slower than expected sales. The total restructuring
adjustment is computed as follows:
Gaming Equipment Asset Impairment Cost $1,245,000
Miami Real Estate Impairment Cost 86,000
Reduction of cigar investment 169,000
----------
Total $1,515,000
==========
See Independent Auditor's Report.
- 13 -
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