SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Annual Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act
Of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
Filed Pursuant To Sections 12, 13 Or 15(D) Of The Securities Exchange Act Of
1934
Commission File Number 1-13530
AMERICAN BINGO & GAMING CORP.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-2723809
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(State or other jurisdiction of corporation or organization
(I.R.S. Employer Identification No.)
515 Congress Avenue, Suite 1200, Austin, Texas 78701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 472-2041
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Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock,
Redeemable Common Stock Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirement for the past 90 days. YES X NO
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K. YES X NO
---
<TABLE>
<CAPTION>
<S> <C>
Registrant's revenues for its most current fiscal year: $3,648,262
Aggregate market value of the voting stock held by
non-affiliates as of March 18, 1997: $5,027,382
Number of shares outstanding as of latest practical date: 4,162,494
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates by reference the Registrant's definitive
Proxy Statement for its annual meeting of stockholders scheduled to be held on
May 22, 1997, which will be filed with the Commission within 120 days of the
end of fiscal 1996.
<PAGE>
PART I
ITEM 1 - BUSINESS
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GENERAL
American Bingo & Gaming Corp. (the "Company") was formed as a public
company under the laws of the State of Delaware in 1994 to consummate the
acquisition of bingo centers (the "centers"). The Company subsequently
completed its initial public offering in December of 1994, raising
approximately $5.2 million through the sale of 1,000,000 shares of the
Company's common stock and 1,725,000 redeemable common stock purchase
warrants. The Company netted approximately $3.1 million from the offering
after the retirement of debt and payment of underwriting fees. The Company
used a majority of its net public offering proceeds for expansion in 1995.
The Company, through its subsidiaries, provides initial investment
capital, facility set up, maintenance and management support for charities
which utilize bingo events as a means of fundraising. The Company's
participating charities raised approximately $3.6 million and $2.5 million in
net proceeds after bingo prizes in 1996 and 1995, respectively, for their
non-profit operations. The Company currently operates fourteen bingo centers,
including seven centers in Texas, four in Alabama and three in South Carolina.
The Company also operates six game rooms with 30 video gaming machines in
South Carolina. The Company had nine bingo centers and three game rooms at the
end of 1995. The Company is currently negotiating several acquisitions and
developments and intends to continue to grow rapidly. The Company's goal is to
operate 25-30 bingo centers by the end of 1997 and 100 bingo centers by the
end of the year 2000.
The Company's revenues are primarily derived from rental revenues
received from participating charities that conduct bingo sessions at the
Company's bingo centers. Additional revenues are derived from vending and
concession operations located in the centers as well as the sale of bingo
paper, daubers and other supplies. In 1996 the Company started deriving
revenues from bingo "card-minders" that allow players to play bingo
electronically. The Company also derives an increasing share of its revenues
from video gaming machines in its South Carolina bingo centers where video
gaming is legal.
Industry publications have reported that the North American charity bingo
market grossed over $4.4 billion in 1995. Thus, bingo players spend almost $85
million per week on bingo. Management believes that the bingo market, while
only a small percentage of the $250 billion total gaming market, is an
attractive and growing niche overlooked by larger gaming firms. Management
believes that this market will continue to be attractive due to: i) increased
customer acceptance and participation; ii) favorable demographic trends,
including an aging population with increasing disposable income migrating to
southern U.S. states; and iii) reduced governmental funding of charities due
to continual budgeting pressures. Management is also confident that the
Company will continue to prosper in the charitable bingo market based on: i)
management's industry knowledge and operational experience; ii) the Company's
early entry as a consolidator in the nationally fragmented bingo market, with
no competition on a similar scale; and iii) the Company's positioning of its
bingo centers in demographically and economically desirable markets, primarily
in the southern part of the U.S.
BUSINESS OVERVIEW
Although state and local regulations vary, the Company's basic business
operation is as follows. The Company identifies markets that offer favorable
population and income demographics for bingo. After the Company identifies an
attractive market for potential expansion, the Company evaluates existing
bingo centers, if any, within that market to identify possible acquisition
candidates. If the Company does identify any desirable bingo center(s) within
that target market, the Company may seek to acquire those center(s),
contingent upon favorable due diligence. The Company will typically pay 1-3x
proven annual cash flows for acquisitions, dependent on the initial cash paid.
The Company will only pursue acquisitions of desirable centers that offer
proven cash flows and/or opportunities for enhanced financial performance.
Bingo center acquisitions typically cost more than building new centers,
but offer certain advantages over building, including: i) greater
predictability and more immediate investment return since the center's past
performance is known; ii) no dilution of the existing bingo market through the
addition of another bingo center; and iii) preservation of the Company's cash,
assuming the acquisition is funded with notes and/or Company stock in addition
to cash. The Company typically includes notes and stock in its acquisitions
which gives the seller a stake in the continued performance of the center as
well as an interest in the Company's performance. The Company also seeks
performance guarantees in its acquisitions to minimize investment risk.
If the Company cannot find an existing bingo center to purchase within a
target market, the Company will re-evaluate that market to determine: i) if
the market can support a new bingo center; and ii) if a desirable, low-cost
site for a new bingo center is available. Building and finish-out for a new
bingo center typically cost $100,000 - $250,000 which is often less expensive
than acquiring an existing center. A development entails greater risk but does
allow the Company to potentially earn a higher rate of return on its
investment, particularly if the landlord assumes a portion of the finish-out
costs. The Company will continue to expand through both acquisitions and
developments.
Concurrent with new bingo center acquisitions or developments, the
Company will obtain all necessary operating permits and licenses from the
appropriate state or local regulating authority. After initiating legal
compliance efforts, the Company contacts local charities to discuss the
fundraising opportunities that charity bingo provides. When recruiting
charities, the Company considers such factors as i) the charitable cause and
presence in the local community; ii) the background of charity officers or
trustees; and iii) a charity's financial stability. Once charity selection is
complete, the Company assists the charities in the development of an operating
plan. The charities then hire a bingo center manager/head cashier to manage
the center. The manager will select and supervise bingo center employees and
volunteers, oversee bingo deposits and disbursements, and maintain an
accounting system. Lease agreements between the Company and the charities are
typically structured on an annual basis, with short-term cancellation options
for both parties. The Company believes that short term leases allow it to
limit its investment risk.
After a bingo center is opened, the Company acts as a consultant and
property manager to the charities in order to ensure profitable operation of
the center for both the Company and the charities. The Company's income is
derived from rental payments from the charities for the lease of the building
and bingo equipment. Rental payments are primarily determined by the Company's
investment in the property and local market conditions, and may be capped by
state or local regulations. Additional income may also be earned from vending
and concessions, the sale of bingo paper and supplies, and video gaming.
Most state or local bingo regulations make participating charities
responsible for the direct operation of bingo centers and employment and
payment of personnel. These regulations generally prohibit management control
by the Company, which eliminates Company staffing obligations and expenses. In
addition, most states require that participating charities be responsible for
all marketing activities and expenses.
The Company's objective is to allow a bingo center to run on a "turnkey"
basis by the charities to the extent possible. However, because of the
Company's substantial investment in opening a bingo center and significant
continued commitment in funding overhead costs, the Company maintains an
advisory role with regard to property management. The Company and its
participating charities each have a vested interest in making sure that
operations are conducted in a mutually profitable way. The Company's objective
is to ensure maximum net proceeds from center operations, which allows
charities to generate substantial funds, and, in turn, allows the Company to
earn the maximum legal rent from leasing its property, furniture and equipment
to charities.
CURRENT OPERATIONS
The Company's bingo centers offer first class facilities and amenities, a
commitment to customer satisfaction and strong charity support. The Company
believes that these principles, together with the Company's management
experience, industry knowledge and ability to raise capital, distinguish the
Company from its competition and allow the Company and its charities to
mutually prosper. The Company's participating charities raised over $3.6
million and $2.5 million in gross proceeds for their use after bingo prizes in
1996 and 1995, respectively. The Company's future expansion will remain
focused on the southern part of the U.S. which offers favorable demographic
and logistical advantages to the Company. A brief description of the Company's
current operations by state follows.
Texas (Seven bingo centers)
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The Company has bingo centers in Austin (2) and San Antonio (1) that have open
since 1987 and 1988, respectively. The Company has also invested heavily in
the development of four bingo centers in McAllen (2) and Brownsville (2),
Texas, which are located near the Texas - Mexico border. The McAllen and
Brownsville centers opened in March and October, 1996, respectively. Texas is
by far the largest bingo market in the U.S., but is highly regulated regarding
prize payouts, number of weekly sessions and charity rental payments. Bingo in
Texas is currently regulated by the Texas Lottery Commission.
Alabama (Four bingo centers)
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The Company has bingo centers in Mobile (3) and Montgomery (1) that have been
open since 1991 and 1992, respectively. Bingo in Alabama is regulated at the
local level with varying laws between counties. Most local laws provide limits
on the number of weekly sessions and prizes that can be offered.
South Carolina (Three bingo centers and six video gaming rooms)
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The Company has operated bingo and gaming centers in Columbia since 1995.
These centers are the Company's largest single investment to date and also
represent the Company's first foray into the video gaming market with six game
rooms containing 30 total video gaming machines. The State Department of
Revenue and Taxation regulates bingo and gaming in South Carolina, and limits
the number of participating charities and sessions per facility. In the first
quarter of 1997 the Company entered into a new lease with an independent
operator to manage the three bingo centers in Columbia. The Company receives
fixed rent and gaming revenue-sharing payments under this lease arrangement.
Florida
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The Company acquired and subsequently sold four Florida bingo centers during
1995 and early 1996 due to legal problems. The Company has not had any
involvement in the operation of these bingo centers since their sale, but has
collected note payments from their sale. In early 1997, the Company, pursuant
to its Florida legal settlement, transferred ownership of three of the four
notes to a third party (See Note 14).
EXPANSION PLANS
The Company's goal is to have 100 bingo centers by the end of the year
2000 and 25-30 centers by the end of 1997, although there can be no assurance
of either. The Company grew from 9 to 14 centers during 1996, an increase of
55%. The Company continuously reviews industry developments and regulations
for expansion opportunities. In addition, by virtue of its size and status as
the largest public bingo center owner in the U.S., the Company regularly
receives investment offers from bingo industry participants.
The Company plans to acquire and/or develop bingo centers in markets that
meet the Company's financial, legal, operational and demographic selection
criteria. The Company will continue to target those markets that offer: i)
equitable bingo regulations; ii) limited bingo and other gaming competition;
iii) attractive real estate pricing; iv) gaming opportunities; v) favorable
demographics; and vi) proximity to the Company's existing operational base.
Ultimately, the success of each bingo center investment is determined by
customer acceptance and patronization. Management strives to maximize the
probability of high customer acceptance by selecting bingo centers: i) in
desirable locations; ii) in favorable competitive environments; and iii) with
strong, customer-focused charity management.
The Company has made a significant investment in assembling its corporate
management team and building its internal systems and operational
infrastructure. This investment cost is highly fixed and the Company intends
to leverage its earnings through incremental revenue growth. Management
believes it can double its current number of bingo centers without materially
changing its fixed cost structure. The Company will therefore continue to
execute its aggressive growth strategy by making strategic expansions in
selected markets.
The Company intends to grow through both acquisitions and developments.
It uses extensive due diligence procedures to evaluate investment
opportunities, including market studies, legal evaluations, financial analyses
and operational reviews. The Company determines acquisition prices and
development budgets based on the proposed investment's historical and
projected financial performance, competitive market position, risk profile and
overall strategic fit within the Company's operational plans. Acquisition
terms typically include cash payments, issuance of Company securities and
seller-financed notes. Consulting, non-compete and performance guaranty
agreements may also be included. The Company structures most acquisitions to
recoup its initial cash investment in one year or less. The Company also
believes that the inclusion of its stock in acquisitions preserves cash for
additional acquisitions and provides a vested interest on the part of the
previous owner in the continued success of the Company.
NEW TECHNOLOGY, OPPORTUNITIES AND LEGISLATION. Some states^ allow video
gaming in charity halls. Based on information obtained from charity lobbyists
and other market watchers, the Company believes that the next decade will
result in a dramatic increase in the number and types of games that charities
will be able to offer. Management believes that video gaming such as video
bingo, video pull-tabs, and video poker have a tremendous appeal to the
existing bingo clientele. Furthermore, the introduction of video gaming holds
the potential to greatly expand the target audience. The Company is actively
involved in the process of attempting to bring video charity gaming to Texas
and other states, and is establishing a video gaming operation in itsthe South
Carolina Centers.
COMPETITION
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There are thousands of commercial bingo centers in the U.S. Commercial
bingo center start-up expenses are generally comprised of site selection and
preparation, finish-out, equipment and furniture costs, and licensing fees
which collectively total from $100,000 to $250,000 per center. Thus, there are
relatively limited financial barriers to entry in this market. However,
rigorous regulatory requirements and legal complexities of charity involvement
in operations reduce the entry of many would-be competitors. Since bingo prize
payouts are often legally limited and consistent among competing centers,
competition is normally focused on a center's amenities. Bingo centers with
convenient locations, attractive facilities, ample parking, attentive
security, comfortable environment, friendly personnel and value-priced
concessions usually succeed in their market. The Company seeks to provide the
most desirable bingo center(s) in its respective markets in order to generate
long-term player loyalty. The Company is committed to ensuring that its bingo
centers remain appealing and that its customers are provided maximum comfort
and enjoyment. Additional competition within the bingo market comes from bingo
centers directly owned and run by charities. In general, however, such centers
have not been able to compete with commercial centers due to, according to
most bingo players, lower bingo prize payouts, smaller and less desirable
facilities and amenities, and fewer bingo sessions.
Additional competition comes from other sectors of the gaming industry
such as casinos, lotteries, and pari-mutuel wagering. While the Company is
cognizant of this competition, and does try to locate its bingo centers in
areas insulated from such competition, the Company believes that its patrons
represent unique, value-oriented customers. A day or night of bingo typically
costs only $10 - $50 and provides several hours of entertainment with payouts
that rival the average slot machine. Pari-mutuel bettors and casino patrons do
enjoy comparable entertainment value to that which bingo provides, but
generally require longer commutes to the gaming establishment as well as
higher wagers for the same period of playing time. Lottery players seek much
larger payouts with less time commitment, despite the infinitesimal odds. In
addition, these other gaming opportunities do not provide the high degree of
socializing value that bingo provides. The Company also has potential
competition from American Indian gaming establishments, which enjoy certain
legal, operational and tax advantages. However, the Company does not have any
bingo centers that compete in American Indian gaming markets.
EMPLOYEES
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As of March 18, 1997 the Company had 7 full-time employees, including
four officers and three professional staff. The Company also has several
independent property managers who oversee its Alabama and South Carolina
properties. No employee of the Company is represented by a labor union or is
subject to a collective bargaining agreement.
<PAGE>
GOVERNMENT REGULATION
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Approximately 45 states and the District of Columbia have legalized
charitable bingo. Some states have also legalized various forms of video
gaming in bingo centers. Most states recognize that: i) their residents want
to play bingo and will go out of state to play, if necessary; ii) charities
are seeing decreased governmental funding at all levels and need supplemental
funding for their operations; and iii) states can increase their tax revenues
through bingo and video gaming. These states also recognize that most
charities lack the investment capital and/or business acumen to independently
establish bingo centers. These states have provided a regulatory structure
that allows commercial lessors such as the Company to act as landlord and
consultant to the charities. The Company operates within this regulatory
structure and provides the charities with the expertise needed to open and
operate a profitable bingo entertainment center. As a public company, the
Company benefits from operating in highly regulated markets with level
competitive playing fields.
The Company and its participating charities are required to obtain and
maintain permits and/or licenses from state and local regulatory agencies to
open and operate a bingo center. State regulations often limit the amount that
the Company can charge a charity for rent per bingo session. Some states also
limit the number of weekly sessions that may be conducted in a given bingo
center, as well as the prize money that a charity may pay out per session. The
Company views this situation as a "double-edged sword," however, because these
regulatory limitations and complexities often discourage new competition that
lack the Company's industry knowledge and experience. However, there can be no
assurance that current laws and regulations will not be changed or interpreted
in such a way as to require the Company to further restrict its activities or
rental income. It is also possible that liberalization of such regulations in
certain areas would diminish the Company's competitive advantage. In states
that limit the number of charity sessions, the Company recruits a sufficient
number of local charities to ensure that the maximum number of sessions are
conducted.
All states providing for the operation of charity bingo centers have
unique regulations. While the vast majority of these states assign the
regulation of charity bingo to a state agency, in some states, regulation is
under the control of localities. Most states require the participating
charities to operate the bingo center. The Company is thus typically
prohibited from paying the wages of those employees operating the center as
well as paying any marketing or advertising expenses for the center. These
regulations eliminate all bingo center payroll and advertising costs for the
Company.
ITEM 2 - PROPERTIES
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The Company's principal executive offices are located at 515 Congress
Avenue, Suite 1200, Austin, Texas, 78701, telephone (512) 472-2041. The
Company leases approximately 2,400 square feet for these offices pursuant to a
lease which runs through February 28, 2002. Except for the Company's South
Carolina facility, which the Company owns, its bingo centers are leased or
subleased by its subsidiaries pursuant to the terms set forth below. In some
cases, increases in real estate taxes or operating expenses are passed through
to the Company, as well as insurance, common area maintenance and repair
expenses. Certain leases are guaranteed by the Company and its President.
<PAGE>
<TABLE><CAPTION>
CURRENT MONTHLY LEASEHOLD
LEASE EXPENSES, INCLUDING PASS
PREMISES EXPIRATION THROUGHS AND OTHER CHARGES
- -------- ------------------ -----------------------------
<S> <C> <C>
Texas Charities, Inc.(1)
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1919 E. Riverside Dr. June 30, 2001 $ 12,635
Austin, TX
2410 E. Riverside Dr. February 28, 1999 $ 9,325
Austin, TX
San Antonio Charities, Inc.
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3719 Blanco Rd. September 30, 2001 $ 7,598
San Antonio, TX
American Bingo & Gaming Corp.
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2901 N. 23rd Street April 19, 2002 $ 9,410
McAllen, TX
Charity Bingo of Texas, Inc.
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1124 Central Blvd. December 14, 2000 $ 9,356
Brownsville, TX
Bing-O-Rama, Inc.
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Theodore Oaks Shopping Center September 15, 1997 $ 4,322
Theodore, AL
Village Square Shopping Center Month-to-Month $ 1,325
Chickasaw, AL
4130-E and F, Government Blvd.1 June 30, 1997 $ 5,150
Mobile, AL
Charity Bingo, Inc.
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3660 East Atlanta Highway June 30, 1997 $ 4,980
Montgomery, AL
Columbia One Corp. & MHJ Corp.
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1470 Charleston Hwy. Company-owned --
West Columbia, SC
<FN>
1. Subleased premises. There can be no assurance that the
Company's interest in this center will not be adversely affected by a default
of the tenant or otherwise under the prime lease.
</TABLE>
ITEM 3 - LEGAL PROCEEDINGS
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None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
There were no items submitted to a vote of shareholders during the fourth
quarter of fiscal 1996. The Company's annual shareholder meeting with voting
on proxy issues is scheduled for May 22, 1997.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ------------------------------------------------------------------------------
MATTERS
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A. MARKET INFORMATION
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The Company's Common Stock and Redeemable Common Stock Purchase Warrants
are traded on the NASDAQ SmallCap Market System under the symbols "BNGO" and
"BNGOW," respectively. The following table shows the range of reported high
and low closing sales prices for the Company's Common Stock and Redeemable
Common Stock Purchase Warrants, for the periods indicated, as reported on the
NASDAQ Summary of Activity monthly reports.
<TABLE>
<CAPTION>
Redeemable Common
Common Stock Stock Purchase Warrants
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High Low High Low
------ ------ -------- -----
<S> <C> <C> <C> <C>
Fiscal 1995:
- --------------
First Quarter $6 1/2 $3 7/8 $2 13/16 $ 1
Second Quarter $ 5 $3 5/8 $1 13/32 $ 1
Third Quarter $ 5 $3 1/2 $ 1 1/8 $ 1
Fourth Quarter $4 1/2 $ 3 $ 1 1/4 $ 1
Fiscal 1996:
- --------------
First Quarter $3 3/4 $3 1/4 $ 1 1/8 $ 3/4
Second Quarter $3 1/2 $ 2 $ 7/8 $ 1/4
Third Quarter $ 3 $1 1/8 $ 11/16 $5/16
Fourth Quarter $2 1/4 $1 3/8 $ 15/32 $7/32
</TABLE>
The Company has 3,067,500 Redeemable Common Stock Purchase Warrants
outstanding. Each Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.00 through December 14, 1998. The Company may redeem
the Warrants, after 30 days written notice at a price of $.001 per Warrant,
provided that the average closing bid quotation of the Company's common stock
is at least $8.00 for 20 consecutive trading days ending three days prior to
the notice of redemption.
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
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As of March 18, 1997, the approximate number of record holders of the
Company's Common Stock was 69 and the approximate number of beneficial
shareholders was 1,323.
C. DIVIDENDS
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The Company has never paid any dividends on its securities. It is
anticipated that any future earnings generated from operations of the Company
will be reinvested to finance the growth of the Company and no dividends will
be paid.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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OVERVIEW
American Bingo & Gaming Corp. was incorporated in 1994 to pursue bingo
and gaming business opportunities. The Company believes that the estimated
$4.4 billion U.S. bingo market is extremely fragmented and inefficient and
thus potentially profitable to experienced, large-scale commercial lessors and
their participating charities. American Bingo is the largest public company
focused exclusively on consolidating the bingo center market. The Company's
strategy is to consolidate a portion of the bingo industry through the
acquisition and/or development of bingo centers in attractive markets.
In 1994, the Company acquired eight bingo centers in Texas and Alabama
through stock-for-stock exchanges for the Company's common stock. In 1995 the
Company added six bingo centers and closed five centers to end the year with
nine centers. In 1996 the Company added five centers to close the year with 14
centers, an increase of 55% over the previous year. The Company is evaluating
numerous additional bingo center acquisitions and developments to further
expand its operations, primarily in the southern region of the U.S., which
offers favorable demographics and operational logistics for the Company's
business. The Company intends to have 25-30 bingo centers by the end of 1997.
The Company's long-term goal is to operate 100 bingo centers by the end of the
year 2000.
The Company contracts with a variety of charities to conduct bingo in its
centers. The Company derives revenues from the charities in the form of lease
rental payments for use of its bingo center facilities, furniture and
equipment. In addition, the Company generates revenues from the sale of bingo
supplies (paper, daubers, etc.), vending and concession sales, and proceeds
from electronic "card minders." The Company also earns revenues from video
gaming machines from its South Carolina properties where video gaming is
legal. The Company is generally responsible for all overhead costs of a bingo
center, including property rental, finish-out of the property for bingo
operations, bingo supplies, janitorial services, utilities, maintenance and
repairs, security, telephone, property taxes, permits and insurance. The
Company must be able to cover these expenses, plus corporate overhead, from
its charity rental payments in order to earn a profit. The charities earn the
net proceeds from bingo events after paying session rentals to the Company,
bingo center payroll costs, bingo center marketing expenses, if any, and other
normal operating costs.
The Company's revenues and results of operations are determined by the
number of Company bingo centers in operation, the number of participating
charities and sessions conducted at each center, the rents that the Company
can charge, the attendance and financial participation of the players, and the
Company's ability to manage operating costs and overhead. The Company's
financial results may therefore vary based on economic and legal factors, as
well as seasonal fluctuations at certain of the Company's bingo centers. Thus,
a key component of the Company's strategy is to continue to grow revenues and
diversify its operations through expansion. As the Company increases its
revenues while maintaining relatively constant management and infrastructure
costs, the Company will increase profits through significant earnings
leverage and economies of scale, although there can be no assurance of such.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash position was $1.07 million at the end of fiscal
1996, up nearly 150% from $431,000 at the end of 1995. The majority of this
cash increase was from strong operational cash flows, particularly in the
fourth quarter of the year when monthly cash flows exceeded $100,000. The
large cash increase was also driven by collection of the Company's Florida
notes partially offset by nearly $460,000 of capital investments in 1996. The
Company expects ongoing cash flows to remain strong, although there can be no
assurance of this.
The Company's cash balances increased by $638,000 during fiscal 1996.
This cash increase was led by cash flows from operational activities from
which the Company netted more than $641,000. Cash flows from operational
activities were primarily led by the Company's net income of $853,000. Major
non-cash operational expenses included a loss on impairment of long-lived
assets in South Texas of $417,000, depreciation and amortization of $431,000,
and the write-off of subscription notes receivable of $101,000. These non-cash
operational expenses were offset by a favorable $865,000 reversal of a
liability to the seller of three Florida bingo centers to the Company. Cash
flows were also reduced by decreases in accruals for legal fees ($289,000) and
accounts payable ($104,000). Total adjustments to the Company's net income of
$853,000 were ($211,000), which netted $641,000 in operational cash flows.
In 1996, cash used in investing activities totaled $154,000, while cash
provided by financing activities totaled $150,000; thus, investing and
financing activities basically netted out on a cash flow basis. Cash flows
from investing activities included capital and intangible asset expenditures
of $458,000, primarily for expansion in South Carolina. The Company also
recorded over $303,000 of positive cash flows from investing activities for
the collection of note payments from the sale of the Company's former Florida
bingo centers. Cash flows from financing activities were largely led by
capital lease and note financing proceeds.
During fiscal 1997 the Company plans to invest additional capital for
expansion in Texas, Alabama, South Carolina and other southern states. The
Company plans a particularly sharp focus on expansion in South Carolina, where
the Company is experiencing strong customer demand in its bingo and gaming
centers. The Company also plans additional investments in its existing
facilities in 1997, although these investments should be relatively minor
since most of these facilities were upgraded in 1996. The Company expects that
its current cash balances in excess of $1 million, current operating cash
flows in excess of $100,000 per month, and two untapped credit lines totaling
$1 million will collectively provide sufficient operating and expansion
capital for 1997. It is possible that the Company may need to seek incremental
financing for certain sizable acquisitions.
The Company had $4.35 million in total assets at the end of fiscal 1996.
This total included $1.07 million of cash and cash equivalents, $1.71 million
in net fixed assets, $1.11 million in net receivables, and $456,000 in various
other assets (See Notes 1-7). The net receivables include approximately
$991,000 due from the purchasers of the Company's former Florida bingo
centers. Bingo paper and other supplies are expensed at the time of purchase,
and inventory of such is not considered material. The Company had $298,000 of
current liabilities at yearend and $140,000 in long-term liabilities (See
Notes 8-11). The Company has no long-term debt. The Company wrote off $865,000
in non-current liabilities at yearend. These liabilities were originally due
to the seller of three Florida bingo centers to the Company. However, these
centers generated substantial losses to the Company which contractually
eliminated the balances due to the original seller. Total shareholder equity
was $3.91 million at the end of fiscal 1996, which is up over $1 million from
the end of 1995 (See Note 13).
RESULTS OF OPERATIONS
The Company posted record sales, net income and earnings per share in
1996 after losses in 1995. The Company's substantial turnaround in 1996 was
primarily led by stellar results in the Company's South Carolina operations,
offset partially by poor performance in the Company's South Texas operations.
The Company sees continued strong performance in South Carolina and is
actively seeking to expand its operations there. The Company is seeing some
improvement in South Texas, but nonetheless recorded significant write-downs
of over $417,000 on its investments there in 1996 (see Note 5). The Company's
losses in 1995 were driven by nearly $2 million of non-cash charges for the
issuance of Company stock warrants at a discount ($750,000), Florida losses
and legal fee accruals ($700,000), employees severance costs and consulting
fees ($325,000) and South Texas and South Carolina start-up expense write-offs
($200,000). The Company has since favorably settled all Florida and Texas
legal issues. Annual cash flows from the Company's operations have always been
positive, even in 1995. The Company expects continued growth in profitability
from its current operations in 1997 and expects to consummate several
acquisitions and/or developments that should significantly increase the
Company's profit potential, although there can be no assurance of that.
COMPARISON OF FISCAL 1996 TO FISCAL 1995. Total revenues increased by 9%
to $3.65 million in fiscal 1996 from $3.35 million in fiscal 1995.
Approximately $750,000 of 1995 revenues were generated by the Company's
discontinued Florida operations, versus just $74,000 in 1996. Thus, the
Company's revenues from existing operations increased over 37% in 1996 when
Florida revenues are excluded. Total 1996 revenue was comprised of $2.06
million of charity lease rental payments, with the balance comprised of
revenues from gaming, paper, supplies, vending, concessions and other
revenues. The Company expects revenues to increase in 1997 from existing
operations as well as expansion activities.
Total costs and expenses were $2.75 million in fiscal 1996 as compared to
$5.72 million in fiscal 1995, representing a substantial 52% decrease. Fiscal
1995 expenses included nearly $2.0 million of one-time, non-cash charges for
the issuance of Company stock purchase warrants at a discount to market
($750,000), Florida losses and legal fee accruals ($700,000), employees
severance costs and consulting fees ($325,000) and South Texas and South
Carolina start-up expense write-offs ($200,000). Fiscal 1996 expenses
benefited from a favorable write-off of $865,000 of liabilities no longer
deemed an obligation, offset by asset write-offs for the Company's South Texas
operations ($417,000), additional depreciation ($85,000), a warrant receivable
write-off ($101,000), and various other reserves and allowances, primarily
associated with the Company's exit from the Florida bingo market ($250,000).
The net effect of these non-recurring favorable and unfavorable transactions
on income in 1996 was largely negligible. The Company expects direct operating
costs to increase in 1997 commensurate with expansion, but expects annual
corporate overhead of approximately $1 million to remain relatively flat.
Management believes this cost structure gives the Company strong earnings
leverage going forward.
Rent and utilities comprised the single largest expense item for the
Company in 1996 and totaled $879,000 versus $903,000 in 1995. Direct
operational costs totaled $784,000 versus $1.25 million in 1995. This cost
decrease was primarily due to the Company's exit from Florida. Operating
expenses totaled $783,000 in 1996 versus $1.91 million in 1995. This big
expense decrease was due to substantially reduced consulting costs and legal
fees from discontinued investment banking services and settlement of Texas and
Florida legal issues. Salaries and other compensation decreased from $945,000
in 1995 to $592,000 in 1996 due to lower employee bonuses. The Company
recorded a favorable liability reversal of $865,000 in 1996, offset by
unfavorable charges for estimated asset impairments as well as additional
allowance provisions, which collectively negated the positive income effect of
this liability reversal.
Depreciation and amortization totaled $430,000 in fiscal 1996 versus
$402,000 in fiscal 1995. This increase was primarily due to additional
investments in the Company's South Texas and South Carolina properties,
partially offset by the sale of the Company's Florida bingo center assets.
The Company recorded $193,000 of net interest income in fiscal 1996
versus $117,000 in fiscal 1995. This increase was primarily attributable to
interest earned on the Company's Florida notes receivable from the sale of its
former Florida bingo centers (See Note 6).
The Company's income tax expense for 1996 was $41,000 versus $1,000 in
1995. Income tax was negligible due to losses in 1995 and application of tax
loss carryforwards against 1996 income. The Company's accumulated tax loss
carryforwards exceed $2.0 million to offset expected future income.
ITEM 7 - FINANCIAL AND SUPPLEMENTARY DATA
- -----------------------------------------------
The financial statements listed in the accompanying index to financial
statements are filed under Part IV, Item 13, as Exhibits to this Report, and
are incorporated herein by reference.
ITEM 8 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
- ----------------------------------------------------------------------
None.
PART III
Items 9-12 are Incorporated by Reference from the Company's Proxy Statement
dated April 18, 1997.
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
- ----------------------------------------------------------------------------
Financial Statements and Schedules:
- -------------------------------------
See Table of Contents at the beginning of attached financial statements
on page F-1.
<TABLE>
<CAPTION>
Exhibits required by Item 601 of Regulation S-B.
- ------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
3.1 * Certificate of Incorporation in the state of Delaware filed on 9/8/94, as amended on 10/17/94.
3.2 * By-laws approved and adopted on 9/9/94.
4.1 * Instruments Defining Rights of Security Holders, Common Stock and Redeemable
Common Stock Purchase Warrants. (Incorporated by reference to the Registration
Statement on Form SB-2, declared effective on 12/14/95, SEC Reg. No. 33-85300).
10.1 * Texas Charities, Inc. (TCI) Stock Purchase Agreements, 10/7/94 and 10/14/94.
10.2 * SA Charities, Inc. (SAC) Stock Purchase Agreements, 10/7/94 and 10/14/94.
10.3 * Bing-O-Rama, Inc. (BRI) Stock Purchase Agreement, 10/7/94.
10.4 * Charity Bingo, Inc. (CBI) Stock Purchase Agreement, 10/7/94.
10.5 * Charity Bingo Inc. - Birmingham (CBI - Birmingham) Stock Purchase
Agreement, 10/3/94.
10.6 * South Carolina Promissory Note Purchase Agreement, 2/21/95.
10.7 * Employment agreement with Greg Wilson, 12/14/94.
10.8 * Employment agreement with Robert Hersch, 12/14/94.
10.9 * Employment agreement with John Orton, 3/10/95.
10.10 * 1994 Employee Stock Option Plan, 12/31/94.
10.11 * 1995 Employee Stock Option Plan, 3/31/95.
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------
10.12 * 1995 Employee Stock Purchase Plan, 3/31/95.
10.13 * Employment Agreement with John Richard Henry, 9/22/95.
10.14 * Employment Agreement with Courtland Logue, Jr., 2/8/96.
10.15 * 1996 Employee Stock Option Plan, 3/29/96.
10.16 * Revised Employment Agreements with Greg Wilson, Courtland Logue, Jr.
John Richard Henry, and John Orton, 9/10/96, 10/25/96, and 10/29/96.
10.17 * 1997 Employee Stock Option Plan, 3/20/97.
21.1 * Subsidiaries of the Registrant, 3/20/97.
<FN>
* Previously filed with the Commission.
</TABLE>
Reports on Form 8-K during the last quarter
- --------------------------------------------------
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Dated: October 31, 1997
AMERICAN BINGO & GAMING CORP.
By: /s/ Greg Wilson
-----------------
Greg Wilson, Chief Executive Officer, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------ ---------------------------------- ----------------
<S> <C> <C>
/s/ Greg Wilson
- ------------------------
Greg Wilson Chief Executive Officer, President October 31, 1997
And Director (Principal Executive
Officer)
/s/ Courtland Logue, Jr.
- ------------------------
Courtland Logue, Jr. Chairman October 31, 1997
/s/ John Orton
- ------------------------
John Orton Chief Financial Officer October 31, 1997
(Principal Financial Officer and
Pricipal Accounting Officer)
</TABLE>
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
DECEMBER 31, 1996
I N D E X
---------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1996 F-3
Consolidated Statements of Operations
For the Years Ended December 31, 1996 and 1995 . F-4
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996 and 1995 . F-5
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995 . F-6 - F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . F-8 - F-24
</TABLE>
<PAGE>
[WEINICK SANDERS LEVENTHAL & CO., LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors
American Bingo & Gaming Corp.
We have audited the accompanying consolidated balance sheet of American
Bingo & Gaming Corp. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsi-bility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
stan-dards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
mate-rial misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant esti-mates made by management, as well as evaluating the overall
financial state-ment presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
pre-sent fairly, in all material respects, the financial position of American
Bingo & Gaming Corp. and Subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the years ended December 31, 1996
and 1995, in conformity with generally accepted accounting principles.
WEINICK SANDERS LEVENTHAL & CO., LLP
New York, N. Y.
February 21, 1997, except for Notes 15 and
14, as to which the dates are March 1, 1997
and October 30, 1997, respectively
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996
<S> <C> <C>
A S S E T S
-----------
Current assets:
Cash and cash equivalents (Note 1). . . . . . . . . . . $ 1,068,969
Accounts receivable (Note 3). . . . . . . . . . . . . . 91,231
Sundry receivables (Note 4) . . . . . . . . . . . . . . 26,049
Notes receivable - current portion - net of
allowance for doubtful collectibility
(Notes 1 and 6) . . . . . . . . . . . . . . . . . . . 347,923
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 58,331
--------------
Total current assets. . . . . . . . . . . . . . . . $1,592,503
Property and equipment - at cost, net of accumulated
depreciation and amortization (Notes 1, 5 and 10) . . . 1,714,169
Other assets:
Notes receivable, net of allowances for
doubtful collectibility (Notes 1 and 6) . . . . . . . 642,671
Intangible assets, net of accumulated
amortization (Notes 1 and 7). . . . . . . . . . . . . 360,280
Security deposits . . . . . . . . . . . . . . . . . . . 37,551
--------------
Total other assets. . . . . . . . . . . . . . . . . 1,040,502
----------
$4,347,174
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 12,944
Notes payable - current portion (Note 10) . . . . . . . 39,936
Accrued expenses and other current liabilities (Note 9) 244,760
--------------
Total current liabilities . . . . . . . . . . . . . $ 297,640
Long-term liabilities:
Notes payable - net of current portion (Note 10). . . . 109,512
Deposit payable (Note 2). . . . . . . . . . . . . . . . 30,000
--------------
Total long-term liabilities . . . . . . . . . . . . 139,512
Commitments and contingency (Note 11) . . . . . . . . . . -
Stockholders' equity (Notes 2 and 13):
Preferred stock - $.01 par value
Authorized and unissued - 1,000,000 shares
Common stock - $.001 par value
Authorized - 20,000,000 shares
Issued and outstanding - 4,162,494 shares . . . . . . 4,162
Additional paid-in capital. . . . . . . . . . . . . . . 10,037,147
Additional paid-in capital - warrants . . . . . . . . . 1,026,750
Accumulated deficit . . . . . . . . . . . . . . . . . . ( 7,158,037)
--------------
Total stockholders' equity. . . . . . . . . . . . . 3,910,022
----------
$4,347,174
==========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues (Note 1):
Rental . . . . . . . . . . . . . . . . . . . . $ 2,062,737 $ 2,568,869
Gaming, concession and other . . . . . . . . . 1,585,525 782,808
------------- -------------
Total revenues . . . . . . . . . . . . . . . . . 3,648,262 3,351,677
------------- -------------
Costs and expenses:
Direct costs . . . . . . . . . . . . . . . . . 784,357 1,248,804
Rent and utilities . . . . . . . . . . . . . . 879,442 903,457
Salaries and other compensation. . . . . . . . 591,844 945,233
Depreciation and amortization. . . . . . . . . 430,519 401,721
Operating expenses . . . . . . . . . . . . . . 783,153 1,907,728
Other costs and (income):
Other income . . . . . . . . . . . . . . . . ( 20,241) -
Interest income. . . . . . . . . . . . . . . ( 193,084) ( 116,979)
Interest expense . . . . . . . . . . . . . . 16,576 6,308
Loss on disposal of property and equipment . - 423,625
Reduction of allowance for doubtful
collectibility (Note 6). . . . . . . . . . ( 69,343) -
Impairment of long-lived assets (Note 1) . . 416,576 -
Liabilities no longer deemed an
obligation (Note 8). . . . . . . . . . . . ( 865,180) -
------------- -------------
Total costs and expenses . . . . . . . . . . . . 2,754,619 5,719,897
------------- -------------
Income (loss) before provision for income taxes. 893,643 ( 2,368,220)
Provision for income taxes (Notes 1 and 12). . . 40,977 1,061
------------- -------------
Net income (loss). . . . . . . . . . . . . . . . $ 852,666 ($2,369,281)
============= =============
Earnings per share (Note 1):
Net income (loss) per share. . . . . . . . . . $ .21 ($.58)
============= =============
Weighted average number of shares outstanding. . 4,140,026 4,090,000
============= =============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Additional Paid-In Subscription Retained Total
Common Stock Paid-in Capital Notes Earnings Stockholders'
-----------------
Shares Value Capital Warrants Receivables (Deficit) Equity
--------- ------ ----------- ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 . . . . . . . 4,083,333 $4,083 $ 9,914,936 $ 172,500 $ - ($5,641,422) $ 4,450,097
Issuance of common stock for consulting 10,000 10 49,990 - - - 50,000
Issuance of common stock warrants
for consulting and other services . . - - - 854,250 ( 100,500) - 753,750
Net loss for year ended December 31,
1995. . . . - - - - - ( 2,369,281) ( 2,369,281)
--------- ------ ----------- ----------- -------------- ------------ -------------
Balance at December 31, 1995 . . . . . . 4,093,333 4,093 9,964,926 1,026,750 ( 100,500) ( 8,010,703) 2,884,566
Issuance of common stock
pursuant to severance agreement. . . . 15,000 15 15,485 - - - 15,500
Sale of common stock pursuant
to Employee Stock Purchase Plan. . . . 6,161 6 10,534 - - - 10,540
Issuance of common stock for consulting 8,000 8 7,992 - - - 8,000
Issuance of common stock to employees. . 40,000 40 38,210 - - - 38,250
Cancellation of subscription notes
receivable. . - - - - 100,500 - 100,500
Net income for the year ended
December 31, 1996. - - - - - 852,666 852,666
--------- ------ ----------- ----------- -------------- ------------ -------------
Balance at December 31, 1996 . . . . . . 4,162,494 $4,162 $10,037,147 $ 1,026,750 $ - ($7,158,037) $ 3,910,022
========= ====== =========== =========== ============== ============ =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 852,666 ($2,369,281)
------------- -------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Cancellation of subscription notes receivable . . . . 100,500 -
Loss on impairment of long-lived assets . . . . . . . 416,576 -
Depreciation and amortization . . . . . . . . . . . . 430,519 401,721
Provision for uncollectible notes receivable. . . . . ( 69,343) 370,481
Loss on disposal of property and equipment. . . . . . - 423,625
Transfer of liabilities in connection
with sale of assets . . . . . . . . . . . . . . . . - 451,152
Compensatory element of common stock
and warrant issuances . . . . . . . . . . . . . . . 61,750 803,750
Liabilities no longer deemed an obligation. . . . . . ( 865,180) -
Increase (decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable . . . . . . . . . . . . . . . . 60,316 ( 57,230)
Prepaid expenses and other current assets . . . . . ( 8,331) 7,554
Sundry receivables. . . . . . . . . . . . . . . . . 19,519 ( 45,568)
Security deposits . . . . . . . . . . . . . . . . . 6,708 ( 8,708)
Accounts payable. . . . . . . . . . . . . . . . . . ( 104,360) ( 126,133)
Accrued and other current liabilities . . . . . . . ( 289,461) 533,809
Deposit payable . . . . . . . . . . . . . . . . . . 30,000 -
------------- -------------
Total adjustments . . . . . . . . . . . . . . . . . . . ( 210,787) 2,754,453
------------- -------------
Net cash provided by operating activities . . . . . . . . 641,879 385,172
------------- -------------
Cash flows from investing activities:
Capital and intangible expenditures . . . . . . . . . . ( 457,809) ( 1,942,296)
Issuances of notes receivable . . . . . . . . . . . . . - ( 1,595,456)
Repayments of notes receivable. . . . . . . . . . . . . 303,724 -
------------- -------------
Net cash used in investing activities . . . . . . . . . . ( 154,085) ( 3,537,752)
------------- -------------
Cash flows from financing activities:
Proceeds from capital lease obligations . . . . . . . . 87,101 -
Payments of capital lease obligations . . . . . . . . . ( 11,938) -
Proceeds from notes payable . . . . . . . . . . . . . . 78,069 -
Payments of notes payable . . . . . . . . . . . . . . . ( 13,684) ( 73,868)
Proceeds from issuance of capital stock . . . . . . . . 10,540 -
------------- -------------
Net cash provided by (used in) financing activities . . . 150,088 ( 73,868)
------------- -------------
Net increase (decrease) in cash . . . . . . . . . . . . . 637,882 ( 3,226,448)
Cash at beginning of year . . . . . . . . . . . . . . . . 431,087 3,657,535
------------- -------------
Cash at end of year . . . . . . . . . . . . . . . . . . . $ 1,068,969 $ 431,087
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended
December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash payments for the year:
Interest expense . . . . . . . . . . . . . . . . . . $ 16,576 $ 6,308
======== ========
Income taxes . . . . . . . . . . . . . . . . . . . . $ 289 $ 1,061
======== ========
Non-Cash Transactions for the year:
Issuance of common stock for employment and services . $ 61,750 $ 50,000
======== ========
Issuance of redeemable common stock purchase warrants
for consulting, legal and other services . . . . . . $ - $753,750
======== ========
Acquisition of subsidiary in exchange for common stock $ - $450,000
======== ========
Loss on disposal of assets from property closures. . . $ - $ 87,829
======== ========
Sale of assets in exchange for notes receivable
totalling $562,581 resulting in a loss . . . . . . . $ - $423,625
======== ========
Acquisition of property and equipment
in exchange for notes payable. . . . . . . . . . . . $ - $700,000
======== ========
Cancellation of subscription notes receivable. . . . . $100,500 $ -
======== ========
Impairment of long-lived assets. . . . . . . . . . . . $416,576 $ -
======== ========
Liabilities no longer deemed an obligation . . . . . . $865,180 $ -
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES.
(a) Basis of Presentation:
The accompanying consolidated financial statements include the
accounts of American Bingo & Gaming Corp., a Delaware corpora-tion and
twenty-two wholly-owned subsidiaries (hereafter collective-ly referred to as
"The Company"). One of these subsidiaries, Texas Charities, Inc. ("TCI") also
has one wholly-owned subsidiary. Dur-ing 1996 and 1995, ten and three of the
subsidiaries, respectively, were inactive. All intercompany accounts and
transactions have been eliminated.
(b) Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
(c) Property and Equipment:
The cost of equipment, furniture and fixtures is depreciated over
the estimated useful lives of the assets of between five or seven years, using
the straight-line method. Leasehold improvements are amortized over the
lesser of the term of the lease or the esti-mated useful lives. The cost of
buildings are being amortized over thirty-nine years which approximates their
estimated useful lives. Building improvements are being amortized over their
estimated use-ful lives of between seven and fifteen years. Upon sale,
retirement or abandonment of assets, the related cost and accumulated
deprecia-tion are eliminated from the accounts and gains or losses are
re-flected in income. Repairs and maintenance expenditures which do not
extend asset lives are expensed as incurred.
<PAGE>
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(c) Property and Equipment: (Continued)
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Asset and for Long-Lived Assets to be Disposed Of". SFAS No. 121
requires that the Company recognize an impairment loss in the event that facts
and circumstances indicate that the carrying amount of an asset may not be
recoverable, and an estimate of future undiscounted cash flows is less than
the carrying amount of the asset. Management determined that certain assets,
namely leasehold improvements, with a carrying value of $560,900 were impaired
and wrote them down by $416,576 to their fair value. Fair value was based on
estimated discounted future cash flows to be generated by two of the Company's
bingo centers located in Texas (see Note 5).
(d) Income Taxes:
At December 31, 1995, the Company and its wholly-owned subsidiaries,
which file a consolidated federal income tax return, have a net operating loss
carryforward of approximately $3,000,000 available to reduce future taxable
income which expires in the year 2010. The Company expects to utilize this
carryforward loss to eliminate current tax obligations resulting from net
income for the year ended December 31, 1996.
The Company adopted Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes" at its inception. Under SFAS
109, the deferred tax provision is determined under the liability method.
Under this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement carrying amount and the tax basis
of assets and liabilities using presently enacted tax rates.
(e) Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. The Company
places its cash investments with high credit quality financial institutions.
At times, such investments may be in excess of the FDIC insurance limit.
<PAGE>
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(f) Revenue Recognition:
The Company generates revenue principally from the following
sources:
(a) Rental Revenues:
Rents are received from not-for-profit organizations through various
sub-lease agreements of the Company's bingo centers. Certain subsidiaries are
licensed by state regulatory author-ities, which dictate the number and
frequency of events an organization can conduct, as well as the maximum rental
fee that a licensed operator, such as these subsidiaries, may charge for
usage.
(b) Gaming, Concession and Other Revenue:
The Company's other sources of revenue are; (i) the leasing of video
gaming machines; (ii) concessions located in the centers for the sale and
supply of refreshments; (iii) vending machines located in the centers and (iv)
the sale of bingo supplies, such as cards and daubers to the not-for-profit
organizations. Inventory in the vending machines and concessions is not a
material asset of the Company and is therefore deemed a periodic expense.
(g) Provision for Doubtful Collectibility on Notes Receivable:
In December 1995, the Company sold certain capital assets which it
had employed in the operation of three bingo centers for
an aggregate selling price of $1,360,034. In February 1996, the Company
sold the capital assets employed in the operation of a fourth center for
$696,574. All of the sales were in exchange for installment notes receivable,
ranging in terms of from 24 to 70 months (see Notes 2 and 6).
Management elected to set up a provision for doubtful collectibility
which amounted to $301,138 and $370,481 at December 31,1996 and 1995,
respectively. Management periodically reviews the provision to determine its
adequacy.
(h) Intangible Assets:
Intangible assets consist of non-compete covenants, certain gaming
and commercial lessor licenses and goodwill. These assets are periodically
reviewed by management to evaluate the future economic benefits or potential
impairments which may affect their recorded values to the Company. This is
done by comparing the undiscounted projected future cash flows of the asset
with the carrying value of the asset to ascertain that the expected cash flows
over the remaining useful life of the asset equal or exceed its book value.
<PAGE>
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES. (Continued)
(i) Per Share Data:
Net income (loss) per share for 1996 and 1995 has been com-puted by
using the weighted average number of common shares and common stock
equivalents out-standing during the year. All common stock equivalents which
are deemed to be anti-dilutive have been excluded from the calculation.
(j) New Accounting Standards:
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), effective for years beginning after December 15,
1995. FAS 123 establishes new methods for accounting for the fair value of
stock-based compensation. FAS 123 also requires pro forma disclosure of the
effects on income and earnings per share from the implementation of FAS 123
where an entity elects to continue accounting for stock-based compensation
under the rules of APB 25. As such, the Company has elected to continue
accounting for stock-based compensation under APB 25, and will provide all
required FAS 123 disclosures (see Note 14).
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS.
The Company was incorporated on September 8, 1994. By agree-ments
dated October 7, 10 and 14, 1994, the Company acquired all the outstanding
shares of Texas Charities, Inc., SA Charities, Inc., Charity Bingo, Inc.
("CBI"), and Bing-O-Rama, Inc., in exchange for 870,000 shares of its common
stock. These acquired companies and the Company were under common control at
the dates of acquisition by virtue of their ownership and management. The
acquisitions of these wholly-owned subsidiaries were accounted for (i) at
historical cost as a pooling of interests for the acquired stock of the
Company's majority stockholder, and (ii) as a purchase recorded at market
value for the acquired stock of the minority interests and the resultant
goodwill for the difference between the market value and their equity on the
dates acquired.
<PAGE>
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
In October 1994, Mr. Gregory Wilson, the Company's President, on
behalf of the Company, acquired an 80% interest in Charity Bingo-Birmingham,
Inc., which operated a bingo center in Pell City, Alabama ("Pell City
Center"). The Pell City Center commenced operations in October 1994. Mr.
Wilson transferred his 80% interest in the Pell City Center to the Company for
nominal consideration. The Company closed the Pell City Center in July of
1995. The assets, net of liabilities, were transferred to CBI and the company
was dissolved.
In April 1995, the Company acquired all of the outstanding shares of
stock of Americana II, Inc. (formerly J B J Enterprises, Inc.) for $50,000 in
cash. Americana II was incorporated in the State of Texas in October 1994.
At the date of acquisition, the corporation was inactive and its sole asset
consisted of a commercial bingo lessor's license issued by the State of Texas.
In May 1995, the Company acquired a promissory note secured by a
collateral mortgage on real property, located in West Columbia, South Carolina
for approximately $569,000 in cash. The Company foreclosed on the note
shortly thereafter and took title to the aforementioned property.
In June 1995, the Company transferred the real property and the
value of the building improvements to Columbia One Corp. a wholly-owned South
Carolina subsidiary, whereupon it commenced operation of two bingo
entertainment centers.
In April 1995, the Company acquired all of the outstanding stock of
MHJ Corp. ("MHJ") for certain concession rights in the Company's bingo
entertainment center. MHJ was incorporated in the State of South Carolina in
May 1993. Prior to its acquisition by the Company, MHJ was a real estate
brokerage company and was inactive. MHJ holds certain gaming equipment and
related licenses which are employed in the Company's operations in West
Columbia, South Carolina.
In July 1995, the Company acquired all of the outstanding stock of
Murdock Hall for Hire, Inc. ("MHHI") in exchange for 110,008 shares of the
Company's common stock which had a market value of $450,000 on the date of
acquisition. The purchase price was adjust-able up or down based on the
results of operations from the centers during the first twelve months of
operation. Based upon these con-tractual terms the Company believes it has no
liability under this obligation. The shares have never been issued (see Note
8).
In December 1995, the Company sold all of the tangible and
intangible assets employed by MHHI. The assets had been used in the operation
of the Company's bingo center in Port Charlotte, Florida. In exchange, the
Company received a promissory note in the amount of $400,000, payable in 36
equal monthly installments including interest at 12% per annum, commencing
January 1, 1996. Payment of the note is secured by a collateral interest in
the aforementioned property.
<PAGE>
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
In July 1995, the Company acquired certain assets for use in the
operation of two bingo entertainment centers from Pondella Hall For Hire, Inc.
("PHHI"), for the conditional purchase price of $900,000. The Company paid
the seller cash in the amount of $450,000 and issued a promissory note in the
amount of $450,000, payable in 24 equal monthly installments including
interest at 8% per annum. The purchase price was adjustable up or down based
on the results of operations from the centers during the first twelve months
of operation. The Company transferred the aforementioned assets to two of its
wholly-owned subsidiaries, 6323 14th Street Hall for Hire, Inc. ("6323 HFH")
and 959 Hall for Hire, Inc. ("959 HFH"), both of which were incorporated in
the State of Florida on July 13, 1995 (see Note 8).
In December 1995, the Company sold all of the tangible and
intangible assets employed by 6323 HFH. The assets had been used in the
operation of the Company's bingo center in Bradenton, Florida. In exchange,
the Company received a promissory note in the amount of $797,453, payable in
48 monthly installments including interest at 12% per annum, commencing
January 1, 1996. Payment of the note is secured by a collateral interest in
the aforementioned property.
In November 1996, the Company and the purchaser of the assets of
6323 HFH mutually agreed to amend the promissory note extending the term to 70
variable monthly installments of $21,000 during peak season and $11,000 during
off-peak season maturing October 1, 2001 (see Notes 1 and 6).
In December 1995, the Company sold all of the tangible and
intangible assets employed by 959 HFH. The assets had been used in the
operation of the Company's bingo center located in North Fort Meyers, Florida.
In exchange, the Company received a promissory note in the amount of $162,581,
payable in 36 monthly installments including interest at 12% per annum,
commencing January 15, 1996. Payment of the note is secured by a collateral
interest in the aforementioned property.
In July 1995, the Company acquired certain assets to be used in the
operation of a bingo center from Lou Rob, Inc. and S. Mark, Inc. (corporations
under common control) for the conditional pur-chase price of $675,000.
Payment of the total amount consisted of cash of $175,000, a promissory note
in the amount of $250,000, payable in 24 equal monthly installments including
interest at 8% per annum and a liability to issue shares of the Company's
common stock having a market value of $250,000 on the date of closing. The
Company transferred these assets to its wholly-owned subsidiary, Delray Hall
for Hire, Inc. ("DELRAY"), which was incorporated in the State of Florida on
July 13, 1995. In February 1996, the Company sold the assets which it had so
acquired to an affiliate of Lou-Rob and S. Mark. The sales price was (i)
$10,000 in cash at closing, (ii) 9% interest bearing installment note in the
amount of $235,422, and (iii) the satisfaction of $201,152 of the note payable
and $250,000 obligation to issue stock to Lou-Rob, Inc. and S. Mark, Inc.
<PAGE>
NOTE 2 - MERGERS, ACQUISITIONS AND MATERIAL DISPOSALS. (Continued)
In March 1996, the Company leased its gaming operation, located in
West Columbia, South Carolina, to an unrelated third party. The lease
includes the use of all the facilities and equipment employed by the Company
in the operation of its gaming centers. Rent charged under the lease is equal
to a specified percentage of the net revenues earned in the operation of these
facilities, exclusive of all operating costs. The term of the lease is for a
period of three years from the commencement date. The lease also required the
tenant to secure his performance by paying a security deposit amounting to
$15,000.
In March 1996, the Company entered into a lease with an unrelated
third party for the use of the Company's bingo centers located in West
Columbia, South Carolina. The lease is for a period of three years and calls
for the Company to receive a fixed monthly rent. In addition, the lease
requires the tenant to reimburse the Company for a percentage of its
insurance, utilities and tax expenses.
During 1996, the Company incorporated two wholly-owned subsidiaries
in the State of Texas. Americana III, Inc. and Americana IV, Inc. were
established to procure bingo licenses. The companies are presently inactive.
During 1996, the Company incorporated five wholly-owned subsidiaries
in the State of Mississippi. Forest Bingo, Inc., Starkville Bingo, Inc.,
Louisville Bingo, Inc., Delta Bingo, Inc. and Grenada Bingo, Inc. were
established to acquire the assets of already existing bingo centers in
Mississippi. The companies are presently inactive.
During 1996, the Company opened four bingo centers in South Texas
and one in South Carolina. Their results of operations are included in the
results of operations of three of the Company's previously existing
wholly-owned subsidiaries. The cost of these five bingo centers incurred in
1995 and 1996 aggregated approximately, $1,100,000.
NOTE 3 - ACCOUNTS RECEIVABLE.
Accounts receivable consist principally of amounts due from
not-for-profit organizations which conduct bingo events within the Company's
various Centers and are generally payable within one month of the event. It
also includes rent due from operators of conces-sions located within the
Centers. All of the amounts due at December 31, 1996 amounting to $91,231
were subsequently collected and, therefore, no allowance for doubtful accounts
is required.
NOTE 4 - SUNDRY RECEIVABLES.
Sundry receivables consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Advances to suppliers,
employees and officers $ 15,178
Interest receivable. . . 9,472
Other. . . . . . . . . . 1,399
--------
$ 26,049
========
</TABLE>
<PAGE>
NOTE 5 - PROPERTY AND EQUIPMENT.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Land . . . . . . . . . . . . . . . . $ 189,671
Buildings and building improvements. 784,657
Leasehold improvements, net of
impairment of $416,576 (Note 1). . 690,644
Equipment, furniture and fixtures. . 671,170
Autos. . . . . . . . . . . . . . . . 86,879
-------------
2,423,021
Less: Accumulated depreciation
and amortization. . . . . . ( 708,852)
-------------
$ 1,714,169
=============
</TABLE>
Depreciation and amortization expense charged to operations for the
years ended December 31, 1996 and 1995 amounted to $336,341 and $177,627,
respectively.
NOTE 6 - NOTES RECEIVABLE - NET.
Notes receivable - net consist of the following:
A promissory note due in 35 equal
monthly installments of $13,300,
including interest at 12% per
annum with a final installment of
$12,685, maturing December 1, 1998 $ 282,053
A promissory note due in 36 equal
monthly installments of $5,400,
including interest at 12% per annum,
maturing December 15, 1998 123,094
A promissory note due in 70 variable
monthly installments of $21,000 and
$11,000, including interest at 12%
per annum, maturing October 1, 2001
(see Notes 1 and 2) 698,014
A promissory note due in 26 equal
monthly installments of $10,000,
including interest at 9% per annum,
maturing April 15, 1998 188,571
------------
1,291,732
Less: Allowance for doubtful
collectibility of notes based
on management's estimate of
purchasers' ability to pay all
notes in full to their maturity ( 301,138)
------------
Notes receivable - net of allowance
for doubtful collectibility $ 990,594
============
<PAGE>
NOTE 6 - NOTES RECEIVABLE - NET. (Continued)
Payment of these notes is dependent solely upon the future
profitability of the Centers. Should the purchasers default in the
performance of the notes, the only recourse available to the Company would be
to foreclose on the same assets which it has sold in these transactions. None
of the purchasers has made any guarantee of pay-ment, express or otherwise.
While management believes the purchas-ers will continue to make a good faith
effort to fulfill the terms of the agreements, it has elected to take a
provision for doubtful collectibility of $301,138 and $370,481 at December 31,
1996 and 1995, respectively, which it estimates would be the resultant loss
should the Company have to foreclose and subsequently resell the assets.
Management re-evaluates the sufficiency of this provision periodically and
adjusts the amount of the provision as necessary. At December 31, 1996,
payments of principal and interest totalling $53,800 were delinquent.
Annual principal maturities under these notes are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
------------- --------------
<S> <C>
1997 $ 453,689
1998 388,529
1999 146,566
2000 165,155
2001 137,793
-------------
1,291,732
Less: Allowance for doubtful
collectibility 301,138
-------------
Notes receivable - net 990,594
Less: Current maturities 347,923
-------------
642,671
=============
</TABLE>
NOTE 7 - INTANGIBLE ASSETS.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Goodwill $326,787
Covenants not to compete 60,000
Bingo and gaming licenses 138,397
--------
525,184
Less: Accumulated amortization 164,904
--------
$360,280
========
</TABLE>
<PAGE>
NOTE 7 - INTANGIBLE ASSETS. (Continued)
Goodwill, which represents the excess of the cost of assets acquired
over the fair value of those assets on the date of their acquisition, is being
amortized over a period of fifteen years. The covenants not to compete are
being amortized over the periods of the stated benefits, ranging from one to
five years. The bingo licenses which the Company acquired in 1995 at a cost of
$65,275, are perpe-tual licenses which can be renewed on an annual basis at a
nominal cost. Management has elected to amortize the cost to acquire these
licenses over a period of forty years. The costs of gaming licenses amounting
to $73,122 are being amortized over their useful lives of one to two years.
Amortization expense charged to operations for the years ended December 31,
1996 and 1995 amounted to $94,178 and $224,094, respectively.
Intangible assets which are determined to have no future benefit to
the Company are written off as of the date of deter-mination. For the year
ended December 31, 1996, $196,668 of fully amortized covenants not to compete
were written off.
NOTE 8 - LIABILITIES NO LONGER DEEMED AN OBLIGATION.
In 1995, the Company incurred two liabilities in connection with the
acquisitions of certain assets employed in bingo centers in Florida. The
first liability was for the issuance of shares of the Company's common stock
with a market value on the date of the agree-ment of $450,000. The second
liability was evidenced by a promis-sory note in the principal sum of
$450,000, of which $415,180 was unpaid at December 31, 1995.
In 1996, based upon a review of the contractual terms of the
agreements which gave rise to the liabilities and after consulting legal
counsel, the Company determined that it is no longer obligated under these
liabilities and has reversed them to income as of December 31, 1996 (see Note
2).
NOTE 9 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES.
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
<S> <C>
Accrued professional fees $168,911
Other 75,849
--------
$244,760
========
</TABLE>
<PAGE>
NOTE 10 - NOTES PAYABLE.
Notes payable, including capital lease obligations, consist of the
following:
A $27,657 note issued in connection with the purchase
of an automobile, payable in 48 equal monthly install-
ments of $671, including interest at 7.65% per annum $27,163
A $22,272 note issued in connection with the purchase
of an automobile, payable in 60 equal monthly install-
ments of $450, including interest at 8.75% per annum 21,975
A $28,140 note issued in connection with the purchase
of an automobile, payable in 60 equal monthly install-
ments of $600, including interest at 10.00% per annum 25,147
Capital lease obligations for the acquisition of equip-
ment with a cost of $87,101 are payable in monthly
installments of $244 to $1,363, including interest
at rates varying from 14.3% to 27% per annum 75,163
---------
149,448
Less: Current maturities 39,936
----------
$ 109,512
==========
The annual principal maturities under these notes are as follows:
<TABLE>
<CAPTION>
Years Ending Capital
December 31, Notes Leases
------------- ------------- --------
<S> <C> <C>
1997 $ 14,808 $ 42,555
1998 16,155 42,555
1999 17,627 26,550
2000 18,558 -
2001 7,137 -
------------- --------
74,285 111,660
Less: Amount representing
interest and taxes - 36,497
------------- --------
Present value of minimum
lease payments 74,285 75,163
Less: Current maturities 14,808 25,128
------------- --------
$ 59,477 $ 50,035
============= ========
</TABLE>
<PAGE>
NOTE 11 - COMMITMENTS AND CONTINGENCY.
(a) Leases:
The Company is obligated under various operating leases.
Generally, the leases provide for minimum annual rentals as well as a
proportionate share of the real estate taxes and certain common area charges
which may be applicable. Minimum annual rentals under these leases are as
follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
- -------------- ----------
<S> <C>
1997 $ 585,161
1998 511,426
1999 478,126
2000 452,961
2001 239,736
Thereafter 36,750
----------
Total minimum
annual rentals $2,304,160
==========
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 amounted
to $735,405 and $772,510, respectively.
(b) Litigation:
In 1995, the State of Florida brought civil and criminal charges
against the Company, and three of its subsidiaries, alleging various illegal
acts. The Company has vigorously defended itself against such allegations.
In January 1997, the Company and the State reach a settlement resolving all
outstanding legal issues. The cost of the settlement and all related legal
fees have been accrued at December 31, 1996.
NOTE 12 - INCOME TAXES.
The Company had net operating loss carryforwards available for
income tax purposes of approximately $3,000,000 at December 31, 1995, expiring
in 2009 through 2010, which upon recognition may result in future tax benefits
of approximately $1,020,000. At December 31, 1996, after giving effect for
utilization of approxi-mately $295,000 of this tax asset, management was
unable to deter-mine if the utilization of the future tax benefit was more
likely than not and accordingly, the remaining asset of approximately $725,000
has been fully reserved.
<PAGE>
NOTE 12 - INCOME TAXES. (Continued)
The Company's income tax provision consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Federal. . . . . . . . . . . . . $ 303,818 ($805,195)
Federal tax creation (benefit)
from utilization of operating
loss carryforward. . . . . . . ( 294,580) 805,195
State and local taxes. . . . . . 31,739 1,061
----------- -----------
Income tax provision . . . . . . $ 40,977 $ 1,061
=========== ===========
</TABLE>
A reconciliation of the statutory income tax effective rate is as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
<S> <C> <C> <C> <C>
Federal statutory rate . . $ 303,839 34.0% ($805,195) (34.0%)
State and local taxes, net
of federal tax benefit . 27,045 3.0 361 -
Creation (utilization) of
net operating loss
carryforward . . . . . . ( 294,580) (33.0) 805,195 34.0
Other. . . . . . . . . . . 4,673 ( 0.5) 700 -
----------- ------ ----------- -------
Effective tax rate . . . . $ 40,977 3.5% $ 1,061 - %
=========== ====== =========== =======
</TABLE>
NOTE 13 - STOCKHOLDERS' EQUITY.
(a) Common Stock and Additional Paid-In Capital:
In May 1995, the Company issued 10,000 shares of its common
stock to a public relations firm for services rendered through 1995. The
Company attributed a fair value of $5.00 per share to the stock, resulting in
a charge to operations of $50,000 and a credit to paid-in capital of $49,990
for the year ended December 31, 1995.
In July 1996, the Company issued 15,000 shares of its common
stock to a former employee of the Company pursuant to a severance agreement.
The Company attributed a fair value of $1.03 per share to the stock, resulting
in a charge to operations of $15,500 and a credit to paid-in capital of
$15,485 for the year ended December 31, 1996.
In September 1996, the Company issued 8,000 shares of its
common stock to two individuals for professional services rendered through
1996. The Company attributed a fair value of $1.00 per share to the stock,
resulting in a charge to operations of $8,000 and a credit to paid-in capital
of $7,992 for the year ended December 31, 1996.
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY. (Continued)
(a) Common Stock and Additional Paid-In Capital: (Continued)
In December 1996, the Company issued 40,000 shares of its
common stock to Company employees as a bonus. The Company attributed a fair
value of $.96 per share to the stock, resulting in a charge to operations of
$38,250 and a credit to paid-in capital of $38,210 for the year ended December
31, 1996.
At various dates in 1996, the Company sold 6,161 shares of its
common stock to employees, pursuant to the Company's 1995 Employee Stock
Purchase Plan at an aggregate price of $10,540 which resulted in a credit to
paid-in capital of $10,534.
(b) Warrants:
In 1994, the Company issued redeemable common stock purchase
warrants as follows:
(i) 337,500 warrants to purchasers of the Bridge Loan Units.
(ii) 1,725,000 warrants at a price of $.10 per warrant, sold in the
Company's initial public offering.
All of the above warrants are exercisable at a price of $5 per share
through December 14, 1998.
In December 1995, the Board of Directors formally resolved to issue
1,005,000 warrants to acquire a like number of the Company's common stock at
$5.00 per share as follows:
(i) 550,000 warrants to the Company's underwriter,
(ii) 150,000 warrants to two consultants to the Company,
(iii) 155,000 warrants to several of the Company's counsels, and
(iv) 150,000 warrants to two officer/directors of the Company.
The holders were granted the warrants in exchange for services
rendered by these persons through December 31, 1995 of $753,750 ($0.75 per
warrant) and subscription notes receivable of $100,500 ($0.10 per warrant) for
an aggregate of $854,250. The Board attributed a value of $0.85 to each
warrant, which approximat-ed the market value of the Company's fully traded
warrants at that date. The $753,750 compensatory element of the warrants was
charged to operations in 1995. In 1996, the subscription notes receivable
were canceled, resulting in a charge to operations of $100,500. The warrants
are exercisable through December 14, 1998.
In June 1996, 75,000 of said warrants were canceled and 75,000
warrants of an identical nature were granted to certain of the Company's legal
counsel.
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY. (Continued)
(c) Stock Options:
In 1994, 1995 an 1996, the shareholders approved the adoption of
the Company's 1994, 1995 and 1996 Employee Stock Option Plans ("The Plan").
The Plans authorize the Company's Board of Directors to grant options for the
purchase of up to 250,000, 500,000 and 500,000 shares, respectively, of the
Company's common stock to employees, consultants, professionals and
non-employee directors.
In February 1995, the Company granted options to acquire
100,000 shares of common stock to a consultant (and former employee) of the
Company. The options vest over a period of three years with exercise prices
ranging from $1.17 to $4.00 per share. As of December 31, 1996, 66,667 of
such options were vested with exercise prices of $3.03 to $4.00 per share.
In February 1996, the Company granted options to acquire 5,000
shares of the Company's common stock to an employee. The options vest over a
year and are exercisable at a price of $2.00 per share. As of December 31,
1996, 4,167 of such options are fully vested.
In April 1996, the Company granted options to acquire 5,000
shares of the Company's common stock to a consultant of the Company. The
options were fully vested at the date of grant and are exercisable at a price
of $3.13 per share.
In September 1996, the Company granted options to acquire
325,000 shares of its common stock to its Board Chairman. The options vest at
a rate of 9,500 shares per month and are exercisable at a price of $.96 per
share. As of December 31, 1996, 38,000 of such options were fully vested.
In October 1996, the Company granted options to purchase
100,000 shares of its common stock each, to two key employees of the Company.
The options replaced similar options previously granted to these individuals
in February and September 1995. The options are exercisable for a period of
fives years from the original dates of grant and vest over a period of three
years with varying exercise prices which are related to the average market
values on the deter-mination dates. As of December 31, 1996, 133,334 of such
options were vested at exercise prices ranging from $1.00 to $2.50 per share.
In October 1996, the Company granted options to acquire 300,000
shares of its common stock to its president. The options vest at rate of
8,334 shares per month and are exercisable at a price of $.96 per share. As
of December 31, 1996, 25,002 of such options were fully vested.
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY. (Continued)
(d) Employee Stock Purchase Plan:
In April 1995, the shareholders voted to approve and adopt the
Company's 1995 Employee Stock Purchase Plan. Under the terms of the plan, all
full time employees are eligible to participate in the plan with the exception
of employees who own, either directly or indirectly, 5% or more of the
outstanding shares of the Company's common stock. The plan is administered by
the disinterested Directors of the Company. The Company has reserved 50,000
shares of stock for sale under the plan. The plan currently has two
partici-pants. At December 31, 1996, the Company was not obligated to issue
any additional shares.
Under FAS 123, the Plan is considered a compensatory plan since
employees are permitted to purchase stock at 85% of the lower of the beginning
or ending market price during each six month period. The Company has elected
to continue accounting for stock purchases under the Plan in accordance with
the existing rules contained in APB 25.
(e) Paid-In Capital - Warrants:
As of December 31, 1995, the Board of Directors resolved to
sell 1,005,000 redeemable common stock purchase warrants to various entities
and individuals (as described in more detail in note 12(b)), at a price of
$.10 per warrant, a discount of $.75 per warrant from market value as of the
date of resolution. The sale of the warrants and the related charges for
services previously render-ed were recorded as of December 31, 1995, resulting
in a credit to additional paid-in capital-warrants of $854,250.
NOTE 14 - ACCOUNTING FOR STOCK-BASED COMPENSATION.
As of December 31, 1996, the Company implemented three
shareholder-approved stock option plans (The 1994 Stock Option Plan, The 1995
Stock Option Plan, and The 1996 Stock Option Plan). These Plans collectively
provide for the total issuance of 1,250,000 common shares over ten years from
the date of approval of each plan. At year end 1996, a total of 1,060,000
shares had been issued under these plans, which are all intended to comply
with Section 422 of the Internal Revenue Code of 1986, as amended. The
Company believes that its ability to attract, retain and motivate quality
personnel is strongly influenced by its ability to grant options.
At December 31, 1996, the Company had the following stock
option shares issued and unexercised:
<TABLE>
<CAPTION>
Exercise
Plan Year Approved Issued Exercised Unexercised Price Range
- --------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1994. . 250,000 250,000 - 250,000 $ 1.00-$2.50
1995. . 500,000 500,000 - 500,000 $ .96-$3.50
1996 . 500,000 310,000 - 310,000 $ .96-$3.50
--------- --------- --------- -----------
Total . 1,250,000 1,060,000 - 1,060,000 $ .96-$3.50
========= ========= ========= ===========
</TABLE>
<PAGE>
NOTE 14 - ACCOUNTING FOR STOCK-BASED COMPENSATION. (Continued)
Assuming the following:
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996 stock price. $ 1-7/16
Exercise price(s): . . . . . . $ .96-$3.50
Life of options. . . . . . . . Three years
Expected volatility (Beta) . . 148%
Expected dividends . . . . . . None
Risk-free interest rate. . . . 8.5%
</TABLE>
The Company would have recorded compensation expense of
$425,389 under FAS 123 for the year ended December 31, 1996, as calculated by
the Black-Scholes option pricing model. As such, pro forma net income and
earnings per share would be as follows under FAS 123 for 1996:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1996
-------------------
<S> <C>
Net income as reported . . . . $ 852,666
Additional compensation. . . . $ 425,389
Adjusted net income. . . . . . $ 427,277
Earnings per share as reported $ .21
Adjusted earnings per share. . $ .10
</TABLE>
NOTE 15 - SUBSEQUENT EVENTS.
On March 1, 1997, pursuant to its settlement with the State of
Florida, the Company sold three of its notes receivable to a corpora-tion
which provides management services to the Company on its Alabama operations.
In exchange, the Company received a promissory note in the principal sum of
$1,033,930, payable in variable amounts, with interest charged at 12% of the
outstanding principal balance through October 2001. The transaction did not
result in the recognition of a gain or loss to the Company.
