SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 (I.R.S. Employer
corporation or organization 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
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 NO X
-----
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
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Registrant's revenues for its most current fiscal year: $12,223,000
Aggregate market value of the voting stock held by non-affiliates as of December
31, 1997: $42,000,000
Number of shares outstanding as of latest practical date: 9,584,548
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
June 5, 1998, which will be filed with the Commission within 120 days of the end
of fiscal 1997.
<PAGE>
PART I
ITEM 1 - BUSINESS
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BUSINESS DEVELOPMENT
American Bingo & Gaming Corp. (the "Company") was formed in 1994 as a
Delaware corporation to consummate the acquisition of charitable bingo centers
and gaming operations. 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 raised approximately $5.2 million
from this offering. The Company used a majority of its net public offering
proceeds for expansion in 1995.
The Company has grown substantially in the three years since its IPO. The
Company began 1995 with approximately $5 million in total assets and a $2
million annual revenue runrate, and today has grown to over $24 million in total
assets and $12 million in annual revenues. The Company began with six bingo
centers and no gaming operations in 1994 and today has 15 bingo centers and over
750 video gaming machines (VGM's). The Company's growth accelerated dramatically
in 1997 as the Company consummated three acquisitions of video gaming businesses
in South Carolina in stock-for-stock transactions. These acquisitions accounted
for $7.5 million or 60% of the Company's 1997 total revenues. The Company also
added ten bingo centers in South Carolina during 1997, but closed five of these
centers due to lack of profitability. The remaining bingo centers in South
Carolina are profitable.
The Company substantially improved its capitalization in 1997 through two
financing transactions. In August of 1997, the Company issued 2,000 shares of
convertible preferred stock at $1,000 per share, raising $2 million in a private
equity transaction. In November of 1997, the Company called all of its
outstanding public warrants and in December of 1997 redeemed 2.3 million
warrants. Each warrant was exercisable into one common share at $5.00 per share,
raising nearly $11.5 million for the Company, or over $11.1 million after
associated financing costs. The Company intends to use this capital to continue
to grow its business.
PRINCIPAL SERVICES AND MARKETS
The Company's business is primarily focused on the non-casino video gaming
and charitable bingo niches within the $587 billion (total 1996 industry
receipts) gaming market in the U.S. Gaming receipts comprised approximately 6%
of U.S. Gross National Product in 1996, and Americans spend nearly as much money
on gaming activities in a year as they do on groceries. Video gaming revenues
comprised approximately 72% of the Company's total revenues in 1997, with bingo
revenues providing about 24%. Management intends to migrate revenues to a more
balanced mix going forward.
Total non-casino video gaming industry receipts were $14.4 billion in the
U.S. in 1996. Video gaming is currently legal in various forms in 11 states in
the U.S. (Colorado, Louisiana, Michigan, Montana, Nevada, New Jersey, Oregon,
Rhode Island, South Carolina, South Dakota, and West Virginia). All of the
Company's gaming revenues are currently earned in the state of South Carolina,
which in 1996 had the second highest non-casino video gaming receipts in the
U.S. after Louisiana. South Carolina currently has about 30,000 VGM's which
gross over $2 billion annually. The Company intends to expand its gaming
business into other markets in the future.
The Company began 1997 with 35 VGM's in South Carolina and today has over
750 VGM's in the state. The Company has been ranked as one of the top 10 video
gaming operators in South Carolina. The Company has grown its South Carolina
video gaming operations primarily through acquisitions and, to a lesser extent,
internal growth. The Company's video gaming operations in South Carolina are
diversified into three segments: bingo centers, routes and freestanding
locations.
The Company currently has about 90 VGM's in bingo centers in South
Carolina, which are located in Columbia and Charleston. The Company believes
that there is a strong financial benefit from operating VGM's in bingo centers
due to the fact that bingo centers typically draw crowds of 300-500 players per
night, many of whom also enjoy video gaming. There are also significant
personnel and overhead cost economies with bingo center VGM operations compared
to other VGM segments. The Company retains all profits from its bingo center VGM
operations, which are the most profitable of its three video gaming segments in
South Carolina.
The Company has over 430 VGM's in route operations in 12 counties in South
Carolina. In the route business, the Company places VGM's in convenience stores,
grocery stores, restaurants, nightclubs, sports bars, laundromats, bowling
alleys and other high customer volume locations. The Company and the location
owner/operator split net VGM profits, typically on a 50/50 basis.
The Company also has over 230 VGM's in freestanding locations, primarily in
Columbia, Charleston and North Augusta. These locations are often in strip malls
or other high-traffic areas. This video gaming segment typically offers the best
facilities and highest level of customer service to video gaming customers and
more closely resembles a casino-style environment. This segment also has the
highest operational leverage of the three video gaming segments due to higher
rent and personnel costs.
Total charitable bingo industry receipts were $4.0 billion in the U.S. in
1996. Also in 1996, U.S. Indian bingo receipts were about $2.1 billion, and
Canadian bingo receipts were about $2.0 billion. Bingo in the U.S. draws more
player visits (1.2 billion in 1996) and receipts ($6.1 billion in 1996) than the
U.S. movie industry which had 1.1 billion visits and $6.0 billion in box office
receipts in 1996. Charitable bingo is authorized in 46 states in the U.S. and
all 12 Canadian provinces. There are 64,000 charitable bingo centers in North
America with over 60,000 organizations licensed to operate bingo. Bingo is the
most accepted form of gaming by the public with over a 75% approval rating.
North American charitable bingo receipts have been flat since 1993 based on the
proliferation of competing Indian games, casinos, lotteries and other forms of
gaming. However, bingo is expected to maintain or possibly increase its market
share of total gaming industry receipts consistent with an aging U.S.
population, which has more disposable income and time and enjoys playing bingo
more than other age groups.
As a charitable bingo commercial lessor, the Company provides investment
capital, facility set up, maintenance and management support for charities that
utilize bingo for fundraising. The Company's participating charities raised
approximately $3.2 million, $3.6 million and $2.5 million in net proceeds after
bingo prizes the past three years. The Company derives bingo revenues from
rental, paper sales and head tax payments received from participating charities
that conduct bingo sessions at the Company's centers. Additional revenues are
also derived from bingo center vending and concession operations, pull-tab
sales, dauber sales and other miscellaneous revenues.
Charities operate bingo centers and ultimately determine their financial
and operational success. The Company, by virtue of its substantial initial and
ongoing investment in bingo centers, operates in an advisory role regarding
center operations. Both parties have a mutual interest in the success of a bingo
center and positive lessor-charity relations are critical to a bingo center's
success. The Company helps its participating charities develop and market bingo
programs, hire employees, review results and maintain financial controls. When a
bingo center is financially successful, there is very low charity turnover.
Marginal or unprofitable bingo centers generally have higher charity turnover.
The Company maintains short-term leases with its charities in order to ensure
continual charity interest in the success of a center. Under-performing
charities can usually be replaced with thirty days notice.
The Company's bingo operations are located in South Carolina, Alabama and
Texas. In terms of total statewide charitable bingo receipts in 1996, South
Carolina ($79 million) and Alabama ($58 million) are relatively small, but
profitable bingo states. Texas ($502 million) is by far the biggest bingo state
in the U.S. with over 12% of total U.S. bingo receipts, but is generally less
profitable for commercial lessors than other states due to more restrictive
lessor rent limits. In the U.S., an average of 74% of total bingo receipts are
paid back to the players in the form of prizes, with 13% of total receipts paid
for expenses and 3% for taxes, leaving 10% of total receipts for the charities.
The Company's rental payments are a portion of the 13% charities pay for
expenses, with labor and supply costs also comprising a significant portion of
charity expenses. From its rental collections, the Company must in turn be able
to cover the costs of its bingo property rent, property management, utilities,
supplies, insurance, repairs and maintenance, security, licenses, taxes and
other overhead costs to earn a profit. By virtue of their fixed cost structure
(guaranteed prize payouts, fixed rent, labor and overhead, etc.), bingo centers
have substantial operational leverage. Thus, even small changes in attendance
can significantly affect a bingo center's profitability for the Company and its
charities. When a bingo center does not draw the necessary attendance to cover
its fixed costs, the Company will likely not be able to collect any rent, and
ultimately the center may be shut down. This dynamic has caused the Company to
close several centers in the past.
The Company presently has 15 bingo centers, and is currently negotiating to
acquire additional centers. There can be no assurance that the Company will be
able to consummate these potential acquisitions. The Company today has eight
centers in South Carolina, three centers in Alabama and four centers in Texas.
The Company closed six start-up bingo centers over the past few months due to
lack of profitability. The Company intends to rapidly grow its bingo business
through acquisitions of existing bingo centers. Acquisitions typically cost more
than start-ups, but have less risk due to greater predictability of financial
results and no dilution of existing bingo markets.
Bingo is derived from an Italian lottery game created in 1530. Bingo was
introduced in the U.S at an Atlanta carnival in 1929. At that time, bingo was
played with cards covered with beans and called "beano," which later changed to
bingo. Bingo changed to paper cards and colorful daubers in the 1980's as a way
to allow players to play more cards at a time. In the 1990's bingo has started
to evolve again with the advent of electronic "card-minders," which allow
players to play up to 600 bingo cards simultaneously. Electronic card-minders
allow a player to use a keyboard, touch-screen or light pen to mark numbers on a
video monitor, or allow players to mark numbers on a hand-held portable unit.
The Company began introducing card-minders into its bingo centers in 1996, which
have generally been successful. Management believes that card-minders are easier
to play, allow more bingo to be played, reduce paper costs, appeal to younger
players, and increase the average spend per player. Since only 5% of 1996 total
bingo receipts in the U.S. were from electronic games, management believes this
is a growth opportunity for the Company and industry and intends to further
computerize its centers in the future.
The Company is not dependent on any single customer or supplier, and none
comprise more than 10% of the Company's business. The Company has not invested
in any research and development activities in the last two years and has no
plans to do so in the future. The Company has not incurred any costs nor
suffered any negative effects due to compliance with environment laws.
EXPANSION PLANS
The Company grew its revenues from $7.7 to $12.2 million in 1997, an
increase of nearly 60%, with only $1.4 million in cash at the beginning of the
year. The Company began 1998 with nearly $12.0 million in cash. Based on its
strong capital position, the Company expects to continue to grow rapidly in the
future. Further, management expects to continue to run a relatively lean
operation, meaning that the Company expects to leverage its management team and
infrastructure for expansion without significantly increasing the Company's cost
structure.
Non-casino video gaming is a $14.4 billion market currently legal in 11
states. The Company intends to expand its gaming operations within markets that
provide attractive economic returns. Charitable bingo, a $6 billion industry in
North America, is legal in 46 states and all 12 Canadian provinces, which
together have over 64,000 bingo centers. Thus, there is ample opportunity for
the Company to continue to grow and consolidate portions of these industries.
Management believes that these market segments will continue to be overlooked by
most larger gaming firms, yet remain attractive due to: i) strong customer
acceptance and participation (75% of the public supports charitable bingo); ii)
favorable demographic trends (an aging population with increasing disposable
income and time); and iii) reduced government funding of charities due to
perpetual budgeting pressures.
The Company's current gaming/bingo revenue mix is about 75/25; management
would like this mix to be more balanced. The Company's expansion within the
South Carolina video gaming market is currently on hold pending resolution of
current legislative and judicial issues affecting the industry. Thus, charitable
bingo, in which Company already has an established presence, will likely be a
focus for expansion in 1998. The Company recently completed the acquisition of a
successful bingo center in Abilene, Texas. The Company is presently evaluating
potential bingo center acquisitions in Canada, Texas, Alabama, Kentucky,
Mississippi and South Carolina. There is no assurance any of these acquisitions
will be consummated and/or successful. The Company intends to continue its focus
on the southern part of the U.S., but may expand outside this area for desirable
growth opportunities. Longer term, the Company may also evaluate expansion into
other bingo and gaming market segments such as military bases, racetracks,
cruise ships and Indian gaming.
The Company intends to grow its bingo center and gaming operations
primarily through acquisitions, and to a lesser extent developments and internal
growth. The Company determines acquisition prices and development budgets based
on the proposed investment's historical and projected financial performance,
competitive market position, and overall strategic fit within the Company's
growth plans. Acquisitions are typically made at 2-4x proven annual cash flows,
dependent on the predictability of cash flows, management talent and
opportunities for enhanced financial performance. Acquisition currency typically
includes cash, notes and Company stock, with higher multiples paid to sellers
who are willing to accept a greater portion of notes and/or stock than cash as
consideration. This strategy allows the Company to leverage its cash resources
for growth purposes. Also, the inclusion of notes and stock provides a stronger
vested interest on the part of the seller in the continued success of the
Company. Consulting, non-compete and performance guaranty agreements are also
often included in the Company's acquisition contracts.
The Company will also continue to grow, to a lesser extent, through
development projects, which normally have a higher risk-reward profile. For
example, the Company's most successful operation is in Columbia, South Carolina,
which was a start-up. Yet a majority of the Company's unsuccessful investments
have been start-ups. Building and finish-out costs for new bingo centers
typically run $100,000 - $250,000 for site selection and preparation,
finish-out, equipment and furniture costs, and licensing fees. The cost of
building a new bingo center is usually less expensive than acquiring an existing
center, but is more risky and will dilute an existing bingo market. Both
acquisition and development projects will target markets that offer: i)
equitable regulations; ii) limited competition; iii) attractive real estate
pricing; iv) favorable demographics; and v) proximity to the Company's existing
operational base.
COMPETITION
Non-casino video gaming is a $14.4 billion market in the U.S. and
charitable bingo is a $6 billion market in North America with 64,000 commercial
bingo centers. Since non-casino video gaming operations and charitable bingo
centers are typically low overhead operations, there is not a significant
financial barrier to entry in these markets on a small scale. Only
well-capitalized entrants can compete in these industries on a large scale
level, however. Also, rigorous regulatory requirements, legal complexities and
perpetual political pressures serve to reduce the entry of many would-be
competitors in these markets.
Within the gaming industry, the Company competes with many other operators
in South Carolina. The Company currently operates over 750 VGM's in South
Carolina; there are over 30,000 VGM's across the state in this $2 billion
industry. The Company has been ranked as one of the top 10 VGM operators in the
state. The Company operates in the bingo center, route, and freestanding
segments of the South Carolina gaming market and competes with many other
private operators in these markets. Most VGM's are virtually the same, but the
Company believes that its strong capitalization, desirable locations and
experienced management team give it a competitive advantage over many other
operators within these market segments.
Within the charitable bingo industry, the Company competes with many other
bingo centers in South Carolina, Alabama and Texas. Since bingo prize payouts
are often legally limited and consistent among competing bingo centers,
competition is normally focused on a center's location, parking, amenities, and
customer service. Bingo serves as a fun, social gathering for most players, and,
as a result, they tend to be very loyal to their chosen center. The Company thus
seeks to provide the most desirable bingo centers in its respective markets in
order to generate and build long-term player loyalty. Additional competition
within the bingo market also 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 generally lower bingo prize payouts, smaller and less
desirable facilities and amenities, and fewer bingo sessions. Indian bingo is
also a growing segment within the bingo industry that has significant
competitive advantages, including fewer regulatory restrictions and lower taxes.
However, the Company is not aware of any competing Indian bingo centers within
its current markets.
Additional competition comes from other sectors of the gaming industry such
as casinos, riverboats, lotteries, card rooms, jai alai and pari-mutuel
wagering. The Company is aware of this competition and locates its bingo and
gaming centers in areas insulated from such competition. However, the Company
believes that most of its patrons represent unique, value-oriented customers for
whom a few hours of video gaming or bingo entertainment can cost much less than
other forms of gaming entertainment. In fact, an evening of bingo entertainment
typically costs only $10 - $50 and provides payouts that rival the average slot
machine. In addition, most other forms of gaming do not provide the high degree
of social value traditionally associated with bingo. The Company also recognizes
additional potential competition from Internet gaming, but believes that most of
its customers are not attracted to online gaming due to the lack of human
interaction and social entertainment value.
GOVERNMENT REGULATION
The $587 billion U.S. gaming industry is highly regulated and the Company's
operations are no exception. The Company must acquire and maintain licenses and
approvals necessary to operate in all of its markets. These processes can
involve extensive investigation of the Company and its officers and directors.
There is no assurance that the Company will be able to maintain and acquire the
necessary licenses and approvals to conduct its business, and the loss of a
license in a given jurisdiction could have a materially harmful affect on the
Company. The Company's video gaming business is regulated by the South Carolina
Department of Revenue. The Company's bingo operations are also regulated in
South Carolina by the Department of Revenue, in Texas by the Texas Lottery
Commission, and in Alabama bingo is regulated at the county level.
The rules and regulations the Company and its participating charities
operate under change frequently and require the Company to continually monitor
the legislative processes that affect these regulations. The Company expends
considerable time and financial resources managing its various regulatory
compliance activities, and expects the gaming industry to continue to be highly
regulated. In fact, President Clinton has formed the "National Gambling Impact
Study Commission" to measure the social and economic impacts of consumer
spending on gambling, with a report due in 1999. Management believes that this
report may recommend increased regulation and taxes for the gaming industry,
perhaps on a national level.
In South Carolina, a video gaming operator must buy a machine license from
the state for each VGM. Each VGM license currently costs $4,000 for a two-year
period, which would currently total over $3.0 million every two years for the
Company's 750 VGM's in South Carolina. There are currently no additional taxes
on VGM's in South Carolina, although it is possible that variable taxes may be
implemented in the future to replace or modify the current licensing structure.
There are also very specific regulations regarding the operations of the VGM's
in South Carolina, including, among others: i) Only state-authorized machines
can be operated; ii) Machines cannot operate on Sundays; iii) Machines cannot
pay out net prizes of more than $125 per player per day; iv) There cannot be
more than five machines per gameroom; v) Each gameroom must have its own
cashier/attendant; and vi) Each gameroom must have a separate utility meter,
firewall, and exit. These regulations, while burdensome, do serve to protect the
South Carolina gaming market from larger national casino operators. It is
possible that additional regulations will be placed on the operation of VGM's in
South Carolina in the future, including background checks for operators and an
online connection of the machines to the State Department of Revenue.
The Company presently faces uncertainty with regards to its video gaming
operations in South Carolina, where the State Governor and House are in favor of
abolishing the industry. Management does not believe the Senate, which has
historically supported the industry, will vote to abolish video gaming. Further,
the South Carolina State Supreme Court is deciding a case that will determine
whether video gaming is a lottery and thus illegal in South Carolina. If video
gaming were abolished in South Carolina, then the Company would continue to
operate there as long as possible, while simultaneously developing and executing
a transition plan to relocate its assets to another gaming market.
Charitable bingo is authorized in 46 states in the U.S., each of which
regulates bingo under its own unique set of rules and regulations. In most
states, the charitable lessor and participating charities must be licensed by
the state and/or local regulating authorities to conduct charitable bingo. The
charities are responsible for the direct operation of bingo centers, employment
and payment of personnel, and maintenance of financial accounts and records.
Regulations generally prohibit management control by the lessor, which
eliminates Company staffing obligations and expenses. In addition, most states
require that participating charities be responsible for all marketing activities
and expenses. Most states also limit the amount of rent that a lessor can charge
a charity for use of a bingo center and equipment. Most states also limit the
number of bingo sessions that may be conducted in a week, as well as the prize
money can be paid out per session. On average, about 74% of bingo center
receipts are paid to the players as prizes, with 13% going to expenses such as
rent, labor and supplies, and charities netting about 10% after taxes. The
Company earns its return from the rental portion of the 13% expenses.
YEAR 2000 PROBLEM
The Company has conducted a comprehensive review of its computer systems to
identify any potential problems that could be caused by the Year 2000 Problem.
This issue is the result of computer programs that have been written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year rather than the year 2000. This could result in a system failure or
miscalculation. The Company currently believes that, with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems
pending these software modifications and upgrades. However, if such software
modifications and upgrades are not completed on an accurate and timely basis,
the Year 2000 Problem could have a potentially material impact on the Company.
EMPLOYEES
As of March 16, 1998 the Company had 109 full-time employees. The majority
of these employees work in the Company's video gaming operations in South
Carolina. The Company has eight employees at its corporate headquarters in
Texas. The Company, under state bingo laws, has no employees in its charitable
bingo centers. The Company has independent property managers who oversee certain
of its charitable bingo center properties. No employee of the Company is
represented by a labor union or is subject to a collective bargaining agreement.
Note: the Company has relied on the following sources for industry information
used in this report: International Gaming & Wagering Business (August 1997);
National Association of Fundraising Ticket Managers (1996 and 1995 Charity
Gaming in North America Reports); New York Times (11/29/97 and 12/16/97).
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 space for the majority of its operations in Texas, Alabama and South
Carolina, as well as for its corporate offices. The Company in turn leases its
bingo centers to various charities. The Company is responsible for real estate
taxes, insurance, common area maintenance and repair expenses on certain of its
leases. Certain property leases are guaranteed by the Company. The Company owns
two of its properties in South Carolina. The Company believes that the condition
of its leased and owned properties is good. No single property, leased or owned,
amounts to 10% or more of the Company's total assets.
ITEM 3 - LEGAL PROCEEDINGS
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In July of 1995 the Company bought three Florida bingo centers from Phillip
Furtney. On June 12, 1997, Mr. Furtney filed a lawsuit against the Company,
alleging breach of contract on these purchases. Mr. Furtney alleges that the
Company defaulted on its original purchase note and stock obligations per sales
agreements.
On July 12, 1997 the Company answered this lawsuit and filed a counterclaim
against Mr. Furtney alleging, among other things, fraud, negligent
representation, breach of express warranties, contractual indemnity and tortious
interference with contractual rights. The Company believes that it was
materially defrauded in its purchases of these three Florida bingo centers from
Mr. Furtney in that he made no disclosure to the Company of an ongoing criminal
investigation of his operation of these centers by the Florida State Attorney
General's Office and that he was fully aware of this investigation. The state of
Florida temporarily closed these three bingo centers, as well as several other
centers formerly owned by Mr. Furtney, in November 1995. The Company re-sold
these three bingo centers in December of 1995. The Company believes that Mr.
Furtney owes the Company monetary damages in excess of $1,000,000, because: i)
these bingo centers did not perform to his contractually-guaranteed net income
levels during the Company's ownership; ii) the Company incurred substantial
monetary damages in its defense against the State of Florida after the bingo
center closings; iii) the Company lost the ability to operate bingo centers in
the state of Florida as part of its settlement with the state of Florida; and
iv) the Company sustained substantial damage to its good name and reputation.
In January of 1997, the Company and the State of Florida settled all
matters regarding the Company's previous ownership and operation of these bingo
centers. The State of Florida is continuing its prosecution of Mr. Furtney,
which is expected to go to trial by the end of 1998. The Company believes that
Mr. Furtney's lawsuit against the Company is completely without merit and that
the Company will prevail in its counterclaim against him.
In 1998 one of the Company's subsidiaries (MHJ Corp.) was named a defendant
(among many other video gaming operators) in a legal action in South Carolina.
This action alleges that the defendants' video gaming operations in South
Carolina i) comprise a lottery, which violates the state constitution; ii)
violate the state's daily net video gaming machine payout limit of $125 per
player; and iii) violate the state's single premise rule which only allows up
to five video gaming machines per premise. The plaintiffs in this action are
attempting to have this action certified as a class action lawsuit. Plaintiffs
originally filed this action in state court, which was then moved to a U.S.
Federal Court by defendants. The federal court certified the lottery issue of
this case and sent the case back to the South Carolina Supreme Court to be
decided. Oral arguments on the certified issues were held before the South
Carolina Supreme Court in April of 1998. The Supreme Court has not yet rendered
its decision. The Company believes that this action is completely without merit
and will defend itself vigorously. If this case were to be decided against the
Company, it could have a materially adverse effect on the financial position and
operations of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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There were no items submitted to a vote of shareholders during the fourth
quarter of fiscal 1997. The Company's annual shareholder meeting with voting on
proxy issues is scheduled for June 5, 1998.
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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A. MARKET INFORMATION
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The Company's common stock is traded on the NASDAQ SmallCap Market System
under the symbol "BNGO." The Company also has convertible preferred stock
outstanding which is not publicly traded. The following table shows the range of
reported high and low closing sale prices for the Company's common stock for the
periods indicated, as reported on the NASDAQ Summary of Activity monthly
reports.
<TABLE>
<CAPTION>
Fiscal 1996: High Low Fiscal 1997: High Low
- -------------- ------ ------ -------------- ------- ------
<S> <C> <C> <C> <C> <C>
First Quarter. $3 3/4 $3 1/4 First Quarter $2 5/16 $1 1/4
Second Quarter $3 1/2 $ 2 Second Quarter $4 7/16 $1 1/2
Third Quarter. $ 3 $1 1/8 Third Quarter $ 7 7/8 $ 4
Fourth Quarter $2 1/4 $1 3/8 Fourth Quarter $10 1/2 $ 5
</TABLE>
B. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
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As of March 31, 1998, the approximate number of record holders of the
Company's common stock was 110 and the approximate number of beneficial
shareholders was 3,167.
C. DIVIDENDS
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The Company has never paid and currently has no intention to pay any
dividends on its common shares. The Company pays a 7% annual dividend on a
quarterly basis on its convertible preferred shares.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------------
OVERVIEW
American Bingo & Gaming Corp. was incorporated in 1994 to pursue bingo and
gaming business opportunities. The Company believes that the North American
non-casino video gaming and charitable bingo markets are highly fragmented, are
overlooked by larger gaming companies, and are therefore attractive for
consolidation. In fact, American Bingo is the largest public company
consolidating the charitable bingo center industry. The Company's strategy is to
continue to rapidly grow its gaming and bingo operations through acquisitions,
developments and internal growth.
The Company's financial results from its gaming and bingo operations are
determined by a number of factors, including: i) attendance and customer spend
at the Company's facilities; ii) number of facilities in operation and idle
facilities; iii) payout percentage paid by the Company's VGM's; iv) lessor rents
and number of sessions conducted at the Company's bingo centers; and v)
operating costs and overhead costs. The Company's freestanding video gaming
operations have substantial personnel and operating costs and the Company's
bingo centers have substantial rental costs. As a result of these high fixed
costs, the financial results of these two business segments are particularly
leveraged by customer attendance and spending. The Company's financial results
are also subject to seasonal factors, with cooler months generally better than
warmer months. The Company's financial results can also be significantly
affected by changes in government rules and regulations. These factors are a key
element behind management's desire to continue to grow revenues and diversify
operations through expansion. If the Company can increase revenues while
maintaining relatively constant management and infrastructure costs, the Company
should be able to increase profits through earnings leverage and economies of
scale.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended 1997 in its strongest financial position ever. Cash
totaled $11.9 million at the end of 1997, up nearly ten-fold from the end of
1996. Cash represented nearly half of the Company's total assets of $24.2
million and nearly 100% of the Company's total revenues of $12.2 million for
1997. Cash increased due to the Company's financing activities in 1997,
primarily from the redemption of 2.3 million common stock purchase warrants in
December of 1997, which grossed nearly $11.5 million and netted over $11.1
million for the Company. Each redeemed warrant was exercised into one common
share of Company stock at $5.00 per share. The Company's liquidity also
increased during the year as the result of a private equity transaction in which
the Company issued $2.0 million of convertible preferred stock in August of
1997. These preferred shares pay a 7% annual dividend and are convertible into
Common Shares under a variable pricing formula ranging from $4.00 to $5.50 per
share. The Company also financed over $1.8 million of capital equipment in 1997,
primarily for video gaming machines for its South Carolina gaming operations.
Cash increased over $10.6 million during the year. Cash flows from
operational activities totaled $1.1 million in 1997. Cash flows from operational
activities were led by the Company's net income of $1.7 million, reduced by a
net $541,000 net increase in working capital primarily from the investment in
additional licenses for video games and accounts receivable from the growth in
the business. Major non-cash items included depreciation and amortization
expense of $926,000 and an extraordinary gain on debt extinguishment of
$602,000.
Cash used in investing activities totaled $2.4 million in 1997, including
expenditures of $1.4 million for the purchase of equipment, primarily video
gaming machines, and $910,000 for intangible assets, primarily bingo center
purchases. Cash provided by financing activities totaled $11.9 million in 1997,
and was led by $11.1 million raised from a warrant call and $1.8 million from a
preferred stock offering. These financing inflows were offset somewhat by
$873,000 of cash distributions for note and lease payments and $437,000 of
distributions to video gaming subsidiary stockholders in periods prior to the
Company's acquisition.
The Company plans to invest its capital resources in growing and
diversifying its business. The Company intends to expand within the $14.4
billion non-casino video gaming market and the $6.0 billion charitable bingo
market. Gaming represented 72% of the Company's total 1997 revenues, and
management would like to evolve the Company's gaming/bingo revenues to a more
balanced mix. Thus, expansion of the Company's bingo operations will likely be a
focus in 1998, particularly given the uncertainty regarding the Company's South
Carolina video gaming operations. The Company is currently evaluating several
acquisition opportunities, most of which would be primarily funded with cash. It
is difficult to forecast the amount of capital resources the Company will invest
in expansion activities in 1998, but management intends to invest its resources
for growth as quickly and prudently as possible.
The Company plans to invest up to $1.0 million into capital expenditures
for its existing operations in 1998. Approximately $300,000 will be invested in
the finish-out of a bingo center in North Augusta, South Carolina; $200,000 will
be invested in the finish-out of management offices, storage space and a Class
"C" bingo center in Columbia, South Carolina; and $100,000 will be spent for the
upgrade of an existing bingo and gaming center in Charleston, South Carolina.
The balance of capital investments is planned to maintain and upgrade the
Company's current gaming and bingo facilities.
The Company expects that its cash balances in excess of $11.9 million, a
margin credit line of $5.0 million, equipment credit lines up to $3.0 million,
and current operating cash flows will provide sufficient operating and expansion
capital for 1998. It is possible that the Company may pursue incremental
financings for certain sizeable, strategic acquisitions in the future.
The Company had $24.2 million in total assets at the end of fiscal 1997.
This total included $11.9 million of cash and cash equivalents, $6.2 million in
net fixed assets, $2.3 million of intangible assets, and $1.4 million of net
video gaming licenses. The Company expenses video gaming parts, bingo paper and
other supplies at the time of purchase, so no inventory is recorded on the
balance sheet.
The Company had $3.8 million in total liabilities at the end of 1997, the
majority of which was for financed equipment. The Company and the former
operator of its South Carolina bingo centers in 1997 mutually agreed to cancel
their asset purchase agreement, which reduced the Company's note payable to this
operator by $557,000. Total shareholder equity was $20.4 million at the end of
fiscal 1997, which increased over $14.3 million over 1996 due primarily to the
Company's 1997 equity financings.
RESULTS OF OPERATIONS
The Company posted record sales, net income and earnings per share in 1997
and 1996 after losses in 1995 and 1994. The Company's financial turnaround the
last two years has been largely attributable to the expansion and success of the
Company's South Carolina video gaming operations. In 1997, the Company
consummated three video gaming pooling acquisitions in South Carolina, which
substantially increased the Company's reported revenues and earnings over prior
years. These acquisitions also significantly shifted the Company's business mix
from bingo to gaming, as gaming accounted for 72% of 1997 revenues. There is
uncertainty regarding the future of the Company's video gaming operations in
South Carolina, however, as the state court system and legislature are currently
reviewing the continued legality and existence of video gaming in that state.
Should video gaming be abolished or adversely modified in South Carolina, the
Company would likely be negatively affected. The Company expects these legal
issues to be favorably resolved in the first half of 1998, although there can be
no assurance of this result.
The Company reported seven consecutive quarters of higher earnings through
the third quarter of 1997. However, financial results were lower in the fourth
quarter of 1997 compared to prior quarters for a number of reasons, including:
i) video gaming revenues in South Carolina dropped substantially in December of
1997 after the governor and attorney general made public threats against video
gaming operators and players (these threats were later withdrawn); ii) bingo
revenues dropped sharply and expenses increased in South Carolina concurrent
with the implementation of more restrictive bingo regulations on October 1,
1997, which decreased player attendance and deposits; iii) corporate expenses
increased due to higher accounting, legal and professional costs associated with
the Company's acquisition activities; and iv) the Company chose to early adopt a
new accounting policy which required the Company to immediately write off all
capitalized start-up costs. The Company has seen a positive financial turnaround
in gaming and bingo revenues and a decrease in expenses in the first quarter of
1998.
Nonetheless, the Company expects tougher earnings comparisons in 1998.
Earnings may be lower due to several factors, including: i) changes in
accounting rules that now require immediate expensing of business start-up
costs; ii) depletion of the Company's tax loss carryforwards that sheltered
profits in 1997 and 1996; iii) additional shares outstanding pursuant to the
Company's 1997 financing transactions; iv) stagnant profitability in the
Company's freestanding video gaming operations; and v) the cost of several idle
properties on which the Company is paying rent but generating no revenue. The
Company's 1998 results could also be negatively affected if video gaming were
abolished or adversely modified in South Carolina.
As of the end of 1997, approximately 85% of the Company's revenues were
generated in South Carolina, with 10% in Alabama and 5% in Texas. Approximately
72% of the Company's revenues are derived from video gaming, with 24% from
bingo. The Company's South Carolina and Alabama operations are generally
profitable, while Texas operates at a break-even level. The Company is seeking
to sub-let its idle South Carolina properties and improve the performance of its
Texas properties to increase profitability. The Company is also looking to
improve profitability and diversify risk through continued expansion.
COMPARISON OF FISCAL 1997 TO FISCAL 1996 (Note: Fiscal 1997 and 1996
results have been restated to incorporate the historical financial statements of
Gold Strike, Lucky 4 and Darlington Music Company from 1997 pooled
acquisitions). Total revenues increased by 58% to $12.2 million in fiscal 1997
from $7.7 million in fiscal 1996. Approximately $8.9 million or 72% of 1997
revenues was generated by the Company's South Carolina video gaming operations,
versus $5.0 million in 1996. Approximately $2.9 million or 24% of 1997 revenues
was comprised of charitable bingo rental payments, paper sales and promoter
fees, as compared to $2.5 million in 1996. The balance of revenues for each year
was comprised of paper, supplies, vending, concessions and other sales. Although
there can be no assurance, the Company expects revenues to increase in 1998 from
expansion and internal growth.
Total costs and expenses were $11.0 million in fiscal 1997 as compared to
$7.3 million in fiscal 1996, an increase of 50%, which was less than the
Company's 58% revenue growth in 1997. Salaries and other compensation totaled
$2.0 million in 1997 versus $900,000 in 1996, up largely due to the
significant expansion of the Company's labor-intensive freestanding video gaming
business in South Carolina in 1997. Rent and utilities totaled $1.9 million in
1997 versus $1.1 million in 1996, up due to the increase in the number of bingo
and gaming centers under lease. Direct operating costs totaled $1.6 million in
1997 versus $1.4 million in 1996. Depreciation and amortization totaled $2.0
million in fiscal 1997 versus $1.4 million in fiscal 1996. This increase was
primarily due to increased video gaming license amortization from the Company's
expansion in the South Carolina video gaming markets. The Company added over
$2.0 million in video gaming licenses and $3.6 million in asset acquisitions,
improvements and capitalized costs in 1997 which significantly increased
amortization and depreciation costs. General and administrative expenses totaled
$3.6 million in 1997 versus $2.6 million in 1996. These costs increased due to
the significant expansion of the Company's gaming business. The Company plans to
reduce or maintain operating and administrative costs in 1998 in order to
enhance profitability.
The Company recorded $257,000 of net interest and other income in fiscal
1997 versus $726,000 in 1996. Fiscal 1996 included a favorable write-off of
$865,000 of Florida acquisition liabilities no longer deemed an obligation
offset by $417,000 of write-offs for asset impairments of the Company's South
Texas operations. The Company expects interest income to increase in 1998
consistent with higher cash balances.
The Company's income tax expense for 1997 was $204,000 versus $73,000 in
1996. Tax loss carryforwards from 1994 and 1995 significantly reduced income tax
expense in 1997 and 1996. Taxes for 1997 were led by income taxes paid by
Darlington Music Company prior to acquisition by the Company. Management expects
taxes to increase in the future assuming the generation of taxable income and
depletion of tax loss carryforwards.
Fiscal 1997 results included an extraordinary benefit of $602,000 ($398,000
net of taxes) for the reduction of a note payable to the operator of the
Company's South Carolina properties The Company offset this gain by write-offs
of capitalized start-up costs for South Carolina investments of over $400,000
from the early adoption of a new accounting policy requiring immediate expensing
of start-up costs.
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
- ----------------------------------------------------------------------
On April 23, 1997, the Board of Directors engaged King, Griffin & Adamson,
P.C., of Dallas, Texas as the Company's principal accountant to audit the
Company's financial statements. The Company dismissed Weinick, Sanders & Co.,
LLP as its principal auditors on this date. There were no adverse opinions,
disclaimers of opinions or modifications as to uncertainty, audit scope or
accounting principles by the previous auditor in the prior two years. Also,
there were no disagreements on accounting and financial disclosure issues with
the previous auditor in the prior two years.
PART III
Items 9-12 are Incorporated by Reference from the Company's Proxy Statement
dated April 30, 1998.
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.
Exhibits required by Item 601 of Regulation S-B.
- ------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S>
3.1 * Certificate of Incorporation in the state of Delaware filed on 9/8/94, as amended on
10/17/94 and 08/01/97.
3.2 * By-laws approved and adopted on 9/9/94, as amended on 4/10/98.
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.
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.
21.1 Subsidiaries of the Registrant, 4/15/98.
27.0 Financial Data Schedule.
<FN>
* Previously filed with the Commission.
</TABLE>
<PAGE>
REPORTS ON FORM 8-K DURING THE LAST QUARTER
- --------------------------------------------------
On October 23, 1997 the Company announced that it had entered into an
agreement to acquire the Lucky 4 Inc. video gaming business in South Carolina.
This acquisition was consummated in a stock-for-stock transaction for 358,000
shares of Company stock. The Company accounted for this transaction as a pooling
of interests.
On November 6, 1997 the Company announced that it had elected to call all
of its publicly traded warrants under terms of its Warrant Agreement. Each
warrant holder was entitled to exchange one warrant share for one common share
at $5.00 per share. Warrant holders had until December 19, 1997 to tender their
warrants. The Company raised $11.5 million from 2.3 million warrants exercised.
On December 19, 1997 the Company announced that it had closed its
acquisition of the Darlington Music Company, a video gaming route business in
South Carolina. This acquisition was consummated in a stock-for-stock
transaction for 1,000,000 shares of Company stock. The Company accounted for
this transaction as a pooling of interests. The Company also reported that the
Attorney General for the State of South Carolina issued an Advisory regarding
the prosecution of video gaming operators and players for violating the state's
lottery law. He subsequently reversed his position and joined a suit targeting
video gaming operators. This suit will attempt to test the legality of video
poker under South Carolina law. The Company noted that the abolition of the
video gaming industry in South Carolina would have a substantial, detrimental
and material impact on its business.
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: April 15, 1998
AMERICAN BINGO & GAMING CORP.
By: /s/ George Harrison, Jr.
-------------------------
George Harrison, Jr., Chief Executive Officer
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/ George Harrison, Jr.
- ------------------------- Chairman and
George Harrison, Jr. Chief Executive Officer April 15, 1998
/S/ John Orton
- -------------------------
John Orton Chief Financial Officer April 15, 1998
/S/ Michael Mims
- -------------------------
Michael Mims Director and Vice President April 15, 1998
/S/ Greg Wilson
- -------------------------
Greg Wilson Director April 15, 1998
/S/ Jeffrey Gilbert
- -------------------------
Jeffrey Gilbert Director April 15, 1998
/S/ Randy Fein
- -------------------------
Randy Fein Director April 15, 1998
/S/ G. George Fox
- -------------------------
G. George Fox Director April 15, 1998
</TABLE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
I N D E X
---------
Page No.
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2 - F-3
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1997 F-4
Consolidated Statements of Operations
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996 F-7 - F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9 - F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
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, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
stan-dards. Those standards require that we plan and perform the audit 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 audit provides 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, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ King Griffin & Adamson P.C.
- -------------------------------------
King Griffin & Adamson P.C.
Dallas, Texas
April 9, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
American Bingo & Gaming Corp.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of American Bingo & Gaming Corp. and
Subsidiaries for the year ended December 31, 1996 (before restatement for the
1996 poolings-of-interest, not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsi-bility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
stan-dards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above pre-sent
fairly, in all material respects, the consolidated results of operations and
cash flows of American Bingo & Gaming Corp. and Subsidiaries for the year ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Weinick Sanders Leventhal & Company, LLP
- --------------------------------------------------
Weinick Sanders Leventhal & Company, LLP
New York, New York
February 21, 1997 except for Note 14
as to which the date is October 30, 1997.
F-3
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
A S S E T S
-----------
<S> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . $11,936,862
Accounts receivable . . . . . . . . . . . . . . . . 715,926
Notes receivable - current portion - net of
allowance for doubtful collectibility . . . . . . 589,363
Prepaid license expense - current portion . . . . . 879,382
Other prepaid expense . . . . . . . . . . . . . . . 212,728
Other current assets. . . . . . . . . . . . . . . . 38,853
------------
Total current assets. . . . . . . . . . . . . . 14,373,114
Property and equipment - at cost, net of accumulated
depreciation and amortization . . . . . . . . . . . 6,155,800
Other assets:
Notes receivable, net of current portion. . . . . . 636,440
Prepaid license expense - net of current portion. . 534,001
Intangible assets, net of accumulated amortization. 2,318,254
Other non-current assets. . . . . . . . . . . . . 168,431
------------
Total other assets. . . . . . . . . . . . . . . 3,657,126
------------
$24,186,040
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . $ 206,076
Notes payable - current portion . . . . . . . . . . 755,152
Capital leases payable - current portion. . . . . . 396,168
Accrued expenses and other current liabilities. . . 810,019
------------
Total current liabilities . . . . . . . . . . . 2,167,415
Long-term liabilities:
Notes payable - net of current portion. . . . . . . 1,027,537
Capital leases payable - net of current portion . . 568,073
------------
Total long-term liabilities . . . . . . . . . . . . 1,595,610
Commitments and contingencies (Notes 12, 14 and 16) ---
Stockholders' equity:
Preferred stock - $.01 par value
Issued and outstanding - 2,000 shares
Liquidation preference of $1,000 per share. . . . 20
Common stock - $.001 par value
Authorized - 20,000,000 shares
Issued and outstanding - 9,286,905 shares . . . . 9,287
Additional paid-in capital. . . . . . . . . . . . . 24,110,122
Accumulated deficit . . . . . . . . . . . . . . . . (3,696,414)
------------
Total stockholders' equity. . . . . . . . . . . 20,423,015
------------
$24,186,040
============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Video Gaming. . . . . . . . . . . . . . . . . . $ 8,874,257 $5,035,875
Bingo . . . . . . . . . . . . . . . . . . . . . 2,921,386 2,459,166
Other . . . . . . . . . . . . . . . . . . . . . 427,493 222,010
----------- -----------
Total revenues. . . . . . . . . . . . . . . . . . 12,223,135 7,717,051
----------- -----------
Costs and expenses:
Salaries and other compensation . . . . . . . . 2,028,874 859,531
Rent and utilities. . . . . . . . . . . . . . . 1,851,228 1,069,554
Direct operating costs. . . . . . . . . . . . 1,586,824 1,391,994
Depreciation and amortization . . . . . . . . . 1,956,269 1,402,000
General and administrative expenses . . . . . . 3,568,915 2,623,500
----------- -----------
Total costs and expenses. . . . . . . . . . . . . 10,992,110 7,346,579
----------- -----------
Other income and (expenses):
Other income. . . . . . . . . . . . . . . . . . 189,331 104,294
Interest income . . . . . . . . . . . . . . . . 68,188 173,476
Impairment of long-lived assets --- ( 416,576)
Liabilities no longer deemed an obligation --- 865,180
----------- -----------
Total other income and (expenses) . . . . . . . . 257,519 726,374
----------- -----------
Income before provision for income taxes
and extraordinary item. . . . . . . . . . . . . 1,488,544 1,096,846
Provision for income taxes. . . . . . . . . . . . 203,688 72,764
----------- -----------
Net income before extraordinary item. . . . . . . 1,284,856 1,024,082
----------- -----------
Extraordinary item:
Gain on extinguishment of debt of $602,327,
net of income taxes of $204,791 397,536 ---
----------- -----------
Net income. . . . . . . . . . . . . . . . . . . . $ 1,682,392 $1,024,082
=========== ===========
Earnings per share:
Basic
Net income before extraordinary item. . . . . . $ .17 $ .15
Extraordinary item $ .06 ---
----------- -----------
Net income. . . . . . . . . . . . . . $ .23 $ .15
=========== ===========
Diluted
Net income before extraordinary item. $ .16 $ .15
Extraordinary item $ .05 ---
----------- -----------
Net income. . . . . . . . . . . . . . $ .21 $ .15
=========== ===========
Weighted average number of shares outstanding . . 7,160,612 6,770,154
Weighted average number of shares outstanding -
Assuming full dilution. . . . . . . . . . . . . 8,133,786 6,770,154
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Addtl.
Addtl. Paid-in Subscription
-Common Stock- Paid-in Capital- Notes Preferred Accumulated
Description Shares Value Capital Warrants Receivable Stock Deficit
- ------------------------------------- ---------- ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at 1/1/96, as restated. . . . 6,723,461 $ 6,279 $ 9,951,781 $ 1,026,750 $ (100,500) $ 0 (5,772,261)
Issuance of common stock pursuant to
a severance agreement . . . . . . . 15,000 15 15,485
Issuance of common stock pursuant to
Employee Stock Purchase Plan. . . . 6,161 6 10,534
Issuance of common stock for services 8,000 8 7,992
Issuance of common stock to employees 40,000 40 38,210
Cancellation of subscription notes
receivable. . . . . . . . . . . . . 100,500
Subsidiary owner distributions. . . . (193,458)
Net income for the year ended
December 31, 1996 . . . . . . . . . 1,024,082
---------- ----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996. . . . . 6,792,622 6,348 10,024,002 1,026,750 0 0 (4,941,637)
Issuance of common stock pursuant to
Employee Stock Purchase Plan. . . . 10,767 11 20,439
Issuance of common stock for services 74,000 74 86,871
Common stock issued for stock
purchase agreement. . . . . . . . . 300,000 300 205,950
Exercise of employee stock options. . 200,000 200 347,133
Issuance of common stock to employees 50,000 50 46,825
Subsidiary owner distributions. . . . (402,169)
Purchase subsidiary treasury stock. . (444,448) (651,300)
Issuance of preferred stock . . . . . 1,829,880 20
Issuance of common stock for purchase
of bingo halls. . . . . . . . . . . 9,969 10 49,990
Preferred dividends . . . . . . . . . (35,000)
Redemption of warrants. . . . . . . . 2,293,995 2,294 12,150,332 (1,026,750)
Net income for the year ended
December 31, 1997 . . . . . . . . . 1,682,392
---------- ----------- ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997. . . . . 9,286,905 $ 9,287 $24,110,122 $ 0 $ 0 $ 20 ($3,696,414)
========== =========== ============ ============ ============ ============ ============
Description Total
- ------------------------------------- ------------
<S> <C>
Balance at 1/1/96, as restated. . . . $ 5,112,049
Issuance of common stock pursuant to
a severance agreement . . . . . . . 15,500
Issuance of common stock pursuant to
Employee Stock Purchase Plan. . . . 10,540
Issuance of common stock for services 8,000
Issuance of common stock to employees 38,250
Cancellation of subscription notes
Receivable. . . . . . . . . . . . . 100,500
Subsidiary owner distributions. . . . (193,458)
Net income for the year ended
December 31, 1996 . . . . . . . . . 1,024,082
Balance at December 31, 1996. . . . . 6,115,463
Issuance of common stock pursuant to
Employee Stock Purchase Plan. . . . 20,450
Issuance of common stock for services 86,945
Common stock issued for stock
purchase agreement. . . . . . . . . 205,250
Exercise of employee stock options. . 347,333
Issuance of common stock to employees 46,875
Subsidiary owner distributions. . . . (402,169)
Purchase subsidiary treasury stock. . (651,300)
Issuance of preferred stock . . . . . 1,829,900
Issuance of common stock for purchase
of bingo halls. . . . . . . . . . . 50,000
Preferred dividends . . . . . . . . . (35,000)
Redemption of warrants. . . . . . . . 11,125,876
Net income for the year ended
December 31, 1997 . . . . . . . . . 1,682,392
------------
Balance at December 31, 1997. . . . . $20,423,015
============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,682,392 $ 1,024,082
------------ ------------
Adjustments to reconcile net income 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. . . . . . . . . . . . . . . . . . . 926,481 825,819
Provision for uncollectible notes receivable . . . . . . . . . . . (59,378) (69,343)
Loss (gain) on disposal of property and equipment. . . . . . . . . (158,903) 15,799
Compensatory element of common stock and warrant issuances . . . . 133,822 61,750
Liabilities no longer deemed an obligation and debt extinguishment (602,327) (865,180)
Increase (decrease) in cash flows as a result of
changes in asset and liability account balances:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . (444,767) 63,345
Prepaid expenses and other current assets. . . . . . . . . . . . (670,830) (332,698)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 24,321 227,356
Accrued and other current liabilities. . . . . . . . . . . . . . 310,439 (259,461)
------------ ------------
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . (780,837) 184,463
------------ ------------
Net cash provided by operating activities. . . . . . . . . . . . . . . 1,141,250 1,208,545
------------ ------------
Cash flows from investing activities:
Capital and intangible expenditures. . . . . . . . . . . . . . . . . (909,768) (1,273,418)
Property and equipment expenditures (1,364,839) ---
Repayments of notes receivable . . . . . . . . . . . . . . . . . . . 190,505 303,724
Issuance of notes receivable (355,782) ---
Proceeds from the sale of assets, other --- 104,496
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . (2,439,484) (865,198)
Cash flows from financing activities:
Payments on capital lease obligations (346,735) ---
Payments on notes payable (526,316) ---
Proceeds from notes payable. . . . . . . . . . . . . . . . . . . . . 100,000 623,677
Proceeds from issuance of common stock . . . . . . . . . . . . . . . 367,783 10,540
Proceeds from warrant call 11,125,876 ---
Purchase and cancellation of treasury stock (251,300) ---
Distribution and dividends to stockholders (437,169) ---
Proprietor distributions . . . . . . . . . . . . . . . . . . . . . --- (193,458)
Proceeds from issuance of preferred stock 1,829,900 ---
------------ ------------
Net cash provided by financing activities. . . . . . . . . . . . . . . 11,862,039 440,759
------------ ------------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . 10,563,805 784,106
Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . 1,373,057 588,951
------------ ------------
Cash at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . $11,936,862 $ 1,373,057
============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended
December 31,
--------------------
1997 1996
---------- --------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash payments for the year:
Interest expense . . . . . . . . . . . . . . . . . . $ 47,113 $ 31,002
========== ========
Income taxes . . . . . . . . . . . . . . . . . . . . $ 442,005 $ 39,447
========== ========
Non-Cash Transactions for the year:
Issuance of common stock for employment
and services, consulting, legal and other. . . . . . $ 133,822 $ 61,750
========== ========
Acquisition of business in exchange for note payable $ 400,000 ---
==========
Acquisition of property and equipment
in exchange for notes payable $1,093,140 ---
==========
Liabilities no longer deemed an obligation and
gain on extinguishment of debt . . . . . . . . . . $ 602,327 $865,180
========== ========
Acquisition of property under capital leases $1,235,812 ---
==========
Acquisition of businesses in exchange for common stock $ 256,250 ---
==========
Purchase of treasury stock through asset distribution $ 400,000 ---
==========
Cancellation of subscription notes receivable --- $100,500
========
Impairment of long-lived assets --- $416,576
========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
AMERICAN BINGO & GAMING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
American Bingo & Gaming Corp. was formed in 1994 as a Delaware
corporation to consummate the acquisition of charitable bingo centers and video
gaming operations. The Company operates primarily through wholly-owned
subsidiaries in Texas, Alabama and South Carolina. The Company completed its
initial public offering in December of 1994 raising approximately $5.2 million
through the sale of 1,000,000 shares of its Common Stock and 1,725,000
Redeemable Common Stock Purchase Warrants.
Principles of Consolidation:
------------------------------
The accompanying consolidated financial statements include the
accounts of American Bingo & Gaming Corp. and its subsidiaries (hereafter
collective-ly referred to as "The Company"). All significant intercompany
accounts and transactions have been eliminated.
Reclassifications:
------------------
Certain items in the financial statements have been reclassified to
maintain consistency and comparability for all periods presented herein.
Management Estimates:
---------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the
reporting period. Ultimate actual results may, in some instances, differ from
previously estimated amounts.
The financial statements include an allowance for collectibility of
the notes receivable as further discussed in Note 5. If the Company were unable
to collect on the note, and is unable to sell the underlying assets at their
estimated fair market value, the amount realized could be substantially less
than net amount reflected in the accompanying balance sheet.
Intangible assets which consist primarily of amounts paid in excess of
the fair market value of tangible assets acquired in connection with the
acquisition of bingo and gaming operations, is amortized over the estimated life
of the intangible. The actual remaining life may differ from management's
expected life.
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, although
this amount was immaterial at December 31, 1997.
Prepaid Licenses:
------------------
Prepaid licenses consist of video gaming, bingo and other operational
licenses which are reviewed periodically to ensure their continued usefulness
and ongoing commercial value. Video
F-9
<PAGE>
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued).
Prepaid Licenses:
------------------
gaming licenses, the largest component of the Company's prepaid licenses, are
required for the Company to operate its South Carolina video gaming machines.
Video gaming licenses currently cost $4,000 per license for a two-year period,
and are amortized over this period. The value of such licenses can be affected
by regulatory issues and changes. The Company has recorded the net unamortized
cost of its licenses as prepaid assets.
Property and Equipment:
-------------------------
The cost of equipment, furniture and fixtures is depreciated over the
estimated useful lives of the assets ranging from four to 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 is
amortized over thirty-nine years which approximates their estimated useful
lives. Building improvements are amortized over their estimated use-ful lives
ranging from seven to 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.
Under Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," the Company recognizes impairment losses when facts and circumstances
indicate that the carrying amount of an asset may not be recoverable. In such
cases, the difference between management's estimate of discounted future cash
flows and carrying value of the asset is recorded as an impairment.
Intangible Assets:
------------------
Intangible assets, primarily consisting of goodwill and non-compete
covenants, are periodically reviewed by management to evaluate the future
economic benefits or potential impairments which may affect their recorded
values. Goodwill, which represents the excess of the cost of assets acquired
over the fair value of those tangible assets on the date of their acquisition,
is amortized over various periods ranging from three to fifteen years,
consistent with the estimated useful life of the goodwill. Non-compete covenants
are amortized over the periods of the stated benefits, ranging from one to
five years, and are monitored for contractual compliance. If the projected
undiscounted future net earnings of an intagible asset is less than the recorded
value, then the intangible asset is written down to fair value.
Revenue Recognition:
---------------------
The Company generates revenues from the following sources:
(i) Video Gaming Revenues:
Video gaming revenues are recorded from the net "handle" of the Company's
video gaming machines. The net "handle" is the total player spend less prizes
paid by the machines. Video gaming revenues are derived from video gaming
machines in bingo centers, freestanding locations and route operations. The
Company generally retains all video gaming revenues generated at bingo centers
and freestanding locations, while route operation revenues are split with the
location owners. Video gaming revenues can vary depending on customer attendance
and spend, games available, and the timing of prize payouts, which are random.
Video gaming revenues comprised 72% of the Company's total 1997 revenues.
F-10
<PAGE>
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued).
(ii) Bingo Revenues:
Bingo rents, paper sales and head tax payments are received from charitable
organizations through various sub-lease agreements of the Company's bingo
centers. Revenues are determined by customer attendance, spend and prize
payouts, as well as state regulations which usually dictate the number of bingo
sessions a charity can conduct and rent limits that can be paid to a commercial
lessor, such as the Company. Bingo revenues comprised 24% of the Company's total
1997 revenues.
(iii) Concessions and Other Revenues:
Concessions and other revenues are earned from concessions, vending
machines, bingo supplies, pool table and jukebox proceeds, and other sources.
These revenues comprised just over 4% of the Company's total 1997 revenues.
Income Taxes:
--------------
Deferred income tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the income tax
and financial reporting carrying amounts of assets and liabilities. The Company
periodically evaluates its deferred tax assets and adjusts any related valuation
allowance based on the estimate of the amount of such deferred tax assets which
the Company believes does not meet the "more-likely-than-not" recognition
criteria.
Per Share Data:
----------------
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share," effective December 15, 1997. Under this statement,
basic earnings per share of common stock is calculated by dividing income from
continuing operations by the weighted average number of common shares actually
outstanding during each period. Diluted earnings per share of common stock is
calculated by dividing net income by the fully diluted weighted average number
of common shares outstanding during each period, which includes dilutive stock
options and convertible shares.
New Accounting Standards:
--------------------------
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, in the first quarter of 1998.
Upon adoption of SFAS No. 130, the Company will present a new Consolidated
Statement of Comprehensive Income which will report all changes in the Company's
stockholders' equity other than transactions with stockholders. Comprehensive
income pursuant to SFAS No. 130 would include the Company's consolidated net
income, as reported in the Consolidated Statement of Operations, plus the net
changes in the marketable securities, foreign currency translation and pension
liabilities components of stockholders' equity. Management does not believe this
statement will have an impact on its consolidated financial statements.
The Company will adopt SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, for the purposes of its annual financial
statements effective for the year ending December 31, 1998. SFAS No. 131 will
supersede the business segment disclosure requirements currently in effect under
SFAS No. 14. SFAS No. 131, among other things, establishes standards regarding
the information a company is required to disclose about its operating segments.
SFAS No. 131 also provides guidance regarding what constitutes a reportable
operating segment. The Company expects to have two operating segments pursuant
to SFAS No. 131.
F-11
<PAGE>
NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued).
The Company will adopt the disclosure requirements of SFAS No. 132,
Employer's Disclosures about Pensions and Other Post-retirement Benefits, in the
fourth quarter of 1998. SFAS No. 132 revises disclosure requirements for such
pension and post-retirement benefit plans to, among other things, standardize
certain disclosures and eliminate certain other disclosures no longer deemed
useful. SFAS No. 132 does not change the measurement or recognition criteria for
such plans. Management does not believe this statement will have an impact on
its consolidated financial statements.
The Company adopted a new accounting standard related to start-up costs in
1997. This statement is required to be adopted for fiscal years beginning after
December 15, 1998 and requires the expensing of all start-up costs, as defined,
as they are incurred.
NOTE 2 - MATERIAL ACQUISITIONS, OPENINGS AND CLOSINGS.
At the end of 1997 the Company closed its double bingo center in
Brownsville, Texas and sub-let it to a federal government agency. The Company
originally opened this center in October of 1996 at an investment cost of
$600,000.
On December 18, 1997 the Company acquired Darlington Music Company, Inc.
("DMC"), a South Carolina video gaming route business. The acquisition was
consummated in a stock-for-stock transaction, with the Company exchanging
1,000,000 shares of its Common Stock for 100% of the issued and outstanding
shares of DMC. There was no cash or other consideration. This acquisition was
accounted for as a pooling of interests, and DMC's historical financial results
have been combined with the Company's financial results. DMC was founded in 1938
by George Harrison Sr. and is today operated for the Company by his three sons
George Harrison, Jr., Thomas Harrison and William Harrison. George Harrison, Jr.
has been appointed Chairman of the Board and acting Chief Executive Officer for
American Bingo & Gaming Corp.
In November of 1997 the Company cancelled a stock purchase agreement with
the manager of its West Columbia, South Carolina bingo and gaming property due
to poor financial performance and construction cost over-runs on new
developments. The Company and the manager mutually agreed to reduce the
Company's note payable balance to the manager from $657,000 to $100,000, plus
past due payments of $45,000, resulting in a one-time extraordinary gain of
$602,000 for the Company. The gain on extinguishment of debt is reflected as an
extraordinary item net of income taxes of $205,000. The Company also canceled
the existing employment agreement with this manager. In exchange, the Company
agreed to reduce the lock-up on this manager's 300,000 shares of Company stock
from two years to one year. The Company retained all other assets acquired in
the original stock purchase agreement. The Company had originally entered into
this stock purchase acquisition agreement in early 1997, acquiring a South
Carolina corporation, related equipment and minority lease ownership rights. In
exchange, the Company provided the manager with $1.0 million of consideration,
including a note for $740,000, 300,000 shares of Company Common Stock valued at
$206,000, and cash of $50,000. The purchase price for this acquisition exceeded
the net tangible asset value, resulting in the recording of goodwill of
$966,000, which is being amortized on a straight-line basis over five years.
On October 9, 1997, the Company acquired Lucky 4 Inc. ("Lucky 4") a South
Carolina corporation engaged in the video gaming business. This acquisition was
consummated in a stock-for-stock transaction, with the Company exchanging
358,000 shares of its Common Stock for 100% of the issued and outstanding shares
of Lucky 4. There was no cash or other consideration. This acquisition was
accounted for as a pooling of interests, and Lucky 4's historical financial
results have been combined with the Company's financial results. The principals
in this acquisition, Danny Dye and Tom Nguyen, have remained with the Company
and continue to manage these video gaming operations.
F-12
<PAGE>
NOTE 2 - MATERIAL ACQUISITIONS, OPENINGS AND CLOSINGS (continued).
On August 25, 1997, the Company acquired Gold Strike, Inc. ("Gold Strike")
a South Carolina corporation engaged in the video gaming business. This
acquisition was consummated in a stock-for-stock transaction, with the Company
exchanging 827,680 shares of its Common Stock for 100% of the issued and
outstanding shares of Gold Strike. There was no cash or other consideration.
This acquisition was accounted for as a pooling of interests, and Gold Strike's
historical financial results have been combined with the Company's financial
results. The principal in this acquisition, Michael Mims, continues to run this
gaming business, as well as video gaming machines in bingo centers, for the
Company. Mr. Mims is an officer and director of the Company.
In August of 1997 the Company acquired two bingo centers in Charleston,
South Carolina. The Company acquired the Beacon I and Beacon II centers for cash
and stock consideration totaling $175,000. The Company recorded this acquisition
as a purchase. The Company subsequently closed the Beacon II center due to lack
of profitability.
In June of 1997 the Company acquired four bingo centers in Charleston,
South Carolina. The Company acquired the Lucky, Shipwatch, Ponderosa and Sea
Galley bingo centers for $1.1 million, comprised of $750,000 in cash, $400,000
in notes and 9,969 shares of Company stock valued at $50,000. The Company
recorded these acquisitions as purchases. The Company subsequently closed the
Sea Galley center due to lack of profitability. The purchase price for this
acquisition exceeded the net tangible asset value, resulting in the recording of
goodwill of approximately $1.0 million, which is being amortized on a
straight-line basis over a three to five year basis per location, consistent
with the remaining property lease periods.
From April of 1997 through the end of the year the Company opened four new
bingo centers in South Carolina (two in Charleston and two in Columbia). The
Company opened and closed these centers several times during the year, trying
different bingo programs, but was unable to generate consistent profitability
from these centers. The Company has since sub-let one of the centers in
Charleston and is evaluating a "high-stakes" bingo game for its dormant Columbia
property.
In March of 1997 the Company entered into a lease for a bingo center in
North Augusta, South Carolina. This center opened in early 1998. A third party
operates the bingo operations for this center, while the Company retains the
video gaming rights. This bingo center is in close proximity to several Company
video gaming centers, and is intended to draw greater crowds to these centers.
In November 1996, the Company and the purchaser of the assets of its former
6323 Hall For Hire Florida bingo center 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.
Subsequently, the purchaser filed an Interpleador legal action, and is paying
the note payments for this bingo center into a Florida court until such time as
the court decides who is legally entitled to these note payments. Management
expects this issue to be favorably resolved by the end of 1998.
In March of 1996, the Company opened the first of two bingo centers in
McAllen, Texas. It opened the second center in McAllen in September of 1996.
Total cost for this South Texas bingo center development was approximately
$600,000. The Company has since closed one of the two McAllen centers due to a
lack of profitability.
All acquisitions accounted for as purchases reflect the operations of the
acquired entities from the respective dates of purchase. The results of
operations for all entities accounted for as poolings are included for all
periods presented.
F-13
<PAGE>
NOTE 2 - MATERIAL ACQUISITIONS, OPENINGS AND CLOSINGS (continued).
Unaudited pro-forma financial information for the year ended December 31,
1996 as though the significant pooled acquisitions had occurred on January 1,
1996 is as follows:
<TABLE>
<CAPTION>
As Previously
As Restated Reported
<S> <C> <C>
(Unaudited)
- -------------------------
Revenues. . . . . . . . . $ 7,717,051 $3,648,262
Net Income. . . . . . . . 1,038,130 852,666
Earnings per share-basic. $ .15 $ .21
Weighted average. . . . . 6,770,154 4,140,026
shares outstanding
</TABLE>
NOTE 3 - ACCOUNTS RECEIVABLE.
Accounts receivable consist principally of amounts due from charitable
organizations which conduct bingo events at the Company's various bingo centers,
and are generally payable within one month of the event. Receivables also
include rent due from operators of conces-sions located within the bingo
centers. Generally, video gaming receivables consist of temporary advances to
video gaming route locations which are normally collected within one month.
Virtually all of the receivables due at December 31, 1997 were subsequently
collected; therefore, no allowance for doubtful accounts has been provided.
NOTE 4 - PROPERTY AND EQUIPMENT.
Depreciation and amortization expense charged to operations for the years
ended December 31, 1997 and 1996 amounted to $798,000 and $808,000,
respectively.
Property and equipment at December 31, 1997 included $1.3 million of assets
held under capital leases and related amortization of 109,000.
Leasehold improvements, with a carrying value of $560,900, were deemed
impaired and written down by $417,000 to their fair value in 1996. Fair value
was based on estimated discounted future cash flows to be generated by two of
the Company's bingo centers located in Texas.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Land . . . . . . . . . . . . . . . . . . . . . . $ 189,671
Buildings and building improvements. . . . . . . 379,342
Leasehold improvements . . . . . . . . . . . . . 1,945,576
Video gaming machines and bingo equipment. . . . 6,103,939
Equipment, furniture and fixtures. . . . . . . . 532,129
Automobiles. . . . . . . . . . . . . . . . . . . 523,801
--------------
9,674,458
Less: Accumulated depreciation and amortization ( 3,518,658)
--------------
$ 6,155,800
==============
</TABLE>
F-14
<PAGE>
NOTE 5 - NOTES RECEIVABLE.
Receivables from the sale of the Company's former Florida bingo centers:
<TABLE>
<CAPTION>
<S> <C>
A promissory note due in equal monthly installments of $13,300, including
interest at 12% per annum, maturing December 1998. . . . . . . . . . . . . . . . $ 149,147
A promissory note due in equal monthly installments of $5,400, including
interest at 12% per annum, maturing December 1998. . . . . . . . . . . . . . . . $ 82,377
A promissory note due in equal monthly installments of $21,000 and $11,000,
including interest at 12% per annum, maturing October 2001 . . . . . . . . . . . $ 753,584
A promissory note due in equal monthly installments of $10,000, including
interest at 9.0% per annum, maturing April 1998. . . . . . . . . . . . . . . . . $ 119,466
Other receivables:
Three non-interest bearing promissory notes due in equal annual installments of
27,333, maturing December 2000. . . . . . . . . . . . . . . . . . . . . . . . . $ 245,996
Various other promissory notes due in monthly installments of $833 to $5,000,
including interest at 6.50% to 8.0% per annum, maturing from July 1998 to
May 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,628
------------
$ 1,457,198
Less allowance for doubtful collectibility . . . . . . . . . . . . . . . . . . . ( $231,395)
------------
$ 1,225,803
============
</TABLE>
Collection of the Florida notes is dependent upon the continued
profitability of the Florida bingo centers. Should the purchasers default in the
performance of the notes, the only recourse available to the Company may 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 $231,395 at December 31, 1997, which it estimates
would be the resultant loss should the Company have to foreclose and
subsequently re-sell the assets.
The Company is not currently collecting payments on the $753,584 note, as
the creditor is depositing the note payments into an escrow account pursuant to
an Interpleador action he filed in Florida. The Company expects to collect this
note upon judicial resolution of the Interpleador action by the end of 1998,
although there can be no assurance of this outcome. Management re-evaluates the
sufficiency of this provision periodically and adjusts the amount of its
allowance provision as necessary.
F-15
<PAGE>
NOTE 5 - NOTES RECEIVABLE (continued).
Annual principal maturities under these notes are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
-------------- ----------
<S> <C>
1998 $ 820,758
1999 254,460
2000 248,809
2001 133,171
2002 ---
----------
1,457,198
Less: Allowance for doubtful collectibility . . . . . 231,395
----------
Notes receivable - net . . . . . . . . . . . . . . . . 1,225,803
Less: Current maturities. . . . . . . . . . . . . . . 589,363
----------
$ 636,440
==========
NOTE 6 - INTANGIBLE ASSETS.
Intangible assets consist of the following:
Covenants not to compete . . . . . . . . . . . . . . . $ 235,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . 2,492,519
----------
2,727,519
Less: Accumulated amortization. . . . . . . . . . . . 409,265
----------
$2,318,254
==========
</TABLE>
Amortization expense charged to operations for the years ended
December 31, 1997 and 1996 amounted to $306,000 and $99,000, respectively.
Intangible assets deemed to have no future benefit are written off as of the
date of deter-mination.
NOTE 7 - LIABILITIES NO LONGER DEEMED AN OBLIGATION.
In 1995, the Company incurred purchase liabilities in connection with
the acquisition of certain 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 was no longer obligated under these
liabilities and has reversed $865,180 to income as of December 31, 1996.
F-16
<PAGE>
NOTE 8 - EXTRAORDINARY ITEM.
In November of 1997, the Company and a former bingo and gaming center
manager in South Carolina mutually agreed to amend their stock purchase
agreement. Under this agreement, the Company's note payable to this manager was
reduced from $657,000 to $100,000, and $45,000 of past due payments were
forgiven, creating a one-time extra-ordinary gain of $602,000, or $398,000 net
of taxes, in 1997. In exchange, the Company agreed to reduce the lockup on the
manager's 300,000 shares of Company stock from two years to one year. The
Company retained all other assets acquired in this acquisition.
NOTE 9 - LONG TERM DEBT.
Long-term debt at December 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Installment note payable to a financial institution, including interest at
7.75%, maturing December 1999, secured by certain equipment. . . . . . . . . . . . $ 342,544
Installment note payable to a third party, due in monthly installments of
10,162, including interest at 13.1%, maturing December 2001, secured by
certain equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,816
Installment note payable to a third party, due in monthly installments of
17,728, including interest at 6.0%, maturing June 1999, secured by certain
equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,443
Installment note payable to a third party, due in monthly installments of $7,069,
including interest at 12.5%, maturing January 2002, secured by certain
equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,750
Installment note payable to a third party, due in monthly installments of $4,220,
including interest at 12.7%, maturing June 2001, secured by certain equipment. . . 142,386
Installment non-interest bearing note payable to an individual, due in monthly
installments of $10,000, maturing November 1998, unsecured . . . . . . . . . . . . 100,000
Installment note payable to a third party, due in monthly installments of $2,240,
including interest at 13.9%, maturing April 2001, secured by certain equipment . . 71,448
Installment non-interest bearing note payable to a third party, due in monthly
installments of $6,000, maturing September 1998, secured by certain equipment. . . 54,000
Installment note payable to a third party, due in monthly installments of $1,525,
including interest at 13.3%, maturing March 2001, secured by certain
equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,903
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,399
----------
1,782,689
Less current installments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755,152
----------
Long-term debt, excluding current installments . . . . . . . . . . . . . . . . . . $1,027,537
==========
</TABLE>
F-17
<PAGE>
NOTE 9 - LONG TERM DEBT (Continued).
Principal payments on long-term debt for each of the next five fiscal years
and thereafter are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31,
-------------
<S> <C>
1998 . . . $ 755,152
1999 . . . 505,854
2000 . . . 276,384
2001 . . . 234,764
2002 . . . 10,535
-------------
1,782,689
</TABLE>
NOTE 10 - INCOME TAXES.
Deferred tax assets and liabilities at December 31, 1997 and 1996 consist
of the following:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Current deferred tax asset . . . . $ 78,657
Valuation allowance. . . . . . . . (78,657)
----------
Net current deferred tax asset . . $ 0
Non-current deferred tax asset . . 756,230
Non-current deferred tax liability (756,230)
----------
Valuation allowance. . . . . . . . $ 0
Net non-current deferred tax asset $ 0
</TABLE>
The current deferred tax asset results primarily from the provision for
doubtful accounts which are not currently deductible for income tax purposes.
The non-current deferred tax asset results primarily from the net operating loss
carryforward. The net operating loss available at December 31, 1997 amounts to
approximately $2,175,000 and begins to expire in 2009. The current and
non-current deferred tax assets have a 100% valuation allowance due to the
uncertainty of generating future taxable income.
During 1997, the Company deducted, for income tax purposes, approximately
$600,000 relating to employee stock options exercised which were not deductible
for financial reporting purposes. The related tax benefit of this permanent tax
difference, approximately $204,000, has been recorded as additional paid-in
capital. However, a valuation allowance has been established for the benefit due
to the uncertainty of generating future taxable income, which is included in the
above valuation allowance for non-current deferred tax assets. In the event that
the Company generates future taxable income, the related allowance will be
reduced and the full benefit will be recognized as an increase to equity. State
income tax expense for 1996 for pooled entities is immaterial, and is not
included in the table below.
F-18
<PAGE>
NOTE 10 - INCOME TAXES (Continued).
The Company's income tax expense for the years ended December 31, 1997 and 1996
differed from the statutory federal rate of 34 percent as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Statutory rate applied to net income before taxes and
gain from extraordinary item. . . . . . . . . . . . . . $ 506,105 $ 377,704
Increase (decrease) in income taxes resulting from:
Amounts not deductible for federal income tax purposes 11,631 ---
State income taxes, net of federal income tax effect . 63,036 48,024
Increase (decrease) in valuation allowance. . . . . . . . 34,776 (352,964)
Amount deductible for federal income tax purposes
relating to exercise of stock options (204,000) ---
Effective tax on unincorporated business acquired (207,860) ---
---------- ----------
Income tax expense. . . . . . . . . . . . . . . . . . . . $ 203,688 $ 72,764
========== ==========
</TABLE>
NOTE 11 - EARNINGS PER SHARE.
A reconciliation of basic to diluted earnings per share from 1997 continuing
operations is as follows:
<TABLE>
<CAPTION>
Numerator: Basic Diluted
- ---------------------------------------------- ----------- ----------
<S> <C> <C>
Net income before extraordinary item . . . . $1,284,856 $1,284,856
less preferred dividends earned (58,333) ---
----------- ----------
Income available to common shareholders. . . $1,226,523 $1,284,856
Denominator:
- ----------------------------------------------
Weighted average shares outstanding. . . . . 7,160,612 7,160,612
Effect of dilutive securities:
Preferred stock --- 220,620
Stock options and warrants --- 752,554
----------- ----------
Weighted average shares outstanding. . . . . 7,160,612 8,133,786
Earnings per share before extraordinary item $ .17 $ .16
</TABLE>
No anti-dilutive shares have been included in the computation of earnings
per share. There were no securities outstanding that could potentially dilute
basic earnings per share in the future that were excluded for anti-dilutive
reasons. The following transactions occurred after December 31, 1997, which, had
they taken place during 1997, would have changed the number of shares used in
the computations of earnings per share: 1) Approximately 90,000 common shares
were issued pursuant to preferred stock conversions; 2) options to purchase
150,000 common shares were issued; and 3) approximately 30,000 common shares
were issued pursuant to an acquisition. Basic and diluted earnings per share for
1996 is identical as the inclusion of any convertible securities outstanding
during the period would be anti-dilutive.
F-19
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES.
(a) Leases:
The Company is obligated under various operating and capital 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.
Minimum annual rentals under these leases are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Operating Capital
- ------------ ----------- -----------
<S> <C> <C>
1998 $1,387,379 $ 491,402
1999 1,121,057 474,302
2000 1,142,151 162,263
2001 729,868 ---
2002 263,722 ---
----------- ----------
Total minimum annual rentals $4,644,177 $1,127,967
===========
Less amount representing interest ( 143,431)
Less amount representing tax ( 20,295)
Present value of net minimum lease payments
Including current maturities of $396,168 $ 964,241
===========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1996 amounted to $1.5
million and $952,000, respectively.
(b) Salaries:
The Company is obligated under various employment agreements.
Generally, the agreements provide for minimum annual salaries as well as
potential bonuses. Certain of the agreements are adjustable, up or down, based
on revenue performance. Minimum annual salaries under these agreements are as
follows:
<TABLE>
<CAPTION>
Years Ending
December 31, Amount
-------------
<S> <C>
1998 . . . . . . . . . . $ 1,350,000
1999 . . . . . . . . . . 1,350,000
2000 . . . . . . . . . . 1,162,500
2001 . . . . . . . . . . 225,000
2002 . . . . . . . . . . 168,750
-------------
Total minimum salaries $ 4,256,250
=============
</TABLE>
(c) Legal:
In July of 1995 the Company bought three Florida bingo centers from Phillip
Furtney. On June 12, 1997, Mr. Furtney filed a lawsuit against the Company,
alleging breach of contract on these purchases. Mr. Furtney alleged that the
Company defaulted on its original purchase note and stock obligations per sales
agreements.
On July 12, 1997 the Company answered this lawsuit and filed a counterclaim
against Mr. Furtney alleging, among other things, fraud, negligent
representation, breach of express warranties, contractual indemnity and tortious
interference with contractual rights. The Company believes that it was
materially defrauded in its purchases of these three Florida bingo centers from
Mr. Furtney in that he made no disclosure to the Company of an ongoing criminal
investigation of his operation of these centers by the Florida State Attorney
General's Office and that he was fully aware of this investigation.
F-20
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued).
The state of Florida temporarily closed these three bingo centers, as well as
several other centers formerly owned by Mr. Furtney, in November 1995. The
Company re-sold these three bingo centers in December of 1995. The Company
believes that Mr. Furtney owes the Company monetary damages in excess of
$1,000,000, because: i) these bingo centers did not perform to his
contractually-guaranteed net income levels during the Company's ownership; ii)
the Company incurred substantial monetary damages in its defense against the
State of Florida after the bingo center closings; iii) the Company lost the
ability to operate bingo centers in the state of Florida as part of its
settlement with the state of Florida; and iv) the Company sustained substantial
damage to its good name and reputation.
In January of 1997, the Company and the State of Florida settled all
matters regarding the Company's previous ownership and operation of these bingo
centers. The State of Florida is continuing its prosecution of Mr. Furtney,
which is expected to go to trial by the end of 1998. The Company believes that
Mr. Furtney's lawsuit against the Company is completely without merit and that
the Company will prevail in its counterclaim against him. There can be no
assurance of this result, however, and a decision against the Company could have
a potentially adverse effect on the financial position and operations of the
Company.
In 1998 one of the Company's subsidiaries (MHJ Corp.) was named defendant (among
many other video gaming operators) in a legal action in South Carolina. This
action alleges that the defendants' video gaming operations in South Carolina:
i) comprise a lottery, which violates the state constitution; ii) violate the
state's daily net video gaming machine payout limit of $125 per player; and iii)
violate the state's single premise rule which only allows up to five video
gaming machines per premise. The plaintiffs in this action are attempting to
have this action certified as a class action lawsuit. Plaintiffs originally
filed this action in state court, which was then moved to a federal court by
defendants. The federal court certified the lottery issue of this case and sent
the case back to the South Carolina Supreme Court to be decided. Oral arguments
on the certified issues were held before the South Carolina Supreme Court in
April of 1998. The Supreme Court has not yet rendered its decision. The Company
believes that this action is completely without merit and will defend itself
vigorously. If this case were to be decided against the Company, it could have a
materially adverse effect on the financial position and operations of the
Company.
The Company also faces risk in that the South Carolina legislature is
currently considering a bill that would abolish the video gaming industry in
South Carolina in June of 1999 (video gaming provided approximately 72% of the
Company's total 1997 revenues). The Governor and House support this bill, but
the Company believes that the bill will not pass the Senate. If the bill does
not pass in the Senate, a number of potential outcomes are possible, including:
i) the passage of an alternative bill that imposes higher taxes and regulation
on the industry; ii) a public referendum on video gaming; or iii) no bill or
referendum in 1998. The South Carolina legislature meets annually, and it is
possible that the continued legalization of video gaming could be an issue in
future legislative sessions. The Company could be adversely affected if the
legislature or court system were to abolish the industry, adversely modify
regulations and/or substantially increase video gaming taxes.
Approximately 228 of the Company's current 755 video gaming machines are
non-compliant with the State of South Carolina's requirement that video gaming
machines be able to be connected on-line with the state in 1999. The Company
will have to retrofit these machines to be compliant with this requirement, or
replace or discontinue these machines. The Company does not expect the cost of
retrofitting or discontinuance to be material, although the cost of replacing
these machines with compliant machines could be material.
F-21
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY.
In December of 1997, the Company redeemed 2,293,995 of its Redeemable
Common Stock Purchase Warrants pursuant to the Company's warrant call in
November of 1997. Each warrant was converted into one share of Company Common
Stock at the price of $5.00 per share. The Company grossed $11.5 million from
this transaction, and netted $11.1 million after associated financing costs.
The Company issued 2,495,649 shares of its Common Stock in 1997 for various
acquisitions in South Carolina. In December, the Company issued 1,000,000 shares
in the stock-for-stock acquisition of the Darlington Music Company video gaming
route business. In October, the Company issued 358,000 shares in the
stock-for-stock acquisition of the Lucky 4 video gaming business. In September,
the Company issued 827,680 shares in the stock-for-stock acquisition of Gold
Strike video gaming business. In September, the Company also issued 9,969 shares
in the acquisition of two bingo centers. Early in the first quarter of 1997, the
Company issued 300,000 shares in a stock purchase acquisition of a bingo center,
equipment and various corporations. All of the shares issued for these
acquisitions, excluding the 9,969 tranche, were subject to Company re-sale
lockup agreements of one to three years.
The Company issued 2,000 Preferred Shares in August of 1997 at $1,000 per
share in a private equity transaction, grossing $2.0 million and netting $1.83
million after associated financing costs. The net proceeds from this transaction
were recorded as equity. These shares are convertible into Company Common Shares
under a variable pricing formula ranging from $4.00 to $5.50 per share.
Conversion rights on these shares were fully vested at April 1, 1998. These
shares pay an annual dividend of 7% on a quarterly basis on the unconverted
principle balance. As of April 6, 1998, approximately 500 shares or 25% of the
total Preferred Shares had been converted into approximately 90,000 Common
Shares.
The Company issued 200,000 shares of its Common Stock in 1997 pursuant to
employee stock option exercises from June through September. These option shares
were exercised and issued at various prices from $1.00 to $2.50 per share,
netting $347,000 in equity proceeds for the Company.
The Company issued 10,767 shares of its Common Stock in July and December
of 1997 pursuant to purchases under the Company's Employee Stock Purchase Plan.
These shares were issued at the existing fair market value of $1.17 and $3.53,
respectively, per share, for the six-month plan periods ended in June and
December, respectively, netting the Company over $20,000 in equity proceeds
through voluntary payroll deductions.
The Company issued 74,000 shares of its Common Stock in the first quarter
of 1997 for various professional, lobbying, and legal services rendered. These
shares were valued at the existing fair market value of $1.09 per share.
The Company granted 50,000 shares of its Common Stock in January of 1997 to
employees as an annual bonus for 1997. These shares were valued at the existing
fair market value of $.94 per share.
The Company issued 6,161 shares of its Common Stock in July and December of
1996 pursuant to purchases under the Company's Employee Stock Purchase Plan.
These shares were issued at the existing fair market value of $2.55 and $1.17,
respectively, per share, for the six-month plan periods ended in June and
December, respectively, netting the Company over $10,000 in equity proceeds
through voluntary payroll deductions.
The Company issued 8,000 shares of its Common Stock in September of 1996
for professional services rendered. These shares were valued at the existing
fair market value average price of $1.00 per share.
F-22
<PAGE>
NOTE 13 - STOCKHOLDERS' EQUITY (continued).
The Company issued 15,000 shares of its Common Stock to a former employee
in June of 1996 pursuant to a severance agreement. These shares were valued at
the existing fair market value of $1.03 per share.
The Company granted 40,000 shares of its Common Stock in 1996 to employees
as an annual bonus for 1996. These shares were valued at the existing fair
market value of $.96.
NOTE 14 - ACCOUNTING FOR STOCK BASED COMPENSATION.
The Company applies APB Opinion No. 25 "Accounting For Stock Issued to
Employees" ("APB 25") in accounting for its stock options. As of December 31,
1997, the Company has implemented four shareholder approved stock option plans.
These plans are intended to comply with Section 422 of the Internal Revenue Code
of 1986, as amended. The Plans collectively provide for the total issuance of
2,000,000 common shares over ten years from the date of each plan's approval.
At year-end 1997 and 1996, a total of 1,386,666 and 1,059,999 option shares had
been granted and were outstanding under these plans, respectively. An
additional 218,000 option shares had been granted to non-employees outside of
these plans as of the end of 1997. The Company believes that its ability to
attract, retain and motivate quality personnel is strongly influenced by its
ability to grant options. A summary of the Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
Employee Stock Plans Other Compensatory Combined Total
-------------------- ------------------ --------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price Options
---------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Outstanding at 12/31/95 429,999 $ 1.79 - - 429,999
Granted . . . . . . . . 630,000 1.45 - - 630,000
Exercised . . . . . . . - - - - -
Forfeited . . . . . . . - - - - -
---------- ------- ----------
Outstanding at 12/31/96 1,059,999 1.59 - - 1,059,999
Granted . . . . . . . . 526,667 $ 1.00 218,000 $ 4.53 744,667
Exercised . . . . . . . (200,000) 1.72 - - (200,000)
Forfeited . . . . . . . - - - - -
---------- ------- ----------
Outstanding at 12/31/97 1,386,666 $ 2.89 218,000 $ 4.53 1,604,666
========== ======= ==========
</TABLE>
The fair value of options issued during 1997 and 1996 was $711,591 and $765,900,
respectively.
The following table summarizes information about options outstanding at December
31, 1997 under the Employee Stock Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
- ---------------- ----------- ---------------- --------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
0.96 - $6.25. . 1,386,666 3.9 years $ 2.89 430,001 $ 1.53
</TABLE>
F-23
<PAGE>
NOTE 14 - ACCOUNTING FOR STOCK BASED COMPENSATION (CONTINUED).
The following table summarizes information about other compensatory stock
options outstanding at December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercisable Price
- ---------------- ----------- ---------------- --------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$3.00-$5.50 218,000 3.2 years $ 4.53 85,000 $ 3.00
</TABLE>
The options granted in 1997 and 1996 have exercise prices which approximate
fair value and accordingly, no compensation cost has been recognized for its
compensatory stock options in the consolidated financial statements. Had
compensation cost for the Company's stock options been determined consistent
with FASB statement No. 123, "Accounting for Stock Based Compensation", the
Company's net income and net income per share have been decreased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net income as reported $1,682,392 $1,038,130
Pro forma $1,069,196 $ 859,792
Years ended December 31,
----------------------
1997 1996
---------- ----------
Basic earnings per share as reported $ 0.23 $ 0.15
Pro forma $ 0.15 $ 0.13
Diluted earnings per share As reported $ 0.21 $ 0.15
Pro forma $ 0.13 $ 0.13
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model. The following assumptions were used for
grants in 1997; dividend yield at 0%, expected volatility at 76%, risk free
interest rates estimated at 6.0%, and an expected life of 1-3 years. The
following assumptions were used for grants in 1996; dividend yield of 0%,
expected volatility of 148%, risk free interest rates estimated at 6.0%, and
an expected life of 1-3 years.
F-24
<PAGE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS.
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate.
Current assets and liabilities are carried at amounts that reasonably
approximate their fair values. The carrying amount and fair value of notes
payable and long-term debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Amount Fair Value
<S> <C> <C>
Fixed rate debt $ 1,782,689 $ 1,795,492
</TABLE>
The fair values of the Company's fixed rate debt have been estimated based upon
relative changes in the Company's borrowing rates since origination of the fixed
rate debt.
NOTE 16 - SUBSEQUENT EVENT.
On March 25, 1998 the Company acquired Ambler Bingo, a bingo center in
Abilene, Texas. Consideration for this acquisition totaled nearly $1.0 million,
and included $500,000 cash, $400,000 of notes, and approximately 30,000 shares
of Company Common Stock valued at $90,000.
F-25
<PAGE>
AMERICAN BINGO & GAMING CORP.
<TABLE>
<CAPTION>
Subsidiaries as of April 15, 1998
---------------------------------
Name Under
State of Which Subsidiary
Name of Subsidiary Incorporation Conducts Business
<S> <C> <C>
1919 Corp. . . . . . . . . . . Texas Same
Ambler Bingo, Inc. . . . . . . Texas Same
Americana I. . . . . . . . . . Texas Same
Americana III. . . . . . . . . Texas Same
Americana IV . . . . . . . . . Texas Same
Charity Bingo of Texas, Inc. . Texas Same
SA Charities, Inc. . . . . . . Texas Same
Shugart, Inc.. . . . . . . . . Texas Same
Texas Charities Inc. . . . . . Texas Same
Bing-O-Rama, Inc . . . . . . . Alabama Same
Charity Bingo, Inc.. . . . . . Alabama Same
Charity Bingo-Birmingham, Inc. Alabama Same
Columbia One Corp. . . . . . . South Carolina Same
Concessions Corp . . . . . . . South Carolina Same
Dabbers, Inc.. . . . . . . . . South Carolina Same
Darlington Music Company, Inc. South Carolina Same
Gold Strike, Inc.. . . . . . . South Carolina Same
Low Country Promotions, Inc. . South Carolina Same
MHJ Corp.. . . . . . . . . . . South Carolina Same
SC Properties II Corp. . . . . South Carolina Same
Delray Hall For Hire, Inc. . . Florida Same
Delta Bingo, Inc.. . . . . . . Mississippi Same
Forest Bingo, Inc. . . . . . . Mississippi Same
Grenada Bingo, Inc.. . . . . . Mississippi Same
Louisville Bingo, Inc. . . . . Mississippi Same
Starkville Bingo, Inc. . . . . Mississippi Same
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 11936862
<SECURITIES> 0
<RECEIVABLES> 1225803
<ALLOWANCES> (231395)
<INVENTORY> 0
<CURRENT-ASSETS> 14373114
<PP&E> 9674458
<DEPRECIATION> 13518658
<TOTAL-ASSETS> 24186040
<CURRENT-LIABILITIES> 2167415
<BONDS> 0
<COMMON> 9287
0
20
<OTHER-SE> 20413708
<TOTAL-LIABILITY-AND-EQUITY> 24186040
<SALES> 0
<TOTAL-REVENUES> 12223135
<CGS> 10992110
<TOTAL-COSTS> 10992110
<OTHER-EXPENSES> (257519)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1488544
<INCOME-TAX> 203688
<INCOME-CONTINUING> 1284856
<DISCONTINUED> 0
<EXTRAORDINARY> 397536
<CHANGES> 0
<NET-INCOME> 1682392
<EPS-PRIMARY> .23
<EPS-DILUTED> .21
</TABLE>
