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EX-10.10 - EX-10.10 - CALL NOW INC | d81155exv10w10.htm |
EX-21 - EX-21 - CALL NOW INC | d81155exv21.htm |
EX-10.9 - EX-10.9 - CALL NOW INC | d81155exv10w9.htm |
EX-32.1 - EX-32.1 - CALL NOW INC | d81155exv32w1.htm |
EX-31.1 - EX-31.1 - CALL NOW INC | d81155exv31w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2010
COMMISSION
FILE NO. 0-27160
CALL NOW, INC.
(Exact name of registrant in its charter)
NEVADA (State of Incorporation) |
65-0337175 (IRS Employer Identification No.) |
1 Retama Parkway
Selma, TX 78154
(Address of principal executive offices)
Selma, TX 78154
(Address of principal executive offices)
Registrants Telephone No. (210) 651-7145
Securities registered pursuant to Section 12(b) of the Act:
NONE
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 par value per share
COMMON STOCK, $.001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
Yes o No þ
Yes o No þ
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 requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates as of June 30,
2010 (the last business day of the registrants most recently completed second fiscal quarter) was
$357,250.
The number of shares outstanding of the issuers common equity is: 2,013,877 shares of common
stock, as of March 8, 2011.
Documents Incorporated by Reference: NONE
TABLE OF CONTENTS
Table of Contents
Special Note Regarding Forward-Looking Statements
This Annual Report and the information contained herein contain forward-looking statements that
involve both risk and uncertainty and that may not be based on current or historical fact. Although
we believe our expectations to be accurate, forward-looking statements are subject to known and
unknown risks and uncertainties that could cause actual results to differ materially from those
expressed or implied by such statements. Factors that could cause or contribute to such differences
include but are not limited to:
| concentration of operations in our subsidiary |
| concentration of assets one investment |
| limited liquidity available in the secondary market for shareholders |
| general economic conditions |
Forward-looking statements can be identified by the use of forward-looking words such as
believes, expects, hopes, may, will, plans, intends, estimates, could, should
would, continue, seeks, pro forma, or anticipates or other similar words (including their
use in the negative), or by discussions of future matters such as the development of new
technology, integration of acquisitions, possible changes in our regulatory environment and other
statements that are not historical. Additional important factors that may cause our actual results
to differ from our projections are detailed later in this report under the section entitled Risk
Factors. You should not place undue reliance on any forward-looking statements, which speak only
as of the date hereof. Except as required by law, we undertake no obligation to publicly update or
revise any forward-looking statement.
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PART I
ITEM 1. | BUSINESS. |
HISTORY AND DEVELOPMENTS DURING THE LAST THREE YEARS
Call Now, Inc. (the Company) was organized under the laws of the State of Florida on September
24, 1990 under the name Rad San, Inc. The Company changed its name to Phone One International,
Inc. in January 1994 and to Call Now, Inc. in December 1994. The Company changed its domicile to
the State of Nevada in 1999.
The primary operation of the Company is the management of Retama Park racetrack (Retama Park) in
Selma, Texas, through an 80% owned subsidiary, Retama Entertainment Group, Inc. (REG). In late
1997 the Company, in conjunction with Retama Partners, the holder of the racing license for Retama
Park Racetrack, formed REG, a management company created to assume management responsibilities at
Retama Park. Retama Park is owned by the Retama Development Corporation (the RDC), a local
government corporation organized by and acting on behalf of the City of Selma, Texas. The RDC has
an agreement with REG to operate and manage Retama Park that extends through November 1, 2020. The
RDC, as owner of the facility, reimburses REG for the majority of payroll and payroll related
expenses, plus a monthly management fee.
Our strategy is to operate the Retama Park racetrack in order to maintain its status as a Class I
racetrack, attract horsemen to its racing meets, provide a satisfactory gaming and entertainment
experience for its customers and provide a safe and attractive facility. We are also seeking the
legalization of additional forms of gaming at Texas racetracks. We believe that the offering of
additional forms of gaming will be required to enable us to achieve a satisfactory return on our
holdings of RDC Series B bonds, which are further described in the Bonds section of Item 7 of this
Annual Report on Form 10-K.
Historically, we have provided loans to the RDC to support the operations of the racetrack and to
meet its interest and sinking fund obligations on its Series A bonds, which are further described
in the Bonds section of Item 7 of this Annual Report on Form 10-K. Such financial support has been
entirely at the discretion of the Company and was documented by promissory notes secured by a
mortgage on the Retama Park racetrack real estate and facilities which is subordinated to the RDC
Series A bonds and converted Series B bonds, if any. As more fully described later in this
section, on February 25, 2010 the Company entered into a transaction with the Companys Chairman,
Christopher J. Hall, whereby the principal and accrued interest value of loans made by the Company
to the RDC, totaling $5,355,428, and other assets, was exchanged with Mr. Hall in favor of certain
municipal bonds and shares of the Companys stock. Following this transaction, the Company no
longer held any debt secured by the RDC other than the Retama Series A and Series B bonds.
Subsequently, on September 16, 2010 the Company loaned the RDC $400,000 for general operating
purposes. The loan carries an interest rate of 8.50% and matures January 1, 2013. At December
31, 2010, the Company recognized interest of $9,728 as a result of the September 16, 2010 loan made
by the Company; however, due to uncertain economic future of Retama Park, the Company elected to
suspend further recognition of interest income until events and circumstances dictate otherwise.
The status of racing industry in Texas is similar to many other states around the country as the
Texas racing facilities continue to experience greater competition from those facilities that have
been granted the right to conduct additional forms of gaming such as video lottery terminals, slot
machines and card games. All states that share a border with Texas Louisiana, Arkansas,
Oklahoma and New Mexico currently allow additional forms of gaming at their racetracks. The
benefits of additional gaming for racing facilities located in these states are two-fold. First,
the operation of this additional gaming has provided these facilities with a new, and typically
highly profitable, business line. Second, additional gaming has also provided supplemental funds
for the horse purses (the prize money paid) within the state. These higher purses have attracted
higher quality horses that tend to be more attractive to the betting public.
We have been actively pursuing the legalization of additional gaming at Texas racetracks through a
coalition of Texas racetracks that includes the other two Class I tracks, Lone Star Park and Sam
Houston Race Park. If the legalization of additional forms of gaming is approved at Texas
racetracks, it is believed that the profit from this operation could provide sufficient cash flow
to enable both the Series A and Series B bonds to be repaid. However, there can be no assurance
that the Texas legislature and governor will approve such additional gaming and, if approved,
whether the structure and taxation on such additional gaming would benefit the Company. There is
substantial opposition to expanding gaming operations in Texas and no such expansion was approved
during the 2009 Texas legislative session. The 2011 Texas legislative session commenced in January
and legislation has been filed that would allow for the expansion of gaming at racetracks by
legalizing the operation of slot machines at such facilities. The principals at Retama Park and
the Company, as well as all other racing interests in Texas, are currently focused on the passage
of favorable legislation.
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Table of Contents
Retama Park experiences strong competition from other gaming alternatives including on-line gaming,
other forms of gaming in surrounding states, as well as from other entertainment venues in its
market area. We expect these factors to continue to adversely affect the liquidity of RDC in the
absence of legislation allowing additional gaming.
However, the legalization of gaming in Texas remains uncertain in both the likelihood and
timeframe. The alternative available to the Company as a majority Series B bondholder would be to
develop a plan with the Series A bondholders and the RDC that would maximize the value of the
underlying collateral real estate through a liquidation or a joint venture redevelopment with a
third party.
On June 26, 2003 the Company entered into a Convertible Promissory Note and Purchase Agreement
with Penson Worldwide, Inc. (PWI) to lend $6,000,000 with the note maturing on June 26, 2008 (the
PWI Note). PWI is related to the Company as Thomas R. Johnson, President and CEO of Call Now,
Inc., is also a Director of both companies. Mr. Johnson has served as a director of PWI since
August 2003. The PWI Note also called for the Company to have the option to convert the entire
outstanding principal amount into shares of PWIs common stock. The conversion price per common
share was 2.25 times PWIs shareholders equity as of June 30, 2003 divided by the actual number of
issued and outstanding shares of PWI as of June 30, 2003, which equated to $2.01 per share. On
December 23, 2003 an additional $600,000 was loaned to PWI under similar terms and conditions as
the original note.
On June 30, 2005, the Company converted the entire $6,600,000 principal balance of the PWI Note
into 3,283,582 shares of PWI common stock. The Company originally extended credit to Penson in
order to achieve a higher return on its capital for use in its business. After the loan was
converted to Penson stock it continues to be held as a source of capital for the Companys
business.
On May 16, 2006, PWI completed the Initial Public Offering (IPO) of their common stock (Nasdaq:
PNSN). In a simultaneous transaction, PWI affected a 1-for-2.4 share reverse split and the
split-off of certain non-core business operations known as SAMCO. As part of the IPO, the Company
elected to participate in the exchange of PWI shares for SAMCO shares and sell a total of 11.5% of
its investment, or 157,337 post-split shares, of the PWI shares in the IPO, resulting in a gain on
the sale of $1,728,504. Following the completion of the PWI IPO, the Companys resulting position
was as follows: 79,900 shares of SAMCO and 1,130,922 shares of the publicly traded PWI common
stock. During the fourth fiscal quarter of 2009, the Company sold 64,000 shares of SAMCO at an
average price of $5.49 per share, resulting in a remaining position of 15,900 shares, or
approximately 1.66% of the outstanding stock as December 31, 2009. During the first fiscal quarter
of 2010, the Company sold its remaining shares of SAMCO at a price of $5.59 per share. In August
2008, the Company sold 30,000 shares of PWI common stock at an average price of $18.30 per share.
In August 2009, the Company sold 100,000 shares of PWI common stock at an average price of $11.71
per share, leaving a balance of 1,000,922 shares of PWI common stock. As more fully described in
the 8-K filed by the Company on February 25, 2010 and Part I History and Developments During the
Last Three Years of this 10-K, on February 25, 2010 the Company entered into a Purchase and Sale
Agreement with Christopher J. Hall (Hall), the Companys majority shareholder, Chairman and
director, where the Company transferred to Hall, in addition to other assets and cash, 500,000
shares of PWI common stock in exchange for 898,000 shares of the Companys common stock and two
municipal bond positions. The Company holds a position of 500,922 shares of PWI common stock, or
approximately 1.75% of the outstanding shares, as of December 31, 2010 and recognizes cumulative
other comprehensive income from the increase in value of the PWI common stock of approximately
$33,000 (gross) or $22,000 net of taxes.
The Company has maintained an investment account with Penson Financial Services, Inc. (PFSI), a
wholly owned subsidiary of PWI, since 1999. At December 31, 2009, the Company had a margin loan in
this account in the amount of $13,259,281, which is collateralized by a majority of its marketable
securities. In September 2009 PFSI determined that, for margin account purposes due to, among
other reasons, the lack of trading activity in the Retama Development Corporation Series B bonds,
it should require a 100% margin requirement, effectively making these bonds non-marginable. As a
result, the Company received a margin call letter on September 28, 2009 from PFSI notifying the
Company that it needed to deposit $5,300,000 in additional cash or margin collateral into its
margin loan account by September 30, 2009. The Company did not make the requested deposit by
September 30, 2009. PFSI elected not to pursue remedial actions at the time, such as account
liquidation, but continued to reserve all of their rights and remedies under the margin agreement
while working with the Company to restructure the margin loan. As part of the margin loan
restructuring, on February 25, 2010, the Company entered into a Promissory Note in favor of PWI, in
the principal amount of $13,922,000, accumulating interest at a rate of 10% per year with a
maturity of February 25, 2012. On September 16, 2010 the Company borrowed an additional $400,000
from PWI, bringing the balance of the Promissory Note to $14,322,000. On November 12, 2010 the
Company made a payment of $1,000,000 in principal and $6,222 in interest on the Promissory Note,
bringing the principal balance down to its current balance of $13,322,000. The Company has granted
PWI a carried interest equal to 20% of the proceeds from its holdings of Retama Development Corp. B
Bonds. If the Company repays the Promissory Note prior to the second anniversary of the issuance
and there is no default or event of default prior to such repayment, the carried
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interest will be reduced to 15%. The carried interest entitles the lender to a percentage of all
income, principal and other proceeds (in whatever form) from or in respect of the Retama
Development Corp. B Bonds of any kind whether on account of interest, redemption of principal,
proceeds of sale, pledge or other transfer or disposition of the Bonds, insurance proceeds, tax
refunds, or otherwise made or payable in respect of any of the Bonds. The carried interest survives
the repayment of the Promissory Note. The Promissory Note is secured by a lien on substantially
all of the Companys assets.
Simultaneous with the execution of the Promissory Note with PWI on February 25, 2010, the Company
entered into a Purchase and Sale Agreement with Christopher Hall, the Companys majority
stockholder, Chairman and a director. Under such agreement, which was approved by the Board of
Directors in accordance with the Companys By-laws, the Company purchased from Mr. Hall the
following:
898,000 shares of Call Now, Inc. common stock for $11,404,600;
$3,200,000 principal amount of Leon County FL Educational Facilities Authority (Southgate)
Series B Bond, 7.625% due 9/1/28 for $2,080,000; and
$2,200,000 principal amount of Cambridge Student Housing Financing Revenue Series C Bond,
9.70% due 11/1/39 for $1,870,000.
In consideration of the foregoing the Company transferred and paid to Mr. Hall the following:
The Retama Development Corporation Funding Agreement with a principal and interest
balance totaling $5,355,428 ($3,627,569 principal plus $1,727,859 interest as of
February 1, 2010);
500,000
shares of Penson Worldwide, Inc. common stock valued at $4,480,000; and $5,511,800 in cash.
Additionally, on June 15, 2010 the Company sold 9,973 shares of the Companys common stock to Mr.
Hall for $126,567.
As a result of these transactions, the Companys outstanding common stock is currently 2,013,877
shares as of December 31, 2010.
On March 31, 2005, the Company entered into a partnership agreement to provide approximately 46% of
the equity for the development of a 270-unit luxury apartment complex known as The Estates at
Canyon Ridge, located in the master planned community of Stone Oak in San Antonio, Texas. The
Estates at Canyon Ridge, Ltd. (ECR Ltd.) closed on the purchase of the 19.739-acre development
site on May 2, 2005. The general partner of ECR Ltd. is an unrelated real estate developer
(General Partner) that also serves as the management company of the property. The limited
partner of ECR Ltd. is Stone Oak Prime, L.P. (Limited Partner). The Company owns the largest
interest in the Limited Partner at 48%. Other partners of the Limited Partner include Thomas R.
Johnson, President, CEO and Director of the Company, Christopher J. Hall, the majority shareholder
and Director of the Company, and Bryan P. Brown, President of REG and Director of the Company. The
General Partner is required to fund 5% of the equity and the Limited Partner is required to fund
95%. As a member of the Limited Partner, the Company is entitled to receive a preferred return of
its capital contribution plus a 10% per annum cumulative return, compounded monthly. Following the
repayment of the preferred return, excess cash, at the discretion of the General Partner, and net
refinancing or disposition proceeds shall be paid 50% to the General Partner and 50% to the Limited
Partner. As of December 31, 2009, the Companys investment totaled approximately $3.21 million.
On November 2, 2010 the sale of The Estates at Canyon Ridge closed to an unrelated third party,
resulting in a realized loss to the Company of approximately $1,683,000. This amount had
previously been reported by the Company as an impairment charge to earnings in the quarter ended
September 30, 2010. At closing the Company utilized its portion of proceeds to repay $1,000,000 in
principal on its PWI Promissory Note and fund the Companys general operating expenses. $250,000
of the closing proceeds are being held in an escrow account for six months as insurance against any
breach of representations and warranties contained in the purchase agreement by the seller. The
Companys portion of the escrow is approximately $116,000 and it is expected to be released in May.
On December 11, 2006 the Company entered into a partnership agreement to provide 95% of the equity
for the acquisition and rehabilitation of a 156-unit, 312-bed full-service, private dormitory
located in Auburn, Alabama, immediately adjacent to the campus of Auburn University. The project
is now known as The Cambridge at Auburn and the partnership is known as Cambridge at Auburn, LP
(CA, LP). The general partner of CA, LP is an unrelated real estate developer who also serves as
the management company of the project. The general partner of CA, LP is the same general partner
of The Estates at Canyon Ridge, Ltd. transaction described in the preceding paragraph. As the
limited partner, the Company is entitled to receive a preferred return of its capital contribution
plus a 10% per annum cumulative return, compounded monthly. Excess cash, at the discretion of the
general partner, as well as refinancing or disposition proceeds shall be paid 50% to the general
partner and 50% to the limited
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partner. In January 2009, the Company sold approximately 23.24% of the 95% limited partnership
interest to Thomas R. Johnson, the President and Chief Executive Officer of the Company, for
$400,000. As of December 31, 2009, the Companys investment totaled approximately $1.08 million.
For the 2009-2010 school year the project was approximately 26% occupied, due to the construction
of new dormitories on the campus of Auburn University, and the high number of freshman that the
University required to live on campus. As a result, the Company, as a limited partner, contributed
an additional $215,000 in 2010 to cover operating losses. While it was anticipated that the
decline in occupancy was a temporary issue during the absorption of the new dorms in the market,
leasing for the current 2010-2011 school year did not rebound as much as anticipated, reaching
approximately 65%. Additionally, due to a lack of available cash, the Company was unable to
continue to fund operating losses and debt service payments in 2010. As a result, the first
mortgage lender for the property has engaged a receiver to operate the property. We have not been
informed of the institution of any foreclosure proceedings at the time, but the lender continues to
reserve their rights to take any action they deem necessary. Due to the current status of the
property, the Company fully impaired its investment in this project, resulting in a charge to
earnings of $1.3 million in the third quarter ended September 30, 2010.
During 2007, the Company provided financing to TNO Holdings, LLC (TNOH), a Florida limited
liability company, totaling approximately $811,000. TNOH owned three municipal bond issues secured
by a first mortgage lien on five long-term care facilities located in Oklahoma and Texas. The
purpose of the loan from the Company was to provide working capital for the facilities and fund
various capital improvements. The loan accrued interest at a rate of 9.50% and compounded monthly.
Following discussions with the managing member of TNOH, the Company agreed to convert the loan to
an approximately 42% equity interest in TNOH. During the fourth quarter of 2007, the two nursing
homes located in Texas were sold to a third party and the net sales proceeds were used to redeem a
portion of the municipal bond issue secured by the facilities and owned by TNO Holdings. The
subsequent distribution to the members of TNOH resulted in the repayment of substantially all of
the funds originally loaned to TNOH by the Company plus an additional return. The Company
continues to maintain an equity interest in TNOH. TNOH continues to own the Texas municipal bond
issue pending collection of the remaining accounts receivable and two Oklahoma municipal bond
issues secured by three nursing home facilities.
EMPLOYEES
The Company has approximately 88 full-time/year-round employees, 57 part-time/year-round employees
and 120 seasonal employees. The majority of the personnel are employees of our 80% owned
subsidiary, Retama Entertainment Group, Inc., which operates and manages the Retama Park racetrack.
AVAILABLE INFORMATION
Copies of the Companys Form 10-K and proxy statement may be obtained by notifying the Company in
writing at its physical address.
ITEM 1A. | RISK FACTORS. |
There are many factors that affect our business and the results of its operation, some of which are
beyond our control. The following is a description of some of the important factors that may cause
the actual results of our operations in future periods to differ materially from those currently
expected or desired.
Risks Related to Our Business
Concentration of Operations of Subsidiary
Our 80% owned subsidiary, Retama Entertainment Group, Inc. provides management services to Retama
Park racetrack, a Class 1 horseracing facility located in Selma, TX. The management contract with
Retama Park is the only management agreement that REG has entered into with a track currently in
operation and, therefore, the management fees received as a result of this management agreement
represent the only source of revenue for REG. The financial performance of REG is reported on a
consolidated basis with the Company. Under certain specific circumstances, the management
agreement with Retama Park may be terminated. If this management agreement were to be terminated
prematurely, it would have significant negative impact on our operations.
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Concentration of Assets
As of December 31, 2010 the Companys investment in Penson Worldwide, Inc. (PWI) common stock
represented approximately 24% of the total assets of the Company. Any significant decline in the
fair market value of this asset may negatively impact the financial position and operations of the
Company.
Limited Liquidity Available in the Secondary Market
As detailed in Item 12 of this report, Christopher J. Hall, the Chairman of the Company holds
approximately 84% of the outstanding common stock of the Company as of March 8, 2011. Given the
majority position held by a single shareholder and the shareholders position as a director of the
Company, there remains a relatively small amount of shares available in the public float. A
limited float may have the effect of reducing the number of buyers and sellers of the Companys
stock, and as a result, negatively impact the liquidity of the Companys common stock.
Internal Revenue Service Examination
As more fully detailed in Note 7 to our audited financial statements, in 2004 the Internal Revenue
Service (IRS) conducted an examination of the tax-exempt status of the municipal bonds issued by
the RDC in connection with that companys reorganization in 1997. In February 2005, the IRS issued
a proposed adverse determination with respect to the RDCs 1997 Series A and Series B bonds. In
August 2005, the IRS completed an examination of the Companys tax returns for the years 2000
through 2003. As a result of the examination, the IRS submitted a request for change to include in
taxable income the interest received by the Company on the RDC Series A bonds.
During the fourth fiscal quarter of 2009, the Company and the law firm that served as legal counsel
for the original issuance of the 1997 RDC bonds entered into a Closing Agreement on Final
Determination in settlement of issues raised by the IRS in the examination of the 1997 RDC bonds.
The terms of the settlement consist of two components: 1.) there shall be a payment made to the IRS
in the amount of $773,750. $375,000 of this amount will be paid by the law firm that provided the
legal opinion for the 1997 RDC bond issue and will be funded at the time of final execution of the
documents by the IRS. The Company will pay the remaining $398,750 over the next three years with
$133,750 due on or before July 1, 2010, $135,000 due on or before July 1, 2011 and $130,000 due on
or before July 1, 2012; and 2.) 35% of the Series B bonds, or $30,425,000 face amount of the
$86,925,000 outstanding, shall be converted to taxable bonds. In favor of the cash contribution to
be made by the Company, the majority of the other holders of the Series B bonds agreed to a higher
percentage of their bonds to be converted to taxable bonds, resulting in the Company agreeing to
convert only $4,897,500, or 11.14%, of the $43,962,500 Series B bonds held by the Company to
taxable bonds. The Company paid the initial payment of $133,750 during 2010. The Company has
accrued the remaining $267,500 as a liability as of December 31, 2010.
General Economic Conditions
The severe economic downturn that the United States is currently experiencing has had an effect on
most businesses. While it remains difficult to assess to long-term effects on the Company, it is
anticipated that if the severe national economic difficulties are protracted, this could negatively
impact the businesses the Company is involved with.
Investment Company Act
The Company has taken the position it is not an investment company required to be registered under
the Investment Company Act of 1940 (the 1940 Act), based on one or more applicable exemptions
there under. If it were established that we are an unregistered investment company, there would be
a risk, among other material adverse consequences, that we could become subject to monetary
penalties or injunctive relief, or both, in an action brought by the Securities and Exchange
Commission. We would also be unable to enforce contracts with third parties or third parties could
seek to obtain rescission of transactions undertaken with us during the period it was established
that we were an unregistered investment company. See Item 7, Managements Discussion and Analysis
of Financial Condition and Results of Operations Investment Company, for more information.
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Risks Related to Our Common Stock
Stock Price Volatility
The market for our common stock is and can be volatile. In 2010, our closing stock price
fluctuated between $1.55 and $3.00 per share. The trading price of our common stock could be
subject to wide fluctuations in response to, among other things, quarterly variations in operating
and financial results and the small trading float of our stock given the ownership of our majority
owner of approximately 84% of our outstanding shares as of December 31, 2010.
Control by a Single Shareholder
Christopher J. Hall, the Chairman and a director of the Company, owns approximately 84% of issued
and outstanding common stock as of December 31, 2010. As a result of such ownership, Mr. Hall has
the power to effectively control the Company, including elections of directors, the determination
of matters requiring shareholders approval and other matters pertaining to corporate governance.
Our Liquidity and Capital Resources may be Adversely Affected by our Margin Loan
We depend upon a margin loan secured by our marketable securities to provide us with working
capital. The amount available for borrowing is related to the market price of the collateral
securities. In the event the market prices of such securities decline we may have to deposit cash
or additional securities or the lender may sell the collateral securities. We have no arrangements
for alternative sources of capital and may be unable to obtain financing or sell assets on
satisfactory terms, or at all. This would impair our ability to obtain funding for working capital,
capital expenditures, acquisitions, general corporate purposes or other purposes. As of December
31, 2010, the Company had no borrowing availability under this margin account. For additional
information see Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
ITEM 2. | PROPERTIES. |
The Company has offices of approximately 512 square feet at Retama Park in space leased from the
Retama Development Corporation on a month-to-month basis.
The Company has an equity interest in a partnership that owns a 156-unit dormitory, which is
further described above in Item 1.
ITEM 3. | LEGAL PROCEEDINGS. |
None.
ITEM 4. | RESERVED. |
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Companys Common Stock trades on the over-the-counter market under the symbol CLNW. The
following sets forth the range of high and low bid quotations for the periods indicated as reported
by National Quotation Bureau, Inc. Such quotations reflect prices between dealers, without retail
mark-up, markdown or commission and may not represent actual transactions.
FISCAL YEAR 2009 | HIGH BID | LOW BID | ||||||
1st Quarter |
$ | 2.77 | $ | 2.75 | ||||
2nd Quarter |
2.00 | .60 | ||||||
3rd Quarter |
3.00 | .60 | ||||||
4th Quarter |
3.00 | 1.50 |
FISCAL YEAR 2010 | HIGH BID | LOW BID | ||||||
1st Quarter |
No bid | No bid | ||||||
2nd Quarter |
No bid | No bid | ||||||
3rd Quarter |
2.50 | 2.00 | ||||||
4th Quarter |
2.10 | 1.50 |
The Company has never declared or paid cash or stock dividends and has no present plans to pay any
such dividends in the foreseeable future. There are no restrictions that limit the Companys
ability to pay dividends. As of March 8, 2011 there were approximately 298 registered holders of
record of the Companys common stock.
ITEM 6. | SELECTED FINANCIAL DATA. |
Not applicable.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Retama Park Racetrack
Management
The Company is primarily engaged in the operation and management of Retama Park, a horse racetrack
located in Selma, TX just outside of San Antonio, through our 80% owned subsidiary, Retama
Entertainment Group, Inc. (REG). REG is responsible for all of the day-to-day operational
activities at Retama Park including: the presentation of live horse racing meets; daily
simulcasting of other racetracks from around the country; the operation of all food and beverage
outlets that include a Turf and Field Club, fine dining, a sports bar and concession stands; all
regulatory responsibilities with the Texas Racing Commission; and the pursuit of additional
legislation from the Texas Legislature that would be favorable to Retama Park, such as other forms
of gaming.
The facility and real estate are owned by the Retama Development Corporation (the RDC), a
municipal subdivision of the city of Selma, TX, and it is encumbered by $93,175,000 face amount of
debt that is discussed in greater detail below in the Bonds section. All personnel at the
racetrack are employees of REG, as a result, it is only the payroll costs of the personnel that are
reimbursed by the RDC to the Company. REG also receives a $20,000 per month management fee from
the RDC. The financial performance of Retama Park is not included in the Companys financial
statements. However, the management fee and the reimbursement of payroll and payroll related
expenses are the Companys only source of revenue at this time, and the loss of this management
contract or the inability to collect the management fee and other obligations of the RDC would
negatively impact the Companys revenue and financial condition.
Bonds
In addition to the management relationship, the Company also maintains a substantial investment in
the facility through holdings of a portion of the Retama Development Corporation Special Facilities
Revenue Refunding Bonds.
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The Company owns both Senior Series A Bonds and Subordinate Series B Bonds as detailed in the chart
below.
Senior | Subordinate | |||||||
Retama Development Corporation | Series A Bonds | Series B Bonds | ||||||
Special Facilities Revenue Bonds, Dated 1997 | 7.00%, due 9/1/33 | 8.00%, due 9/1/33 | ||||||
Total Face Amount of Bonds Outstanding at December 31, 2010 |
$ | 6,045,000 | $ | 86,925,000 | ||||
Face Amount of Bonds owned by Call Now, Inc. at December 31, 2010 |
$ | 133,000 | $ | 43,962,500 | ||||
Cost Basis of Bonds owned by Call Now, Inc. at December 31, 2010 |
$ | 27,594 | $ | 1,077,083 | ||||
Carrying Value of Call Now, Inc. position at December 31, 2010
as reported on the balance sheet |
$ | 133,000 | $ | -0- | ||||
The Series A bonds are subject to an annual mandatory sinking fund redemption and annual interest
payment at the rate of 7% due on September 1st each year, all of which were current as
of December 31, 2010. As of December 31, 2010, a total of $955,000 of the original $7,000,000
Series A bonds have been redeemed through the sinking fund, resulting in $6,045,000 in Series A
bonds remaining outstanding. The scheduled annual sinking fund redemptions for the next five years
are as follows:
Date | Amount | |||
9/1/11 |
$ | 115,000 | ||
9/1/12 |
$ | 120,000 | ||
9/1/13 |
$ | 130,000 | ||
9/1/14 |
$ | 140,000 | ||
9/1/15 |
$ | 150,000 |
The Companys carrying value on its balance sheet is at the face value of the Series A bonds, or
$133,000.
The Series B bonds are subject to an annual interest payment at the rate of 8% due on September
1st each year, with a maturity of September 1, 2033. There is no sinking fund
requirement for the Series B bonds. Payment of accrued interest is subject to the availability of
Excess Cash Flow, as defined in the Trust Indenture as cash or cash equivalent on hand less senior
debt obligations, required deposits to the Reserve Fund, adjustments for working capital and trust
funds held by the issuer. If there are insufficient funds available for the payment of interest,
the amount due shall be deferred (Deferred Interest) and not constitute an event of default.
Each such installment of Deferred Interest shall accrue interest from the interest payment date and
payable at maturity. Additionally, on September 1 of each year, beginning September 1, 1999, all
or a part of the Series B bonds shall be converted to senior lien obligations on a parity and
payable pari passu with the Series A bonds (Converted Series B bonds, and the Series A bonds and
Converted Series B bonds collectively referred to as Senior Lien Obligations), and thereafter
shall bear interest at the rate of 7%, provided that there is no event of default existing on the
Senior Lien Obligations. The number of Series B bonds to be converted to senior lien obligations
shall equal (i) the quotient resulting from the lower of earnings before interest, taxes,
depreciation and amortization for the last two immediately preceding fiscal years, divided by
.0875, (ii) less the outstanding principal amount of the Series A bonds and Converted Series B
bonds. Conversion is also subject to the RDC delivering to the bond Trustee to the Trustees
satisfaction, the deed of trust including the Series B bonds to be converted and a new or amended
mortgage title insurance policy ensuring that the liens securing the Series A bonds and all
Converted Series B bonds are first and prior and pari passu, subject only to permitted encumbrances
that are subordinate and inferior to the deed of trust. There have been no Series B bonds
converted to Converted Series B bonds. The Company fully impaired the Series B bonds in 2006 based
on the limited available market, the uncertainty of principal or interest payments to be made in
the foreseeable future and the subordinated lien on the collateral.
Our strategy is to operate the Retama Park racetrack in order to maintain its status as a Class I
racetrack, attract horsemen to its racing meets, provide a satisfactory gaming and entertainment
experience for its customers and provide a safe and attractive facility. We are also seeking the
legalization of additional forms of gaming at Texas racetracks. We believe that the offering of
additional forms of gaming will be required to enable us to achieve a satisfactory return on our
holdings of RDC Series B bonds, which are further described in Item 1 Business of this Annual
Report on Form 10-K.
In the event of a default on the Series A bonds, the holders of the bonds could seek to foreclose
on the Retama Park racetrack facilities and real estate. We have provided loans to the RDC to
support the operations of the racetrack and to meet its interest and sinking fund obligations on
its Series A bonds, which are further described in Item 1 Business of this Annual Report on Form
10-K. We believe it has been in our best interest to help the RDC avoid default of the Series A
bonds as the best strategy to achieve
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returns on the Series B bonds in the event of additional forms of gaming are approved for Texas
racetracks, of which there can be no assurance. Such financial support is entirely at the
discretion of the Company and has been documented by promissory notes secured by a mortgage on the
Retama Park racetrack real estate and facilities which is subordinated to the RDC Series A bonds
and converted Series B bonds, if any. As more fully described in the 8-K filed by the Company on
February 25, 2010 and Part I History and Developments During the Last Three Years of this 10-K,
on February 25, 2010 the Company entered into a Purchase and Sale Agreement with Christopher J.
Hall (Hall), the Companys majority shareholder, Chairman and director, where the Company
transferred to Hall, in addition to other assets and cash, the full principal and interest value of
these RDC notes in exchange for 898,000 shares of the Companys common stock and two municipal bond
positions. Subsequently, on September 16, 2010 the Company loaned the RDC $400,000 for general
operating purposes. The loan carries an interest rate of 8.50% and matures January 1, 2013. At
December 31, 2010, the Company recognized interest of $9,728 as a result of a loan made by the
Company in September of this year; however, due to uncertain economic future of Retama Park, the
Company elected to suspend further recognition of interest income until events and circumstances
dictate otherwise.
The status of racing industry in Texas is similar to many other states around the country as the
Texas racing facilities continue to experience greater competition from those facilities that have
granted the right to conduct additional forms of gaming such as video lottery terminals, slot
machines and poker. All states that share a border with Texas Louisiana, Arkansas, Oklahoma and
New Mexico currently allow additional forms of gaming at their racetracks. The benefits of
additional gaming for racing facilities located in these states are two-fold. First, the operation
of this additional gaming has provided these facilities with a new, and typically highly
profitable, business line. Second, additional gaming has also provided supplemental funds for the
horse purses (the prize money paid) within the state. These higher purses have attracted higher
quality horses, which tend to be more attractive to the betting public.
We have been actively pursuing the legalization of additional gaming at Texas racetracks through a
coalition of Texas racetracks that includes the other two Class I tracks, Lone Star Park and Sam
Houston Race Park. If the legalization of additional forms of gaming is approved at Texas
racetracks, it is believed that the profit from this operation could provide sufficient cash flow
to enable both the Series A and Series B bonds to be repaid. However, there can be no assurance
that the Texas legislature and governor will approve such additional gaming and, if approved,
whether the structure and taxation on such additional gaming would benefit the Company. There is
substantial opposition to expanding gaming operations in Texas and no such expansion was approved
during the 2009 Texas legislative session. The 2011 Texas legislative session commenced in January
and legislation has been filed that would allow for the expansion of gaming at racetracks by
legalizing the operation of slot machines at such facilities. The principals at Retama Park and
the Company, as well as all other racing interests in Texas, are currently focused on the passage
of favorable legislation.
Retama Park experiences strong competition from other gaming alternatives including on-line gaming,
other forms of gaming in surrounding states, as well as from other entertainment venues in its
market area. We expect these factors to continue to adversely affect the liquidity of RDC in the
absence of legislation allowing additional gaming.
However, the legalization of gaming in Texas remains uncertain in both the likelihood and
timeframe. The alternative available to the Company as a majority Series B bondholder would be to
develop a plan with the Series A bondholder and the RDC that would maximize the value of the
underlying collateral real estate through a liquidation or a joint venture redevelopment with a
third party.
Penson Worldwide, Inc.
On June 26, 2003 the Company invested $6,000,000 in Penson Worldwide, Inc. (PWI) of Dallas,
Texas. On December 23, 2003, an additional $600,000 was loaned to PWI. PWI is a leading provider
of a broad range of critical securities-processing infrastructure products and services to the
global securities and investment industry. Their products and services include securities and
futures clearing, margin lending, facilities management, technology and other related offerings to
broker-dealers, investment funds, banks and financial technology.
The investment in PWI was made in the form of a convertible promissory note maturing on June 26,
2008 (the PWI Note). The PWI Note also called for the Company, as noteholder, to have the option
to convert the entire outstanding principal amount into shares of PWIs common stock. The
conversion price per common share was 2.25 times PWIs shareholders equity as of June 30, 2003
divided by the actual number of issued and outstanding shares of PWI as of June 30, 2003, which
equated to $2.01 per share.
In August of 2003, the Companys President and CEO, Thomas R. Johnson, was elected to the Board of
Directors of PWI.
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On June 30, 2005, the Company converted the entire $6,600,000 principal balance of the PWI Note
into PWI common stock, totaling 3,283,582 shares.
On May 16, 2006, PWI completed the Initial Public Offering (IPO) of their common stock (Nasdaq:
PNSN). In a simultaneous transaction, PWI affected a 1-for-2.4 share reverse split and the
split-off of certain non-core business operations known as SAMCO. As part of the IPO, the Company
elected to participate in the exchange of PWI shares for SAMCO shares and sell a total of 11.5% of
its investment, or 157,337 post-split shares, of the PWI shares in the IPO resulting in a gain on
the sale of $1,728,504. Following the completion of the PWI IPO, the Companys resulting position
was as follows: 79,900 shares of SAMCO and 1,130,922 shares of the publicly traded PWI common
stock. During the fourth fiscal quarter of 2009, the Company sold 64,000 shares of SAMCO at an
average price of $5.49 per share, resulting in a remaining position of 15,900 shares, or
approximately 1.66% of the outstanding stock as December 31, 2009. During the first fiscal quarter
of 2010, the Company sold its remaining shares of SAMCO at a price of $5.59 per share. In August
2008, the Company sold 30,000 shares of PWI common stock at an average price of $18.30 per share.
In August 2009, the Company sold 100,000 shares of PWI common stock at an average price of $11.71
per share, leaving a balance of 1,000,922 shares of PWI common stock. As more fully described in
the 8-K filed by the Company on February 25, 2010 and Part I History and Developments During the
Last Three Years of this 10-K, on February 25, 2010 the Company entered into a Purchase and Sale
Agreement with Christopher J. Hall (Hall), the Companys majority shareholder, Chairman and
director, where the Company transferred to Hall, in addition to other assets and cash, 500,000
shares of PWI common stock in exchange for 898,000 shares of the Companys common stock and two
municipal bond positions. The Company holds a position of 500,922 shares of PWI common stock as of
December 31, 2010 and recognizes cumulative other comprehensive income from the increase in value
of the PWI common stock of approximately $33,000 (gross) or $22,000 net of taxes.
The Company originally extended credit to Penson in order to achieve a higher return on its capital
for use in its business. After the loan was converted to Penson stock it continues to be held as a
source of capital for the Companys business.
The Company has maintained an investment account with Penson Financial Services, Inc. (PFSI), a
wholly owned subsidiary of PWI, since 1999. At December 31, 2010, the Company had a margin loan in
this account in the amount of $5,777,021, which is collateralized by a majority of its marketable
securities. In September 2009, PFSI determined that, for margin account purposes due to, among
other reasons, the lack of trading activity in the Retama Development Corporation Series B bonds,
it should require a 100% margin requirement, effectively making these bonds non-marginable. As a
result, the Company received a margin call letter on September 28, 2009 from PFSI notifying the
Company that it needed to deposit $5,300,000 in additional cash or margin collateral into its
margin loan account by September 30, 2009. The Company did not make the requested deposit by
September 30, 2009. PFSI elected not to pursue remedial actions at the time, such as account
liquidation, but continued to reserve all of their rights and remedies under the margin agreement
while working with the Company to restructure the margin loan. As part of the margin loan
restructuring, on February 25, 2010, the Company entered into a Promissory Note in favor of PWI, in
the principal amount of $13,922,000, accumulating interest at a rate of 10% per year with a
maturity of February 25, 2012. On September 16, 2010 the Company borrowed an additional $400,000
from PWI, bringing the balance of the Promissory Note to $14,322,000. On November 12, 2010 the
Company made a payment of $1,000,000 in principal and $6,222 in interest on the Promissory Note,
bringing the principal balance down to its current balance of $13,322,000. The Company has granted
PWI a carried interest equal to 20% of the proceeds from its holdings of Retama Development Corp. B
Bonds. If the Company repays the Promissory Note prior to the second anniversary of the issuance
and there was no default or event of default prior to such repayment, the carried interest will be
reduced to 15%. The carried interest entitles the lender to a percentage of all income, principal
and other proceeds (in whatever form) from or in respect of the Retama Development Corp. B Bonds of
any kind whether on account of interest, redemption of principal, proceeds of sale, pledge or other
transfer or disposition of the Bonds, insurance proceeds, tax refunds, or otherwise made or payable
in respect of any of the Bonds. The carried interest survives the repayment of the Promissory Note.
The Promissory Note is secured by a lien on substantially all of the Companys assets.
The Estates at Canyon Ridge
On March 31, 2005 the Company entered into a partnership agreement to provide approximately 46% of
the equity for the development of a 270-unit luxury apartment complex to be known as The Estates at
Canyon Ridge, located in the master planned community of Stone Oak in San Antonio, Texas. The
Estates at Canyon Ridge, Ltd. (ECR Ltd.) closed on the purchase of the 19.739-acre development
site on May 2, 2005. The general partner of ECR Ltd. is an unrelated real estate developer
(General Partner). The Company owns the largest interest in Stone Oak Prime, L.P. (Limited
Partner) at 48%. Other partners of the Limited Partner include Thomas R. Johnson, President, CEO
and director of the Company, Christopher J. Hall, the majority shareholder and director of the
Company, and Bryan P. Brown, CEO of Retama Entertainment Group, Inc. and director of the Company.
The General Partner is required to fund 5% of the equity and the Limited Partner is required to
fund 95%.
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As a member of the Limited Partner, the Company is entitled to receive a preferred return of its
capital contribution plus a 10% per annum cumulative return, compounded monthly. Following the
repayment of the preferred return on the capital contribution, excess cash, at the discretion of
the General Partner, and net refinancing or disposition proceeds shall be paid 50% to the General
Partner and 50% to the Limited Partner. The Estates at Canyon Ridge was sold on November 2, 2010
to an unrelated third party, resulting in a loss by the Company of approximately $1,683,000, which
was reflected in an impairment charge. At closing, the Company utilized its portion of proceeds to
repay a portion of the PWI Promissory Note and fund the Companys general operating expenses.
$250,000 of the closing proceeds are being held in an escrow account for six months as insurance
against any breach of representations and warranties contained in the purchase agreement by the
seller. The Companys portion of the escrow is approximately $116,000 and it is expected to be
released in May.
The Cambridge at Auburn
On December 11, 2006 the Company entered into a partnership agreement to provide 95% of the equity
for the acquisition and rehabilitation of a 156-unit, 312-bed full-service, private dormitory
located in Auburn, Alabama, immediately adjacent to the campus of Auburn University. The project
is now known as The Cambridge at Auburn. The Company is the sole limited partner of Cambridge at
Auburn, LP (CA, LP). The general partner of CA, LP is an unrelated real estate developer who
also serves as the management company of the project. The general partner of CA, LP is the same
general partner of The Estates at Canyon Ridge, Ltd. transaction described in the preceding
paragraphs. As the limited partner, the Company is entitled to receive a preferred return of its
capital contribution plus a 10% per annum cumulative return, compounded monthly. Following the
repayment of the preferred return on the capital contribution, excess cash, at the discretion of
the general partner, as well as refinancing or disposition proceeds shall be paid 50% to the
general partner and 50% to the limited partner. In January 2009, the Company sold 23.2446% of its
95% limited partnership in CA, LP to Thomas R. Johnson, the President and CEO of the Company, for
$400,000, representing the Companys cost basis in that portion of the partnership. As of December
31, 2009, the Companys investment totaled approximately $1.08 million. Rehabilitation of the
facility was completed during 2007 and 100% occupancy was achieved for the beginning of the
2008-2009 school year, however, due to the construction of new dormitories on the campus of Auburn
University, and the high number of freshman that the University required to live on campus, the
facility only achieved 26% occupancy for the current 2009-2010 school year. As a result, the
Company, as a limited partner, contributed an additional $215,000 in 2010 to cover operating
losses. While it was anticipated that the decline in occupancy was a temporary issue during the
absorption of the new dorms in the market, leasing for the current 2010-2011 school year did not
rebound as much as anticipated, reaching approximately 65%. Additionally, due to a lack of
available cash, the Company was unable to continue to fund operating losses and debt service
payments in 2010. As a result, the first mortgage lender for the property has engaged a receiver
to operate the property. We have not been informed of the institution of any foreclosure
proceedings at the time, but the lender continues to reserve their rights to take any action they
deem necessary. Due to the current status of the property, the Company fully impaired its
investment in this project, resulting in a charge to earnings of $1.3 million in the third quarter
ended September 30, 2010.
TNO Holdings, LLC
During 2007, the Company provided financing to TNO Holdings, LLC (TNOH), a Florida limited
liability company, totaling approximately $811,000. TNOH owned three municipal bond issues secured
by a first mortgage lien on five long-term care facilities located in Oklahoma and Texas. The
purpose of the loan from the Company was to provide working capital for the facilities and fund
various capital improvements. The loan accrued interest at a rate of 9.50% and compounded monthly.
Following discussions with the managing member of TNOH, the Company agreed to convert the loan to
an approximately 42% equity interest in TNOH. During the fourth fiscal quarter of 2007 for the
Company, the two nursing homes located in Texas were sold to a third party and the net sales
proceeds were used to redeem a portion of the municipal bond issue secured by the facilities and
owned by TNO Holdings. The subsequent distribution to the members of TNOH resulted in the
repayment of substantially all of the funds originally loaned to TNOH by the Company plus an
additional return. The Company continues to maintain an equity interest in TNOH. TNOH owns two
Oklahoma municipal bond issues secured by three nursing home facilities.
Investment Company Act
The Company has taken the position that it is not an investment company required to be registered
under the Investment Company Act of 1940 (the 1940 Act) because under Section 3(b)(1) of such
Act, an issuer which is primarily engaged in a business other than investment in securities is not
considered an investment company under the Act. If it were established that the Company is an
unregistered investment company, there would be a risk, among other material adverse consequences,
that the Company could become subject to monetary penalties or injunctive relief, or both, in an
action brought by the Securities and Exchange
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Commission. The Company would also be unable to enforce contracts with third parties or third
parties could seek to obtain rescission of transactions undertaken in the period it was established
the Company was an unregistered investment company.
If the Company were deemed an investment company under the 1940 Act and failed to qualify for an
exemption, the Company would have to modify how it conducts business in order to conform to the
Act. The 1940 Act places significant restrictions on the capital structure and corporate
governance of a registered investment company, and materially restricts its ability to conduct
transactions with affiliates. Such changes could have a material adverse affect on the Companys
business, results of operations and financial condition.
In addition, if the Company is deemed to have been an investment company and did not register under
the 1940 Act, it would be in violation of the 1940 Act and would be prohibited from engaging in
business or certain other types of transactions and could be subject to civil and criminal actions
for doing so. In addition, the Companys contracts would be voidable and a court could appoint a
receiver to take control and liquidate it.
There can be no assurance that an exemption from the registration requirements of the 1940 Act will
be available to the Company on a continuing basis. The Company is currently consulting with legal
counsel and evaluating alternatives to ensure that it complies with applicable law.
Critical Accounting Policies and Estimates
General
Managements discussion and analysis of its financial condition and results of operations is based
upon our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to the reported amounts of revenues and expenses
and the valuation of our assets, income taxes, and contingencies. We base our estimates on
historical experience and on various other assumptions and evidence as appropriate. We believe our
estimates and assumptions to be reasonable under the circumstances. However, actual results could
differ from those estimates under different assumptions or conditions.
Valuation of Marketable Securities
Investments in equity and debt securities are generally based on quoted market prices. However,
the investments in the RDC Series A and B bonds represent debt securities, and there is no readily
available quoted market price, as these securities are owned by a limited number of holders. The
Series A bonds are classified as available-for-sale and have been valued at their face value of
$133,000 as supported by our estimate of the underlying value of the collateral (the Retama Park
racetrack facility). We estimated the value based upon a complete appraisal of the racetrack land
and improvements in June 2005, supplemented by our review of subsequent industry and economic
trends, condition of the racetrack facilities and local real estate trends, and based our valuation
of the Series A bonds on our percentage ownership. The Company has fully impaired the Series B
bonds based on the limited available market, the uncertainty of principal or interest payments and
the subordinate lien on the collateral.
Valuation of Penson Worldwide, Inc. Common Stock
The Penson Worldwide, Inc. (PWI) (Nasdaq: PNSN) common stock is valued at their quoted market
price at the close of business on December 31, 2010, the last trading day of the fiscal year.
Based on a closing price of $4.89 per share and a position of 500,922 shares, the Companys
holdings of PWI common stock is valued at $2,449,509 as of December 31, 2010. The Company held
1,000,922 shares of PWI common stock as of December 31, 2009 and the holdings were value at
$9,068,353 at that time.
Notes and Interest Receivable Retama Development Corporation
The Company has provided advances to the RDC primarily to meet the RDCs interest and sinking fund
obligations on its Series A bonds. Such advances are entirely at the discretion of the Company and
are documented by promissory notes secured by a second lien mortgage on the Retama Park racetrack
real estate and facilities, which is subordinated to the RDC Series A bonds and Converted Series B
bonds, if any. We estimate at the end of each reporting period the valuation and collectibility of
the RDC note and accrued interest that has been recognized as income, and report the total amount
as other assets in our consolidated balance
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sheet. If such estimate indicates that the collateral value is sufficient to assure repayment of
such advances and interest that has been recognized as income in the current and previous
accounting periods, the notes and interest continue to be carried at the full amount. If we
estimate the security for the RDC note and interest that has been previously recognized as income
is insufficient to assure full repayment we would provide an allowance to reduce the carrying value
of the notes and interest accordingly. Our policy in recognizing interest on the RDC note as
income is discussed in greater detail in the following section, Interest Income Recognition
Retama Development Corporation.
Valuation of Other Investments
The Company estimates fair value for its other investments based on historical cost and other
relevant information. The Company assesses the impairment of the other investments at least
annually, and whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. Factors considered important, which could trigger an impairment review, include
the following: significant underperformance relative to historical or projected future cash flows;
significant changes in the strategy of the overall business; and significant negative industry
trends. When management determines that the carrying value of the other investments may not be
recoverable, impairment is measured as the excess of the assets carrying value over the estimated
fair value. The Company recorded impairment losses during the fiscal year ended December 31, 2010
of $3,044,241.
Interest Income Recognition Retama Development Corporation
During each accounting period, the Company evaluates whether to continue to recognize the accrued
interest on the RDC note as income based on several criteria including, but not limited to, the
value of the underlying collateral, the financial performance of Retama Park and the payment
history of the RDC note and other similarly positioned debt securities. For the nine months ended
September 30, 2009, the Company recognized the accrued interest on the RDC note as income; however,
as of October 1, 2009, the Company elected to suspend further recognition of interest income until
events and circumstances dictate otherwise. Due to the continued decline of the financial
performance of Retama Park and the lack of timely funding of the Series A Bonds September 1, 2009
interest payment, the Company deemed it appropriate to suspend the income recognition of the
interest on the RDC note. The Company will continue to evaluate its assessment, and make any
adjustments it deems necessary.
Accounting for Income Taxes
Significant management judgment is required to determine the provisions for income taxes and to
determine whether deferred tax assets will be realized in full or in part. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. When it is
more likely than not that all or some portion of specific deferred income tax assets will not be
realized, a valuation allowance must be established for the amount of deferred income tax assets
that are determined not to be realized. Accordingly, the facts and financial circumstances
impacting deferred income tax assets are reviewed quarterly and managements judgment is applied to
determine the amount of valuation allowance required, if any, in any given period.
Tax authorities periodically audit the Companys income tax returns. These audits include
questions regarding our tax filing positions, including the timing and amount of deductions. In
evaluating the exposures associated with the Companys various tax filing positions, the Company
adjusts its liability for unrecognized tax benefits and income tax provision in the period in which
an uncertain tax position is effectively settled, the statute of limitations expires for the
relevant taxing authority to examine the tax position, or when more information becomes available.
The Companys liability for unrecognized tax benefits (none at December 31, 2010) contains
uncertainties because management is required to make assumptions and to apply judgment to estimate
the exposures associated with its various filing positions. The Companys effective income tax
rate is also affected by changes in tax law, the level of earnings and the results of tax audits.
Although the Company believes that the judgments and estimates are reasonable, actual results could
differ, and the Company may be exposed to losses or gains that could be material. An unfavorable
tax settlement generally would require use of the Companys cash and result in an increase in its
effective income tax rate in the periods of resolution. A favorable tax settlement would be
recognized as a reduction in the Companys effective income tax rate in the period of resolution.
The Companys income tax expense includes the impact of reserve provisions and changes to reserves
that it considers appropriate, as well as related interest.
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YEAR ENDED DECEMBER 31, 2010 COMPARED TO 2009
RESULTS OF OPERATIONS
a. Revenues and Other Income
Revenues
The Companys revenue for the year ended December 31, 2010 was $4,317,238 compared to $4,951,460
for the year ended December 31, 2009. The decrease in revenue is attributed to a decrease in the
number of race days at Retama Park racetrack, 16 in 2010 as compared to 59 in 2009. As discussed
in the Retama Park Racetrack Management section under Item 7 in this section, the Companys
revenue is directly related to the reimbursement of payroll and payroll related expenses of the
racetrack. Therefore, a decrease in race days results in a decrease in staffing requirements and,
consequently, decreases reimbursements to the Company.
Interest Income
Interest income for the year ended December 31, 2010 was $332,853 compared to $437,006 for the year
ended December 31, 2009. The Companys increase in interest income from interest bearing municipal
bonds acquired in the exchange of assets in February of 2010 as more fully described in the 8-K
filed by the Company on February 25, 2010 and Part I History and Developments During the Last
Three Years of this 10-K, was more than offset by the decrease in accrued interest from the Funding
Agreement with the Retama Development Corporation that was disposed of as part of the same
transaction.
b. Expenses
Cost and Other Expenses of Revenues
Operating expenses for the year ended December 31, 2010 was $4,918,736 compared to $5,498,323 for
the year ended December 31, 2009. The decrease in operating expense in 2010 as compared to 2009 is
also attributable to the decrease in the number of race days at Retama Park racetrack in 2010 from
the prior year.
Income Tax
The Company recognized a federal tax benefit in 2010 of $986,398 and an expense in 2009 of $76,019.
The Companys total federal income tax does not approximate the expected corporate tax rate due
primarily to non-taxable municipal bond interest income. The significant increase in federal tax
benefit in 2010 from 2009 is the result of an approximately $1.3 million impairment taken on the
Companys investment in Cambridge at Auburn and an impairment loss of approximately $1.68 million
on the Companys investment in The Estates at Canyon Ridge.
Other Comprehensive Income
As of December 31, 2010, the Company recognized cumulative other comprehensive income of
($197,782), net of related taxes, primarily on the disposition of a portion of the Companys
investment in PWI common stock and the subsequent decline in fair market value over the Companys
cost basis of its investments in PWI common stock based on the closing price of the common stock as
of December 31, 2010. Accumulated other comprehensive income at December 31, 2009 was $2,840,676,
net of taxes.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2010, the Companys operating activities used cash of $2,268,138
compared to $1,404,834 used for the year ended December 31, 2009.
As discussed in Note 5 to the audited financial statements, the Company maintains an investment
account that utilizes a margin loan collateralized by the Companys marketable securities. As of
December 31, 2010 there was no availability under this margin as detailed in the following chart.
The Company is currently in the process of pursuing transactions, such as the liquidiation of
certain municpal bond positions that, if successful, would paydown the margin loan balance in an
amount sufficient to provide operating a liquidity and restore borrowing availability. While there
can be no assurances that the Company will be successful in completing these transactions, the
Company believes that there is a reasonable likelihood of executing at least one transaction that
16
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would be meaningful in restoring operating liquidity. While the Company pursues these
transactions, PWI has elected not to engage in the liquidation of the underlying collateral.
As of December 31, 2009 | As of December 31, 2010 | |||||||
Margin value of Retama Series B bonds |
$ | | $ | | ||||
Margin value of all other marketable securities |
9,259,476 | 6,130,097 | ||||||
Total margin value of marketable securities |
$ | 9,259,476 | $ | 6,130,097 | ||||
Maximum loan based on 75% loan-to-value |
$ | 6,944,607 | $ | 4,597,573 | ||||
Margin loan outstanding |
$ | 13,259,281 | $ | 5,777,020 | ||||
Margin loan availability (call) |
$ | (6,314,674 | ) | $ | (1,179,447 | ) |
In September 2009, PFSI determined that, for margin account purposes due to, among other reasons,
the lack of trading activity in the Retama Development Corporation Series B bonds, it should
require a 100% margin requirement, effectively making these bonds non-marginable. As a result, the
Company received a margin call letter on September 28, 2009 from PFSI notifying the Company that it
needed to deposit $5,300,000 in additional cash or margin collateral into its margin loan account
by September 30, 2009. The Company did not make the requested deposit by September 30, 2009. PFSI
elected not to pursue remedial actions at the time, such as account liquidation, but continued to
reserve all of their rights and remedies under the margin agreement while working with the Company
to restructure the margin loan. As part of the margin loan restructuring, on February 25, 2010,
the Company entered into a Promissory Note in favor of PWI, in the principal amount of $13,922,000,
accumulating interest at a rate of 10% per year with a maturity of February 25, 2012. In addition,
the Company has granted PWI a carried interest equal to 20% of the proceeds from its holdings of
Retama Development Corp. B Bonds. If the Company repays the Promissory Note prior to the second
anniversary of the issuance and there is no default or event of default prior to such repayment,
the carried interest will be reduced to 15%. The carried interest entitles the lender to a
percentage of all income, principal and other proceeds (in whatever form) from or in respect of the
Retama Development Corp. B Bonds of any kind whether on account of interest, redemption of
principal, proceeds of sale, pledge or other transfer or disposition of the Bonds, insurance
proceeds, tax refunds, or otherwise made or payable in respect of any of the Bonds. The carried
interest survives the repayment of the Promissory Note. The Promissory Note is secured by a lien
on substantially all of the Companys assets.
In response to the Companys continued operating losses, the Company will continue to assess the
sale of certain assets and marketable securities in order to provide additional liquidity.
Specifically, management will assess the proper timing to continue selling a portion of the
Companys holdings of the Penson common stock. Given the highly liquid nature of this security,
management believes it has adequate financial resources to fund its operations and capital
requirements for the next twelve months and the foreseeable future.
In the past the Company has provided loans to the RDC but has had no obligation to do so since
1999. These loans were provided in order to support the continued operation of Retama Park as a
Class I racetrack while pursuing the approval of additional forms of gaming at Texas racetracks.
We anticipate that the profits from additional gaming operations at Retama Park, if approved, would
provide sufficient cash flow to the RDC to enable the Series B bonds to be repaid in full. We
believe our loans to the RDC, which amount to $409,728 including accrued interest as of December
31, 2010, and our holdings of RDC Series A bonds in the amount of $133,000 are fully secured by the
collateral security in the Retama Park facilities and real estate and would be repaid even if the
operations of Retama Park racetrack were terminated. The Company will respond to any future
requests for additional funding by the RDC as it deems appropriate.
OFF-BALANCE SHEET ARRANGEMENTS
We currently have no off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 7A. QUANTATATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
17
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Report of Independent Registered Public Accounting Firm |
F-1 | |||
Consolidated Balance Sheets, December 31, 2010 and 2009 |
F-2 | |||
Consolidated Statements of Operations, years ended December 31, 2010 and 2009 |
F-3 | |||
Consolidated Statements of Changes in Stockholders Equity (Deficit), years ended December 31, 2010
and 2009 |
F-4 | |||
Consolidated Statements of Cash Flows, years ended December 31, 2010 and 2009 |
F-5 | |||
Notes to Consolidated Financial Statements |
F-6 |
18
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Call Now, Inc. and Subsidiary
San Antonio, Texas
Call Now, Inc. and Subsidiary
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Call Now, Inc. and Subsidiary
(collectively referred to as the Company) as of December 31, 2010 and 2009 and the related
consolidated statements of operations, changes in stockholders equity (deficit), and cash flows
for the years then ended. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on the consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. 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 estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Call Now, Inc. and Subsidiary as of
December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows
for the years then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Akin, Doherty, Klein & Feuge, P.C. | ||||
Akin, Doherty, Klein & Feuge, P.C. | ||||
San Antonio, Texas | ||||
March 31, 2011 |
F-1
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Consolidated Balance Sheets
December 31, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 189,340 | $ | 17,452 | ||||
Accounts receivable, net |
777,460 | 789,069 | ||||||
Marketable securities related party |
2,449,509 | 9,068,353 | ||||||
Marketable securities other |
3,638,437 | 140,808 | ||||||
Other current assets |
232,007 | 139,696 | ||||||
Total current assets |
7,286,753 | 10,155,378 | ||||||
Furniture, Equipment and Improvements (less accumulated
depreciation of $5,296 and $1,372) |
10,401 | 14,325 | ||||||
Other Assets: |
||||||||
Marketable securities Retama Development Corp. |
133,000 | 145,000 | ||||||
Investments |
116,279 | 4,365,136 | ||||||
Notes and interest receivable Retama Development Corp. |
409,728 | 5,222,893 | ||||||
Deferred tax asset |
2,048,940 | 936,601 | ||||||
Total other assets |
2,707,947 | 10,669,630 | ||||||
Total Assets |
$ | 10,005,101 | $ | 20,839,333 | ||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||
Current Liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 532,536 | $ | 654,301 | ||||
Margin loan payable related party |
5,777,021 | 13,259,281 | ||||||
Deferred taxes payable |
| 1,463,379 | ||||||
Total current liabilities |
6,309,557 | 15,376,961 | ||||||
Long-Term Note Payable and Accrued Interest related party |
14,508,750 | | ||||||
Equity (Deficit): |
||||||||
Call Now Stockholders Equity (Deficit): |
||||||||
Preferred stock, $.001 par value; authorized 266,667 shares,
none outstanding |
| | ||||||
Common stock, $.001 par value; authorized 16,666,667 shares,
3,327,075 issued and 2,013,877 and 2,902,367 outstanding |
3,327 | 3,327 | ||||||
Additional paid-in-capital |
7,091,120 | 7,091,120 | ||||||
Treasury stock, at cost, 1,313,198 and 424,708 shares |
(14,372,488 | ) | (3,094,455 | ) | ||||
Accumulated other comprehensive income (loss) |
(197,783 | ) | 2,840,676 | |||||
Retained earnings (deficit) |
(3,495,497 | ) | (1,502,733 | ) | ||||
Total Call Now stockholders equity |
(10,971,321 | ) | 5,337,935 | |||||
Non-controlling interest |
158,115 | 124,437 | ||||||
Total equity (deficit) |
(10,813,206 | ) | 5,462,372 | |||||
Total Liabilities and Equity (Deficit) |
$ | 10,005,101 | $ | 20,839,333 | ||||
See notes to consolidated financial statements.
F-2
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Consolidated Statements of Operations
Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Revenues |
||||||||
Reimbursement of payroll and payroll related expenses |
$ | 4,077,238 | $ | 4,711,460 | ||||
Management fees |
240,000 | 240,000 | ||||||
4,317,238 | 4,951,460 | |||||||
Expenses |
||||||||
Payroll and payroll related expenses |
4,076,113 | 4,711,460 | ||||||
Corporate general and administrative operations |
842,623 | 786,863 | ||||||
Total expenses |
4,918,736 | 5,498,323 | ||||||
Net Operating (Loss) |
(601,498 | ) | (546,863 | ) | ||||
Other Income (Expenses) |
||||||||
Interest income related party |
149,635 | 283,429 | ||||||
Interest income other |
183,218 | 153,577 | ||||||
Gain on sale of marketable securities related party |
2,077,510 | 688,197 | ||||||
Gain (loss) on sale of marketable securities other |
(10,001 | ) | 41,571 | |||||
Gain on sale of investment related party |
12,179 | 107,162 | ||||||
Gain on sale of investment other |
| 42,764 | ||||||
Impairment of other investments, long-term |
(3,044,241 | ) | | |||||
Interest expense related party |
(1,712,286 | ) | (1,059,953 | ) | ||||
Total other income (expense), net |
(2,343,986 | ) | 256,747 | |||||
(Loss) before income taxes |
(2,945,484 | ) | (290,116 | ) | ||||
Income tax expense (benefit) |
(986,398 | ) | 76,019 | |||||
Net (loss) including non-controlling interest |
(1,959,086 | ) | (366,135 | ) | ||||
Less: net income attributable to non-controlling interest |
(33,678 | ) | (48,000 | ) | ||||
Net (Loss) Attributable to Call Now |
$ | (1,992,764 | ) | $ | (414,135 | ) | ||
Per Share Data |
||||||||
Basic and diluted (loss) per share attributed to |
||||||||
Call Now common shareholders |
$ | (.90 | ) | $ | (.14 | ) | ||
Weighted average common shares outstanding: |
||||||||
Basic |
2,214,868 | 2,902,367 | ||||||
Dilutive |
2,214,868 | 2,902,367 |
See notes to consolidated financial statements.
F-3
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders Equity (Deficit)
Consolidated Statements of Changes in Stockholders Equity (Deficit)
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Other | Retained | Non- | Total | ||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | Earnings | Controlling | Stockholders | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Income | (Deficit) | Interest | Equity (Deficit) | ||||||||||||||||||||||||||||
Balance, December 31, 2008 |
3,327,075 | $ | 3,327 | $ | 7,091,120 | 424,708 | $ | (3,094,455 | ) | $ | 2,113,109 | $ | (1,088,598 | ) | $ | 76,437 | $ | 5,100,940 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net income (loss) |
| | | | | | (414,135 | ) | 48,000 | (366,135 | ) | |||||||||||||||||||||||||
Unrealized gain on securities, net of
$375,000 in income taxes |
| | | | | 727,567 | | | 727,567 | |||||||||||||||||||||||||||
Total comprehensive income |
| | | | | | | | 361,432 | |||||||||||||||||||||||||||
Balance, December 31, 2009 |
3,327,075 | $ | 3,327 | $ | 7,091,120 | 424,708 | $ | (3,094,455 | ) | $ | 2,840,676 | $ | (1,502,733 | ) | $ | 124,437 | $ | 5,462,372 | ||||||||||||||||||
Purchase of treasury stock from related party |
| | | 898,463 | (11,404,600 | ) | (11,404,600 | ) | ||||||||||||||||||||||||||||
Sale of treasury stock to related party |
| | | (9,973 | ) | 126,567 | 126,567 | |||||||||||||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net income (loss) |
| | | | | | (1,992,764 | ) | 33,678 | (1,959,086 | ) | |||||||||||||||||||||||||
Unrealized gain on securities, net of
$1,565,000 in income taxes |
| | | | | (3,038,459 | ) | | | (3,038,459 | ) | |||||||||||||||||||||||||
Total comprehensive income |
| | | | | | | | (4,997,545 | ) | ||||||||||||||||||||||||||
Balance, December 31, 2010 |
3,327,075 | $ | 3,327 | $ | 7,091,120 | 1,313,198 | $ | (14,372,488 | ) | $ | (197,783 | ) | $ | (3,495,497 | ) | $ | 158,115 | $ | (10,813,206 | ) | ||||||||||||||||
See notes to consolidated financial statements.
F-4
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Year Ended December 31, | ||||||||
2010 | 2009 | |||||||
Operating Activities |
||||||||
Net (loss) including non-controlling interest |
$ | (1,959,086 | ) | $ | (366,135 | ) | ||
Adjustments to reconcile net (loss) to
net cash (used) by operating activities: |
||||||||
Net realized (gains) on sales of marketable securities related party |
(2,077,510 | ) | (688,197 | ) | ||||
Net realized loss (gains) on sales of marketable securities other |
10,001 | (41,571 | ) | |||||
Net realized (gains) on sales of long-term investments related party |
(12,179 | ) | (107,162 | ) | ||||
Net realized (gains) on sales of long-term investments other |
| (42,764 | ) | |||||
Loss on impairment |
3,044,241 | | ||||||
Bad debt allowance |
180,000 | 60,000 | ||||||
Deferred income taxes |
(1,010,451 | ) | (92,920 | ) | ||||
Depreciation |
3,924 | 3,924 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(168,391 | ) | (240,000 | ) | ||||
Other current assets |
(156,921 | ) | (20,036 | ) | ||||
Accounts payable and accrued expenses |
(121,766 | ) | 130,027 | |||||
Net Cash (Used) by Operating Activities |
(2,268,138 | ) | (1,404,834 | ) | ||||
Investing Activities |
||||||||
Advances on notes and interest receivable Retama Development Corp. |
(409,728 | ) | (283,429 | ) | ||||
Sales of note receivable Retama Development Corp. |
5,222,893 | | ||||||
Proceeds from sales of available-for-sale marketable securities |
54,999 | 1,106,364 | ||||||
Proceeds from sales of available-for-sale marketable securities related
party |
4,492,000 | 1,170,597 | ||||||
Purchase of available-for-sale marketable securities |
(3,950,000 | ) | | |||||
Proceeds from sale of other long-term investments |
| 451,500 | ||||||
Proceeds from sale of other long-term investments to related party |
| 400,000 | ||||||
Purchase of other long-term investments |
(251,250 | ) | (723,762 | ) | ||||
Proceeds from other investments |
1,532,655 | | ||||||
Net Cash Provided by Investing Activities |
6,691,569 | 2,121,270 | ||||||
Financing Activities |
||||||||
Proceeds from margin loans related party |
7,537,367 | 1,510,058 | ||||||
Payments on margin loans related party |
(15,019,627 | ) | (2,297,879 | ) | ||||
Proceeds from long-term debt related party |
15,514,972 | | ||||||
Repayment of long-term debt related party |
(1,006,222 | ) | | |||||
Purchase of treasury stock related party |
(11,404.600 | ) | | |||||
Sale of treasury stock related party |
126,567 | | ||||||
Net Cash (Used) by Financing Activities |
(4,251,543 | ) | (787,821 | ) | ||||
Net Change in Cash and Cash Equivalents |
171,888 | (71,385 | ) | |||||
Cash and cash equivalents at beginning of year |
17,452 | 88,837 | ||||||
Cash and Cash Equivalents at End of Year |
$ | 189,340 | $ | 17,452 | ||||
Supplemental Disclosures |
||||||||
Interest paid in cash |
$ | 1,720,619 | $ | 1,059,953 | ||||
Income taxes paid in cash |
12,813 | 7,429 |
See notes to consolidated financial statements.
F-5
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 SUMMARY OF ACCOUNTING POLICIES
Nature of Business: Call Now, Inc. was organized under the laws of the State of Florida on
September 24, 1990 under the name Rad San, Inc. The Company changed its name to Phone One
International, Inc. in January 1994 and to Call Now, Inc. in December 1994. The Company changed
its domicile to the State of Nevada in 1999.
The primary operation of the Company is the management of Retama Park racetrack (Retama Park) in
Selma, Texas, through an 80% owned subsidiary, Retama Entertainment Group, Inc. (REG). Retama
Park is owned by the Retama Development Corporation (the RDC). The RDC has an agreement with REG
to operate and manage Retama Park. The RDC, as owner of the facility, reimburses REG for the
majority of payroll and payroll related expenses, plus a monthly management fee.
The management agreement with Retama Park is the only management agreement that REG has executed
with a track currently in operation and is the only source of revenue for REG.
Principles of Consolidation: The accompanying consolidated financial statements include the
accounts of Call Now, Inc. and its 80% owned subsidiary, Retama Entertainment Group Inc.
(collectively the Company or Call Now). All significant inter-company transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable: Accounts receivable are reported at outstanding principal, net of an
allowance for doubtful accounts of $240,000 and $60,000 at December 31, 2010 and 2009. The
allowance for doubtful accounts is determined based on historical trends and an account-by-account
review. Accounts are charged off when collection efforts have failed and the account is deemed
uncollectible. The Company normally does not charge interest on accounts receivable.
Marketable Securities: The Company classifies its investment portfolio as held-to-maturity,
available-for-sale, or trading. At December 31, 2010 and 2009, all of the Companys marketable
securities were available-for-sale. Securities available-for-sale are carried at fair value with
unrealized gains and losses included in stockholders equity as a component of other comprehensive
income. Classification as current or non-current is based primarily on whether there is an active
public market for such security.
Securities that do not trade in an active market are valued based on the best information available
to Management. Impairments are reviewed on at least an annual basis. Gains or losses from the
sale or redemption of the marketable securities are determined using the specific identification
method.
Furniture and Equipment: Furniture and equipment are stated at cost. Depreciation and
amortization are computed on a straight-line method over the estimated useful lives of the related
assets, ranging from three to seven years. Leasehold improvements are amortized over the lesser of
the estimated useful lives or remaining lease period. Expenditures for maintenance and repairs are
charged to expense as incurred.
Impairment of Long-Lived Assets: The Company periodically reviews, on at least an annual basis,
the carrying value of its long-lived assets, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. To the extent the fair value of a
long-lived asset, determined based upon the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, are less than the carrying amount, an impairment loss
is recognized.
Notes and Interest Receivable Retama Development Corporation: Notes and interest receivable
from Retama Development Corporation are carried at outstanding principal plus accrued interest.
The Company reviews the carrying value for impairment on at least an annual basis, and believes the
security is sufficient to assure recovery of the principal and accrued interest.
Valuation of Other Investments The Company estimates fair value for its other investments based
on historical cost and other relevant information. The Company assesses the impairment of the
other investments at least annually, and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. Factors considered important, which could trigger an
impairment review, include the following: significant underperformance relative to historical or
projected future cash
F-6
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 SUMMARY OF ACCOUNTING POLICIES continued
flows; significant changes in the strategy of the overall business; and significant negative
industry trends. When management determines that the carrying value of the other investments may
not be recoverable, impairment is measured as the excess of the
assets carrying value over the estimated fair value. The Company recorded an impairment charge
during the fiscal year ended December 31, 2010 of $3,044,241.
Interest Income Recognition Retama Development Corporation: During each accounting period, the
Company evaluates whether to continue to recognize the accrued interest on the RDC note as income
based on several criteria including, but not limited to, the value of the underlying collateral,
the financial performance of Retama Park and the payment history of the RDC note and other
similarly positioned debt securities. Through September 30, 2009, the Company recognized the
accrued interest on the RDC note as income; however, as of October 1, 2009, the Company elected to
suspend further recognition of interest income until events and circumstances dictate otherwise.
Due to the continued decline of the financial performance of Retama Park the Company has deemed it
appropriate to suspend the income recognition through December 31, 2010. The Company will continue
to evaluate its assessment, and make any adjustments it deems necessary.
Income Taxes: Deferred tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax basis of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to reverse. The Company is
subject to the Texas margin tax.
The Company follows Accounting Standards Codification (ASC) Topic 740. The Standard defines the
confidence level that a tax position must meet in order to be recognized in the financial
statements. ASC 740 requires a two-step approach under which the tax effect of a position is
recognized only if it is more-likely-than-not to be sustained and the amount of tax benefit
recognized is equal to the largest tax benefit that is greater than 50 percent likely of being
realized upon ultimate settlement of the tax position. This approach requires the Company to
exercise considerable judgment and estimates are inherent. ASC 740 also requires that the amount
of interest expense to be recognized related to uncertain tax positions be computed by applying the
applicable statutory rate of interest to the difference between the tax position recognized in
accordance with ASC 740 and the amount previously taken or expected to be taken in a tax return.
Revenue Recognition: The Company receives reimbursement of payroll and related expenses for costs
incurred under its management agreement with the RDC. Such amounts are recognized as revenue when
the reimbursable expense is incurred. The Company also receives a monthly management fee under the
agreement.
Interest and dividend income is recognized as earned on its investments, except for the RDC Series
B bonds. The Company does not recognize interest income on the RDC Series B bonds (see Note 3), as
the Company does not expect to realize such interest in the foreseeable future.
Earnings (Loss) Per Common Stock Attributable To Call Now, Inc.: Basic earnings (loss) per common
share is computed on the basis of the weighted average number of common shares outstanding during
each year. Diluted earnings per share are computed on the basis of the weighted average number of
common shares and dilutive securities outstanding. Dilutive securities having an anti-dilutive
effect on diluted earnings (loss) per share are excluded from the calculation.
Concentration of Credit Risk: Financial instruments that potentially expose the Company to credit
risk consist of cash and cash equivalents, marketable securities, and notes receivable. The
Company maintains its cash balances at two financial institutions. Accounts at the institutions
are secured by the FDIC up to $250,000. Balances may periodically exceed this amount. Cash
balances at Penson Financial Services, Inc. have additional insurance in excess of $10,000,000.
At December 31, 2010 and 2009, the Companys investment in Penson Worldwide, Inc. common stock
totaled $2,449,509 and $9,068,353, respectively, or approximately 24% and 44%, respectively, of the
Companys total assets. Any significant decline in the fair market value of this asset would
negatively impact the financial position of the Company.
Fair Value of Financial Instruments: Cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, and margin loan payable are reflected in the accompanying consolidated
financial statements at cost, which approximates fair value
F-7
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 1 SUMMARY OF ACCOUNTING POLICIES continued
because of the short-term maturity of these instruments. Marketable securities are recorded at
fair value, with a majority of such securities being traded in an active market. Fair value of
notes payable is based on rates available to the Company for debt with similar terms and
maturities.
Use of Estimates: The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure on
contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Stock Based Compensation: The Company applies the provisions of ASC Topic 718-10, Compensation
Stock Compensation, which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors, including grants of stock options and
employee stock purchases under the Companys Employee Stock Purchase Plan, based on estimated fair
values. There were no options granted in 2010 or 2009, and no options were outstanding at December
31, 2010 or 2009.
Comprehensive Income: Comprehensive income includes all changes in equity except those resulting
from investments by owners and distributions to owners. The components of comprehensive income are
included in the Statement of Changes in Stockholders Equity.
Subsequent Events: Management has reviewed and evaluated events and transactions which have
occurred subsequent to December 31, 2010 through March 31, 2011, the date of issuance of these
financial statements.
Reclassification: Certain reclassifications, all insignificant in amount, have been made to the
prior years financial statements in order to conform to the current presentation.
NOTE 2 MARKETABLE SECURITIES
The carrying amounts of marketable securities as shown in the accompanying balance sheet and their
approximate market values are as follows at December 31, 2010 and 2009:
Gross | Gross | Carrying/ | ||||||||||||||
Unrealized | Unrealized | Market | ||||||||||||||
2010 | Cost | Gains | (Losses) | Value | ||||||||||||
Current Assets, available-for-sale: |
||||||||||||||||
Equity securities, PWI common
stock, see note 4 |
$ | 2,416,449 | $ | 33,060 | $ | | $ | 2,449,509 | ||||||||
Municipal bonds |
4,076,575 | | (438,138 | ) | 3,638,437 | |||||||||||
$ | 6,493,024 | $ | 33,060 | $ | (438,138 | ) | $ | 6,087,946 | ||||||||
Non-current Assets, available-for-sale: |
||||||||||||||||
RDC Series A bonds |
27,594 | 105,406 | | 133,000 | ||||||||||||
Total available-for-sale securities |
$ | 6,520,618 | $ | 138,466 | $ | (438,138 | ) | $ | 6,220,946 | |||||||
F-8
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 2 MARKETABLE SECURITIES continued
Gross | Gross | Carrying/ | ||||||||||||||
Unrealized | Unrealized | Market | ||||||||||||||
2009 | Cost | Gains | (Losses) | Value | ||||||||||||
Current Assets, available-for-sale: |
||||||||||||||||
Equity securities, PWI common
stock, see note 4 |
$ | 4,828,448 | $ | 4,239,905 | $ | | $ | 9,068,353 | ||||||||
Municipal bonds |
191,575 | | (50,767 | ) | 140,808 | |||||||||||
$ | 5,020,023 | $ | 4,239,905 | $ | (50,767 | ) | $ | 9,209,161 | ||||||||
Non-current Assets, available-for-sale: |
||||||||||||||||
RDC Series A bonds |
30,083 | 114,917 | | 145,000 | ||||||||||||
Total available-for-sale securities |
$ | 5,050,106 | $ | 4,354,822 | $ | (50,767 | ) | $ | 9,354,161 | |||||||
Unrealized gains (losses) on marketable securities available-for-sale at December 31, 2010 and 2009
are shown net of income taxes as a component of stockholders equity.
The Company has five debt securities in an unrealized loss position at December 31, 2010. The
unrealized loss on these securities at December 31, 2010 is $438,138 and the market value is
$3,638,437. The Company does not consider these investments to be other than temporarily impaired.
NOTE 3 MARKETABLE SECURITIES AND NOTES RECEIVABLE RETAMA DEVELOPMENT
During 1996 and 1997, the Company purchased a significant portion of the Special Facilities Revenue
Bonds, Series 1993, of the Retama Development Corporation (the RDC). The revenue bonds were
originally issued to fund the construction of the Retama Park racetrack in Selma, Texas. Following
the bankruptcy by the RDC and the defeasance of the Series 1993 bonds, the Company retained a
significant interest in the new 1997 RDC Series B bonds, which are secured by a lien, subordinate
to the Series A bonds and the funding agreement, on the Retama Park racetrack real and personal
property, and now owns a small position the Series A bonds (the Retama Series A bonds hold the
first lien position). Both the Series A and Series B bonds mature September 1, 2033. For several
years following the initial acquisition, the Company purchased and sold several blocks of the
bonds. However, the Company has not purchased or sold any of the Series B bonds since 2002, and
changes to the Series A bonds have been limited to redemptions of $5,000 each year. The Companys
investment in the RDC Series B bonds was fully impaired in 2006.
Payment on the Series A bonds have remained current through the payment of interest and principal
due December 31, 2010 substantially as a result of loans made through the Funding Agreement. There
have never been any payments made on the Series B bonds and it is not anticipated that any payment
will be made unless additional forms of gaming (video lottery terminals, slot machines, table
games) are legalized at Texas racetracks or the underlying collateral real estate is either sold or
redeveloped. The Company fully impaired the Series B bonds based on the limited available market,
the uncertainty of principal or interest payments and the subordinate lien on the collateral.
As part of the bond defeasance agreement, the Company was obligated to lend certain amounts to the
RDC to fund any operating losses for up to 2 years, which expired in 1999. Although the Company is
not currently obligated to fund the RDC, it has continued to do so as part of its strategy to
assure continued operations at the racetrack. At December 31, 2010, the total amount funded by the
Company to the RDC for its operations includes principal of $400,000 plus interest of $9,728 as a
result of a loan made by the Company in September of this year; however, due to uncertain economic
future of Retama Park, the Company elected to suspend further recognition of interest income until
events and circumstances dictate otherwise.
F-9
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 3 MARKETABLE SECURITIES AND NOTES RECEIVABLE RETAMA DEVELOPMENT continued
At December 31, 2009, the Company had an outstanding receivable from the RDC in the principal
amount of $3,627,569 plus accrued interest of $1,595,324. Such funding was secured by a second
lien on the racetrack facility. As more fully described in the 8-K filed by the Company on
February 25, 2010 and Part I History and Developments During the Last Three Years of this 10-K,
on February 25, 2010 the Company entered into a Purchase and Sale Agreement with Christopher J.
Hall (Hall), the Companys majority shareholder, Chairman and director, where the Company
transferred to Hall, in addition to other assets and cash, the full principal and interest value of
these RDC notes in exchange for 898,000 shares of the Companys common stock and two municipal bond
positions.
The balance of these bonds and notes receivable, all considered long-term, are as follows at
December 31, 2010 and 2009:
Total | Face Amount | |||||||||||||||
Face Amount | Owned By | Cost | Carrying | |||||||||||||
2010 | Outstanding | Call Now | Basis | Value | ||||||||||||
RDC Bonds (Marketable Securities): |
||||||||||||||||
RDC Series A bonds |
$ | 6,045,000 | $ | 133,000 | $ | 27,594 | $ | 133,000 | ||||||||
RDC Series B bonds |
86,925,000 | 43,962,500 | 1,077,463 | | ||||||||||||
Total bonds, long-term |
$ | 133,000 | ||||||||||||||
RDC Notes and Interest Receivable: |
||||||||||||||||
Notes receivable, principal balance |
$ | 400,000 | $ | 400,000 | $ | 400,000 | $ | 400,000 | ||||||||
Accrued interest receivable |
9,728 | 9,728 | 9,728 | 9,728 | ||||||||||||
Total notes and interest receivable |
$ | 409,728 | ||||||||||||||
Total | Face Amount | |||||||||||||||
Face Amount | Owned By | Cost | Carrying | |||||||||||||
2009 | Outstanding | Call Now | Basis | Value | ||||||||||||
RDC Bonds (Marketable Securities): |
||||||||||||||||
RDC Series A bonds |
$ | 6,250,000 | $ | 145,000 | $ | 30,083 | $ | 145,000 | ||||||||
RDC Series B bonds |
86,925,000 | 43,962,500 | 1,077,463 | | ||||||||||||
Total bonds, long-term |
$ | 145,000 | ||||||||||||||
RDC Notes and Interest Receivable: |
||||||||||||||||
Notes receivable, principal balance |
$ | 3,627,569 | $ | 3,627,569 | $ | 3,627,569 | $ | 3,627,569 | ||||||||
Accrued interest receivable |
1,595,324 | 1,595,324 | 1,595,324 | 1,595,324 | ||||||||||||
Total notes and interest receivable |
$ | 5,222,893 | ||||||||||||||
NOTE 4 MARKETABLE SECURITIES RELATED PARTY
On June 26, 2003 the Company entered into a Convertible Promissory Note and Purchase Agreement
with Penson Worldwide, Inc. (PWI) to lend $6,000,000 with the note maturing on June 26, 2008. The
President of Call Now, Inc. is a Director of PWI. The note called for principal payments in the
amount of $400,000 to be paid monthly beginning April 26, 2007 and ending on June 26, 2008. The
note required the Company, as noteholder, to have the option to convert the entire outstanding
principal amount into shares of PWI common stock. The conversion price per common share was 2.25
times PWI shareholders equity as of June 30, 2003 divided by the actual number of issued and
outstanding shares of PWI as of June 30, 2003, which equated to $2.01 per share. On December 23,
2003, an additional $600,000 was loaned to PWI under similar terms and conditions as the original
note.
On June 30, 2005, the Company converted the entire $6,600,000 principal balance of the PWI note
into PWI common stock, totaling 3,283,582 shares.
F-10
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 4 MARKETABLE SECURITIES RELATED PARTY continued
On May 16, 2006, PWI completed the Initial Public Offering (IPO) of their common stock (Nasdaq:
PNSN). In a simultaneous transaction, PWI affected a 1-for-2.4 share reverse split and the
split-off of certain non-core business operations known as SAMCO. As part of the IPO, the Company
elected to participate in the exchange of PWI shares for SAMCO shares and sell a total of 11.5% of
its investment, or 157,337 post-split shares, of the PWI shares in the IPO resulting in a gain on
the sale of $1,728,504. Following the completion of the PWI IPO, the Companys resulting position
is as follows: 79,900 shares of SAMCO which represents an approximate 7.29% interest in the
company; and 1,130,922 shares of the publicly traded PWI common stock. During the fourth fiscal
quarter of 2009, the Company sold 64,000 shares of SAMCO at an average price of $5.49 per share,
resulting in a remaining position of 15,900 shares, or approximately 1.66% of the outstanding stock
as December 31, 2009. During the first fiscal quarter of 2010, the Company sold its remaining
shares of SAMCO at a price of $5.59 per share. In August 2008, the Company sold 30,000 shares of
PWI common stock at an average price of $18.30 per share. In August 2009, the Company sold 100,000
shares of PWI common stock at an average price of $11.71 per share, leaving a balance of 1,000,922.
As more fully described in the 8-K filed by the Company on February 25, 2010 and Part I History
and Developments During the Last Three Years of this 10-K, on February 25, 2010 the Company entered
into a Purchase and Sale Agreement with Christopher J. Hall (Hall), the Companys majority
shareholder, Chairman and director, where the Company transferred to Hall, in addition to other
assets and cash, 500,000 shares of PWI common stock in exchange for 898,000 shares of the Companys
common stock and two municipal bond positions. The Company holds a position of 500,922 shares of
PWI common stock, or approximately 1.75% of the outstanding shares as of December 31, 2010 and
recognizes cumulative other comprehensive income from the increase in value of the PWI common stock
of approximately $33,000 (gross) or $22,000 net of taxes. The Company originally extended credit
to Penson in order to achieve a higher return on its capital for use in its business. After the
loan was converted to Penson stock it continues to be held as a source of capital for the Companys
business.
NOTE 5 MARGIN LOAN PAYABLE RELATED PARTY
The Company has a margin loan payable to Penson Financial Services, Inc., a wholly owned subsidiary
of Penson Worldwide, Inc., which accrues interest at an interest rate of 7.45% at December 31, 2010
and 2009. The balance of the margin loan was $5,777,020 and $13,259,281 at December 31, 2010 and
2009, respectively. The margin loan is collateralized by a majority of the Companys marketable
securities, including all of its PWI common stock. The Company paid interest on the margin loan of
$387,131 in 2010 and $1,059,953 in 2009. There was no borrowing availability from this margin
account at December 31, 2010 and 2009.
NOTE 6 NOTE PAYABLE RELATED PARTY
On February 25, 2010, the Company entered into a Promissory Note in favor of PWI, in the principal
amount of $13,922,000, accumulating interest at a rate of 10% per year with a maturity of the
principal and interest onFebruary 25, 2012. On September 16, 2010 the Company borrowed an
additional $400,000 from PWI, bringing the balance of the Promissory Note to $14,322,000. On
November 12, 2010 the Company made a payment of $1,000,000 in principal and $6,222 in interest on
the Promissory Note, bringing the principal balance down to its current balance of $13,322,000.
The Company has granted PWI a carried interest equal to 20% of the proceeds from its holdings of
Retama Development Corp. B Bonds. If the Company repays the Promissory Note prior to the second
anniversary of the issuance and there is no default or event of default prior to such repayment,
the carried interest will be reduced to 15%. The carried interest entitles the lender to a
percentage of all income, principal and other proceeds (in whatever form) from or in respect of the
Retama Development Corp. B Bonds of any kind whether on account of interest, redemption of
principal, proceeds of sale, pledge or other transfer or disposition of the Bonds, insurance
proceeds, tax refunds, or otherwise made or payable in respect of any of the Bonds. The carried
interest survives the repayment of the Promissory Note. The Promissory Note is secured by a lien
on substantially all of the Companys assets.
F-11
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 7 STOCKHOLDERS EQUITY
Preferred Stock: The Company has authorized 266,667 shares of $.001 par value preferred stock, of
which 100,000 shares are designated Class A convertible redeemable preferred stock (Class A),
66,667 shares are designated Class B convertible redeemable preferred stock (Class B), and 100,000
are designated as Class C convertible redeemable preferred stock (Class C).
The Class A preferred stock is non-voting, redeemable at the option of the Company at a price of $5
per share plus accrued but unpaid dividends, and convertible into five shares of common stock at
the option of the holder. The Class A preferred stockholders are entitled to receive an annual
dividend of $.30 per share. No Class A shares are outstanding at December 31, 2010 and 2009.
The Class B preferred stock is non-voting, redeemable at the option of the Company at a price of
$100 per share plus accrued but unpaid dividends, and convertible into 100 shares of common stock
at the option of the holder. The Class B preferred stockholders are entitled to receive an annual
dividend of $6.00 per share. No Class B shares are outstanding at December 31, 2010 and 2009.
The Class C preferred stock is non-voting, redeemable at the option of the Company at a price of
$3.00 per share plus one share of common stock and convertible into one share at the option of the
holder. No Class C shares are outstanding at December 31, 2010 and 2009.
NOTE 8 INCOME TAXES
Income tax expense does not approximate the expected corporate tax rate due primarily to
non-taxable municipal bond interest income received in each year. The components of the provision
for income tax expense (benefit) are as follows at December 31:
2010 | 2009 | |||||||
Deferred federal income tax (benefit) |
$ | (1,010,449 | ) | $ | (92,921 | ) | ||
Current federal income tax |
| 148,750 | ||||||
State income tax |
24,051 | 20,190 | ||||||
Income tax expense (benefit) |
$ | (986,398 | ) | $ | 76,019 | |||
Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and used for income tax
purposes. Significant components of the Companys deferred tax assets and liabilities are as
follows as of December 31, 2010 and 2009:
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Net operating loss carryforward, long-term |
$ | 1,775,847 | $ | 765,397 | ||||
Basis difference in assets, long-term |
| 171,204 | ||||||
Unrealized losses on marketable securities, current |
101,888 | | ||||||
$ | (1,877,735 | ) | $ | 936,601 | ||||
Deferred tax (liabilities): |
||||||||
Unrealized gains on marketable securities, current |
$ | | $ | (1,463,379 | ) | |||
The Company has net operating loss carryforwards for tax purposes of approximately $5,223,000 that
begin to expire in the year 2023.
Other Tax Matters: The Company recognizes interest and penalties related to unrecognized tax
benefits in tax expense. The Company included accruals for unrecognized income tax benefits
totaling $0 as a component of other liabilities as of December
F-12
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 8 INCOME TAXES continued
31, 2010 and 2009. During 2009 an unrecognized tax position of $398,750 has been settled with the
taxing authority. The Company accrued interest of $21,250 at December 31, 2009. The Company does
not anticipate a significant change in the amount of unrecognized tax benefits in the next 12
months.
A reconciliation of the change in the unrecognized tax benefits is as follows:
Unrecognized tax benefit at December 31, 2008 |
$ | 250,000 | ||
Gross increases tax positions in prior years |
148,750 | |||
Settlements |
(398,750 | ) | ||
Unrecognized tax benefits at December 31, 2009 |
$ | 0 | ||
As of December 31, 2010, the tax years ending December 31, 2006 through 2009 remain subject to
examination by tax authorities.
NOTE 9 RELATED PARTY TRANSACTIONS
The Company owns 500,922 shares of Penson Worldwide, Inc. common stock with a market value of
$2,449,509 at December 31, 2010, and 1,000,922 shares with a market value of $9,068,353 at December
31, 2009. The Company also has a margin loan payable to Penson Financial Services, Inc., a wholly
owned subsidiary of Penson Worldwide, Inc., with a balance of $5,777,021 at December 31, 2010 and
$13,259,281 at December 31, 2009. The President of Call Now, Inc. is a Director of Penson
Worldwide, Inc.
In 2005 the Company purchased a limited partnership interest in a 270-unit luxury apartment complex
under development at the master planned community of Stone Oak in San Antonio, Texas. Other
limited partners include the Companys President/CEO, the Companys majority shareholder and the
President of REG. The general partner is an unrelated real estate development company based in
Houston. The Estates at Canyon Ridge was sold on November 2, 2010 to an unrelated third party,
resulting in a realized loss by the Company of approximately $1,683,000. This amount had
previously been reported by the Company as an impairment charge to earnings in the quarter ended
September 30, 2010.
In January 2009, the Company sold approximately 23.24% of the 95% limited partnership interest in
Cambridge at Auburn, LP to Thomas R. Johnson, the President and Chief Executive Officer of the
Company for $400,000. The purchase price represented the Companys cost basis in the partnership
and the proceeds were utilized to support other investments of the Company. The transaction was
evaluated and approved by the Companys directors who had no interest in the transaction.
On February 25, 2010, the Company entered into a Promissory Note in favor of PWI, in the principal
amount of $13,922,000, accumulating interest at a rate of 10% per year with a maturity of February
25, 2012. On September 16, 2010 the Company borrowed an additional $400,000 from PWI, bringing the
balance of the Promissory Note to $14,322,000. On November 12, 2010 the Company made a payment of
$1,000,000 in principal and $6,222 in interest on the Promissory Note, bringing the principal
balance down to its current balance of $13,322,000. In addition, the Company has granted PWI a
carried interest equal to 20% of the proceeds from its holdings of Retama Development Corp. B
Bonds. If the Company repays the Promissory Note prior to the second anniversary of the issuance
and there is no default or event of default prior to such repayment, the carried interest will be
reduced to 15%. The carried interest entitles the lender to a percentage of all income, principal
and other proceeds (in whatever form) from or in respect of the Retama Development Corp. B Bonds of
any kind whether on account of interest, redemption of principal, proceeds of sale, pledge or other
transfer or disposition of the Bonds, insurance proceeds, tax refunds, or otherwise made or payable
in respect of any of the Bonds. The carried interest survives the repayment of the Promissory Note.
The Promissory Note is secured by a lien on substantially all of the Companys assets.
Simultaneous with the execution of the Promissory Note with PWI on February 25, 2010, the Company
entered into a Purchase and Sale Agreement with Christopher Hall, the Companys majority
stockholder, Chairman and a director. Under such agreement,
F-13
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 9 RELATED PARTY TRANSACTIONS continued
which was approved by the Board of Directors in accordance with the By-laws, the Company purchased
from Mr. Hall the following:
898,000 shares of Call Now, Inc. common stock for $11,404,600;
$3,200,000 principal amount of Leon County FL Educational Facilities Authority (Southgate)
Series B Bond, 7.625% due 9/1/28 for $2,080,000; and
$2,200,000 principal amount of Cambridge Student Housing Financing Revenue Series C Bond,
9.70% due 11/1/39 for $1,870,000.
In consideration of the foregoing the Company transferred and paid to Mr. Hall the following:
The Retama Development Corporation Funding Agreement with a current principal and
interest balance totaling $5,355,428 ($3,627,569 principal + $1,727,859 interest);
500,000 shares of Penson Worldwide, Inc. common stock valued at $4,480,000; and
$5,511,800 in cash.
Additionally, on June 15, 2010 the Company sold 9,973 shares of the Companys common stock to Mr.
Hall for $126,567.
NOTE 10 MANAGEMENT AGREEMENT
The Companys agreement to operate and manage the Retama Park racetrack extends through November 1,
2020. The Company is reimbursed for the majority of its payroll and payroll related expenses, and
receives a management fee is $20,000 per month, with certain adjustments.
NOTE 11 FAIR VALUE MEASUREMENTS
ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. As defined in ASC Topic 820, fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (exit price). The Company utilizes market data
or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These
inputs can be readily observable, market corroborated, or generally unobservable. The Company
classifies fair value balances based on the observability of those inputs. ASC Topic 820
establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level
3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1: | Quoted prices are available in active markets for identical asset or liabilities; | ||
Level 2: | Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or | ||
Level 3: | Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations. |
Financial assets and liabilities are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Companys assessment of the
significance of a particular input to the value measurement requires judgment, and may affect the
valuation of fair value assets and liabilities and their placement within the fair value hierarchy
levels. The following table sets forth by level within the fair value hierarchy the Companys
financial assets and liabilities that were accounted for at fair value as of December 31, 2010 and
2009.
F-14
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 11 FAIR VALUE MEASUREMENTS continued
December 31, 2010 | ||||||||||||||||
Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Marketable securities related party |
$ | 2,449,509 | $ | | $ | | $ | 2,449,509 | ||||||||
Marketable securities other |
3,638,437 | | | 3,638,437 | ||||||||||||
Marketable securities Retama Development Corp. Series A |
| | 133,000 | 133,000 | ||||||||||||
Liabilities: |
||||||||||||||||
None |
| | | |
December 31, 2009 | ||||||||||||||||
Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Marketable securities related party |
$ | 9,068,353 | $ | | $ | | $ | 9,068,353 | ||||||||
Marketable securities other |
140,808 | | | 140,808 | ||||||||||||
Marketable securities Retama Development Corp. Series A |
| | 145,000 | 145,000 | ||||||||||||
Liabilities: |
||||||||||||||||
None |
| | | |
The Companys financial instruments, other than marketable securities Retama Development Corp.,
relate to its available-for-sale marketable securities, which are valued using quoted market
prices.
The marketable securities Retama Development Corp. financial instruments are debt securities.
The fair value of these instruments are determined based on observable and unobservable pricing
inputs and therefore, the data sources utilized in these valuation models are considered level 3
inputs in the fair value hierarchy.
The following table sets forth a reconciliation of changed in the fair market value of financial
assets classified as level 3 in the fair value hierarchy.
Marketable Securities | ||||||||
Retama Developmement Corp. | Total | |||||||
Balances as of January 1, 2009 |
$ | 145,000 | $ | 145,000 | ||||
Total losses (realized or unrealized): |
||||||||
Included in earnings |
| | ||||||
Included in other comprehensive income |
| | ||||||
Purchases, issuances, redemptions and settlements |
| | ||||||
Transfers in and out of level 3 |
| | ||||||
$ | 145,000 | $ | 145,000 | |||||
Change in unrealized gains or losses in earnings (or changes in net
assets) relating to asset still held as of December 31, 2009 |
$ | | $ | | ||||
F-15
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 11 FAIR VALUE MEASUREMENTS continued
Marketable Securities | ||||||||
Retama Developmement | ||||||||
Corp. | Total | |||||||
Balances as of January 1, 2010 |
$ | 145,000 | $ | 145,000 | ||||
Total losses (realized or unrealized): |
||||||||
Included in earnings |
| | ||||||
Included in other comprehensive income |
| | ||||||
Purchases, issuances, redemptions and settlements |
(12,000 | ) | (12,000 | ) | ||||
Transfers in and out of level 3 |
| | ||||||
$ | 133,000 | $ | 133,000 | |||||
Change in unrealized gains or losses in earnings (or changes in net
assets) relating to asset still held as of December 31, 2010 |
$ | | $ | | ||||
December 31, 2010 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Non-Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | Impairments | |||||||||||||||
Assets: |
||||||||||||||||||||
Investments Long-term |
$ | | $ | | $ | 116,279 | $ | 116,279 | $ | (3,044,241 | ) |
December 31, 2009 | ||||||||||||||||||||
Total | ||||||||||||||||||||
Non-Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | Impairments | |||||||||||||||
Assets: |
||||||||||||||||||||
Investments Long-term |
$ | | $ | | $ | 4,365,136 | $ | 4,365,136 | $ | |
NOTE 12 EARNINGS PER SHARE ATTRIBUTABLE TO CALL NOW, INC.
The following reconciles the components of the earnings per share (EPS) computation:
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Year Ended December 31, 2010 |
||||||||||||
Basic EPS: |
||||||||||||
Net (loss) attributable to Call Now, Inc. |
$ | (1,992,764 | ) | 2,214,868 | $ | (.90 | ) | |||||
Effect of dilutive options |
| | | |||||||||
Dilutive EPS |
$ | (1,992,764 | ) | 2,214,868 | $ | (.90 | ) | |||||
Year Ended December 31, 2009 |
||||||||||||
Basic EPS: |
||||||||||||
Net (loss) attributable to Call Now, Inc. |
$ | (414,135 | ) | 2,902,367 | $ | (.14 | ) | |||||
Effect of dilutive options |
| | | |||||||||
Dilutive EPS |
$ | (414,135 | ) | 2,902,367 | $ | (.14 | ) | |||||
F-16
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
NOTE 13 CONTINGENCY
Investment Company Act: Management has taken the position that the Company is not an investment
company required to be registered under the Investment Company Act of 1940. If it was established
that the Company is an unregistered investment company, there would be a risk, among other material
adverse consequences, that the Company could become subject to monetary penalties or injunctive
relief, or both, in an action brought by the Securities and Exchange Commission. The Company would
also be unable to enforce contracts with third parties or third parties could seek to obtain
rescission of transactions undertaken during the period it was established that the Company was an
unregistered investment company.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
F-17
Table of Contents
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act))
as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of December 31, 2010 are effective to ensure that information we are required to
disclose in reports that we file or submit under the Exchange Act (i) is recorded, processed
summarized and reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required reasonable
assurance that such information is accumulated and communicated to our management. Our disclosure
controls and procedures are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and procedures include
components of our internal control over financial reporting. Managements assessment of the
effectiveness of our internal control over financial reporting is expressed at the level of
reasonable assurance that the control system, no matter how well designed and operated, can provide
only reasonable, but not absolute, assurance that the control systems objectives will be met.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Under the supervisions and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2010. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework as supplemented by the COSO publication,
Internal Control over Financial Reporting Guidance for Smaller Public Companies. Based on this
evaluation, our management concluded that our internal control over financial reporting was
effective as December 31, 2010 based on these criteria.
This annual report does not include an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Managements report was not subject to
attestation by our registered public accounting firm.
Changes in Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the
quarter ended December 31, 2010 that have materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
19
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The directors and executive officers of the Company are as follows:
NAME AND POSITION | AGE | |||
Bryan P. Brown, Director and CEO of Retama Entertainment Group, Inc. |
50 | |||
Christopher J. Hall, Director and Chairman |
52 | |||
Thomas R. Johnson, Director and President and Chief Executive Officer |
43 | |||
William P. McNeer III, Director |
50 |
Bryan P. Brown has served as director since 1997. He was President from 1997 to December 1998. He
was previously President of Riverwood, a master planned golf course community in Port Charlotte,
Florida. He served as Treasurer of the Mariner Group, Inc. and Assistant Vice President of First
Union National Bank and First Republic Bank. He has served as CEO of the Companys 80% owned
subsidiary, Retama Entertainment Group, Inc. since December 1998.
Christopher J. Hall was the co-founder and co-owner of Howe, Solomon and Hall, Inc. (HSH) from
1985-1998. HSH was a NASD licensed securities firm founded on Wall Street. In 1998 Mr. Hall left
to pursue entrepreneurial efforts which include Call Now, Inc. He became a director in November
2001.
Thomas R. Johnson was elected as President, Chief Executive Officer and Director of Call Now, Inc.
in November 2001. Mr. Johnson has served on the Board of Directors of Penson Worldwide, Inc.
(PWI), a publicly traded company that the Company holds a position of 500,922 shares, since August
of 2003. Prior to joining the Company, Mr. Johnson was an independent fixed-income bond trader and
analyst. He also has been a fixed-income bond analyst and broker for a municipal bond firm from
1989 to 1999.
William P. McNeer III has served as director since 2010. Since 1992 he has been engaged as a
self-employed consultant specializing in assisting clients in locating financing alternatives and
providing guidance in foreclosure workouts. He has also concurrently served as President of
Mortgage Operations for WRC Mortgage in North Palm Beach Florida from 1997 to 2008.
Our directors are elected yearly at our annual shareholders meeting. The Board of Directors may
fill vacancies with an appointment until the next annual meeting. Officers serve until removed or
replaced by the Board.
CODE OF ETHICS
The Company has adopted a Business Ethics and Conduct Policy that has been filed as Exhibit 14 to
the Annual Report as its code of ethics. This policy is applicable to all of the Companys
directors, officers and employees, including its principal executive officer, principal financial
officer and principal accounting officer. We will provide a copy to any person, without charge,
upon a request in writing to: Thomas R. Johnson, President, Call Now, Inc., P.O. Box 47535, San
Antonio, Texas, 78265.
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents compensation information for the year ended December 31, 2010 for the
persons who served as our principal executive officer and each of our two other most highly
compensated executive officers whose aggregate salary and bonus was more than $100,000 in such
year. We refer to these executive officers as our named executive officers elsewhere in this
annual report. Mr. Brown and Mr. Johnson were each paid a $10,000 bonus for 2008 in the 2009
fiscal year. Mr. Hall and Mr. Johnson each earned $7,000 for their participation in 2009 as
directors of the Company, but elected to defer collection of these directors fees until an improved
financial position of the Company allows.
20
Table of Contents
Name and | Options | All Other | ||||||||||||||||||||||
Principal Position | Year | Salary | Bonus | Awards | Compensation(1) | Total | ||||||||||||||||||
Thomas R. Johnson, |
2010 | $ | 200,000 | | | $ | 0 | $ | 200,000 | |||||||||||||||
President/CEO |
2009 | $ | 200,000 | $ | 10,000 | | $ | 0 | $ | 210,000 | ||||||||||||||
Christopher J. Hall, |
2010 | $ | 200,000 | | | $ | 0 | $ | 200,000 | |||||||||||||||
Chairman |
2009 | $ | 200,000 | | | $ | 0 | $ | 200,000 | |||||||||||||||
Bryan P. Brown, |
2010 | $ | 200,000 | | | $ | 0 | $ | 200,000 | |||||||||||||||
CEO, Retama
Entertainment Group |
2009 | $ | 200,000 | $ | 10,000 | | $ | 7,000 | $ | 217,000 |
(1) | Consists of director meeting fees. |
EXECUTIVE EMPLOYMENT CONTRACTS
In March 2004, the Company and REG entered into an employment agreement with Thomas R. Johnson
(Johnson). The terms of the agreement called for a base salary of $125,000 per year that has
been amended and is currently at the rate of $200,000. If Electronic Gaming Machines (EGM) are
authorized for operation at Retama Park, Johnson shall receive a monthly bonus of 1/2% of monthly Net
Win generated from EGMs up to $120 million at Retama. For annual net win in excess of $120 million
at Retama, Johnson shall receive a monthly bonus of 1/4% of monthly Net Win. In the event of
Johnsons termination upon a Change of Control, Johnson shall receive at closing, one lump sum
payment equal to the payment made according to the percentage bonus based on Net Win in the month
immediately preceding the Change of Control multiplied by seventy-six (76). The term of Johnsons
employment continues for one (1) year and thereafter for successive terms of one (1) year each
unless at the option of either party upon at least thirty days prior written notice such
employment is terminated at the end of the current term.
In March 2004, REG entered into an employment agreement with Bryan P. Brown (Brown) as CEO of
REG. The terms of the agreement call for a base salary of $200,000 per year. If EGM are
authorized for operation at Retama Park, Brown shall receive bonus compensation of a one-time
payment of $100,000 upon the commercial operation of EGMs at Retama. Brown shall receive a monthly
bonus of 1/2% of monthly Net Win generated from EGMs up to $120 million at Retama. For annual net
win in excess of $120 million at Retama, Brown shall receive a monthly bonus of 1/4% of monthly Net
Win. In the event of Browns termination upon a Change of Control, Brown shall receive at
closing, one lump sum payment equal to the payment made according to the percentage bonus based on
Net Win in the month immediately preceding the Change of Control multiplied by seventy-six (76).
The term of Browns employment continues for one (1) year and thereafter for successive terms of
one (1) year each unless at the option of either party upon at least thirty days prior written
notice such employment is terminated at the end of the current term.
In May 2008, the Company engaged Christopher J. Hall, the majority shareholder of the Company, as
Chairman with an annual salary of $200,000 per year. At this time, there is no employment
agreement with Mr. Hall.
RISK CONSIDERATIONS
The Board considers whether the Companys compensation policies and practices for both executives
and other employees encourage unnecessary or excessive risk taking. The Board believes the
Companys compensation policies and practices are appropriate and do not encourage unnecessary and
excessive risk taking.
EQUITY COMPENSATION PLAN INFORMATION AS OF DECEMBER 31, 2010
The Company does not have any equity compensation plans outstanding as of December 31, 2010. All
equity compensation awards have been exercised or expired prior to such date.
DIRECTOR COMPENSATION
Our directors, including our directors who are named executive officers, are paid $1,000 for each
board meeting attended. We reimburse our directors for reasonable travel and lodging expenses
incurred in attending meetings.
Director compensation paid to named executive officers is included in the summary compensation
table above.
21
Table of Contents
The following table sets forth compensation earned or paid to our non-employee directors in 2010.
Fees Earned or | Non-equity Incentive | All Other | ||||||||||||||||||
Name | Paid in Cash | Option Awards | Plan Compensation | Compensation | Total | |||||||||||||||
William P. McNeer III |
$ | 5,000 | | | | $ | 5,000 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The following table sets forth, as of March 8, 2011, the beneficial ownership of the Companys
Common Stock by (i) the only persons who own of record or are known to own, beneficially, more than
5% of the Companys Common Stock; (ii) each director and executive officer of the Company; and
(iii) all directors and officers as a group. As detailed in Note 9 Related Party Transactions
of the audited financial statements for fiscal year ended December 31, 2010 above, the Company
acquired 898,000 shares and sold 9,973 shares of the Companys common stock from the Companys
Chairman, Christopher J. Hall leaving a total number of shares outstanding as of March 8, 2011 of
2,013,877.
Percent of Outstanding | ||||
Name | Number of Shares | Common Stock | ||
Christopher J. Hall |
1,696,621 | 84.25% | ||
Thomas R. Johnson |
93,975 | 4.69% | ||
Bryan P. Brown |
-0- | 0% | ||
William M. Allen |
-0- | 0% |
Officers and Directors as a group (4 Persons).. 1,790,596 88.91%
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; DIRECTOR INDEPENDENCE. |
As of December 31, 2010, the Company owned 500,922 shares of common stock of Penson Worldwide, Inc.
with a market value of $2,449,509. In August of 2003, the Companys President and CEO, Thomas R.
Johnson, was elected to the Board of Directors of PWI pursuant to a provision in the original PWI
Note which required that PWI use its best efforts to appoint a nominee of the Company to PWIs
board of directors. The Company has maintained an investment account with Penson Financial
Services, Inc., a wholly owned subsidiary of Penson Worldwide, Inc., since 1999. On December 31,
2010, the Company had a margin loan in this account in the amount of $5,777,021, which is
collateralized by its marketable securities.
In 2005, the Company purchased a limited partnership interest in The Estates at Canyon Ridge, a
270-unit luxury apartment complex under development at the master planned community of Stone Oak in
San Antonio, Texas. Other limited partners include the Companys President/CEO, the Companys
majority shareholder and the President of REG, each of who is also a director of the Company. The
general partner is an unrelated real estate development company based in Houston. The Estates at
Canyon Ridge was sold on November 2, 2010 to an unrelated third party, resulting in a realized loss
by the Company of approximately $1,683,000. The Companys cost basis at the time of the sale was
$3,243,623.
In January 2009, the Company sold approximately 23.24% of the 95% limited partnership interest in
Cambridge at Auburn, LP to Thomas R. Johnson, the President and Chief Executive Officer of the
Company for $400,000. The purchase price represented the Companys cost basis in the partnership
and the proceeds were utilized to support other investments of the Company.
On February 25, 2010 the Company entered into an agreement to acquire 898,000 shares of the
Companys common stock and two municipal bond positions from Hall in exchange for a combination of
the Companys interest in the RDC Note receivable, 500,000 shares of PWI stock owned by the company
and $5,511,800 in cash. The effective value of the transaction was $12.70 per share of common
stock.
On June 15, 2010 the Company sold 9,973 shares of the Companys common stock to Mr. Hall for
$126,567.
Each related party transaction is required to be reviewed and approved by a majority of directors
with no interest in the transaction.
22
Table of Contents
DIRECTOR INDEPENDENCE
The following information concerning director independence is based on the director independence
standards of The NASDAQ Stock Market Corporate Governance Rules. Because more than 50% of our
voting power is held by Christopher J. Hall, we would be considered a controlled company under
such rules and would not be subject to the requirements of NASDAQ Rule 4350(c) that would otherwise
require us to have (i) a majority of independent directors on the Board; (ii) a compensation
committee composed solely of independent directors; (iii) a nominating committee composed solely of
independent directors; (iv) compensation of our executive officers determined by a majority of the
independent directors or a compensation committee composed solely of independent directors; and (v)
director nominees selected, or recommended for the Boards selection, either by a majority of the
independent directors or a nominating committee composed solely of independent directors.
The Board has determined that directors Christopher J. Hall, Thomas R. Johnson and Bryan P. Brown
are not independent and William P. McNeer III is independent. In determining independence, the
Board reviews and seeks to determine whether directors have any material relationship with the
Company, direct or indirect, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. The Board reviews business, professional,
charitable and familial relationships of the directors in determining independence. The Board has
not designated a separate compensation or nominating committee.
AUDIT COMMITTEE
The Board of Directors has not designated a separate audit committee and the entire Board, whose
members are named above, conducts the functions of such committee. The Board has determined that
Thomas R. Johnson is an audit committee financial expert and that Mr. Johnson in not an independent
director.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Akin, Doherty, Klein & Feuge, P.C. (Akin) audited the Companys financial statements for the year
ended December 31, 2010 and December 31, 2009.
Fees related to services performed by Akin in the year ended December 31, 2010 and December
31, 2009 was as follows:
2010 | 2009 | |||||||
Audit Fees (1) |
$ | 60,500 | $ | 60,500 | ||||
Audit-Related Fees |
| | ||||||
Tax Fees (2) |
5,150 | 4,650 | ||||||
All Other Fees (3) |
750 | 11,500 | ||||||
Total |
$ | 66,400 | $ | 76,650 | ||||
(1) | Audit Fees represent services provided in connection with the fiscal year audit of our financial statements and review of our quarterly financial statements, notwithstanding when the fees were billed or when the service was rendered. | |
(2) | Tax fees principally included tax advice, tax planning and tax return preparation for services billed from January through December of the fiscal year. | |
(3) | All other fees include services billed from January through December of the fiscal year. |
23
Table of Contents
BOARD OF DIRECTORS REPORT
The Board of Directors has reviewed and discussed with the Companys management and independent
auditor the audited consolidated financial statements of the Company contained in the Companys
Annual Report on Form 10-K for the Companys 2010 fiscal year. The Board has also discussed with
the independent auditor the matters required to be discussed pursuant to SAS No. 61 (Codification
of Statements on Auditing Standards, AU Section 380), which includes, among other items, matters
related to the conduct of the audit of the Companys consolidated financial statements.
The Board has received and reviewed the written disclosures and the letter from the independent
auditor required by the applicable requirements of the Public Company Accounting Oversight Board
regarding the independent auditors communications with the Board concerning independence, and has
discussed with its independent auditor its independence from the Company.
The Board has considered whether the provision of services other than audit services is compatible
with maintaining auditor independence.
Based on the review and discussions referred to above, the Board approved the inclusion of the
audited consolidated financial statements in the Companys Annual Report on Form 10-K for its 2010
fiscal year for filing with the SEC.
Pre-Approval Policies
The Boards policy is to pre-approve all audit services and all permitted non-audit services
(including the fees and terms thereof) provided by the Companys independent auditor; provided,
however, pre-approval requirements for non-audit services are not required if all such services (1)
do not aggregate to more than five percent of total revenues paid by the Company to its accountant
in the fiscal year when services are provided; (2) were not recognized as non-audit services at the
time of the engagement; and (3) are promptly brought to the attention of the Board and approved
prior to the completion of the audit.
The Board pre-approved all fees described above.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
24
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. | Financial statements. | ||
The index for the Consolidate Financial Statements and Report of Independent Registered Public Accounting Firm can be found on page 18. | |||
2. | Financial statement schedules. | ||
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included the Consolidated Financial Statements and Notes thereto. | |||
3. | Exhibits. | ||
A list of exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously filed or furnished by us) is provided in the Exhibit Index immediately following the signature pages of this report. We will furnish copies of exhibits for a reasonable fee (covering the expense of furnishing copies) up written request. Stockholders may request exhibit copies by contacting: Thomas R. Johnson, President, Call Now, Inc., 1 Retama Parkway, Selma, TX 78154. |
25
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CALL NOW, INC. |
||||
By: | /s/ THOMAS R. JOHNSON | |||
Name: | Thomas R. Johnson | |||
Title: | President, Chief Executive Officer and Director | |||
Date: | March 31, 2011 | |||
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.
/s/ THOMAS R. JOHNSON
|
President, Chief Executive Officer
and Director (Principal Executive Officer and Principal Accounting Officer) |
March 31, 2011 | ||
/s/ CHRISTOPHER J.
HALL
|
Chairman and Director | March 31, 2011 | ||
/s/ BRYAN P. BROWN
|
Director | March 31, 2011 | ||
/s/ WILLIAM P.
MCNEER III
|
Director | March 31, 2011 |
26
Table of Contents
INDEX TO EXHIBITS
Exhibit | Incorporated By | |||||
Number | Reference Note | Description | ||||
3(a) | A | Articles of Incorporation of Registrant as filed with
the Secretary of State of
Nevada on September 3, 1999. |
||||
3(c) | C | By-Laws of the Registrant. |
||||
8.12 | G | Management Agreement for Retama Park. |
||||
8.15 | L | First Amendment to Management Agreement for Retama Park. |
||||
8.16 | M | Second Amendment to Management Agreement for Retama Park. |
||||
8.17 | N | Third Amendment to Management Agreement for Retama Park. |
||||
10.3 | O | Employment Agreement between Call Now, Inc. and Thomas
R. Johnson, dated
November 3, 2003. * |
||||
10.4 | P | Employment Agreement between Retama Entertainment Group
and Bryan P.
Brown, dated March 31, 2004. * |
||||
10.6 | V | Fourth Amendment to Management Agreement for Retama Park. |
||||
10.7 | W | Senior Secured Promissory Note between Call Now, Inc.
and Penson Worldwide,
Inc., dated February 25,2010. |
||||
10.8 | X | Purchase and Sale Agreement between Call Now, Inc. and
Christopher J. Hall,
dated February 11, 2010. |
||||
10.9 | Director Compensation. * |
|||||
10.10 | Summary of Compensation for Named Executive Officers as
of March 8,
2011. * |
|||||
14 | U | Business Ethics and Conduct Policy (Code of Ethics). |
||||
21 | Subsidiaries |
|||||
31.1 | Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith). |
|||||
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section
906 of The Sarbanes-Oxley Act of 2003 (filed herewith). |
NOTE INCORPORATION BY REFERENCE
A
|
Incorporated by reference to Exhibit 3(a) of Form 10-KSB for the year ended December 31, 1999. | |
C
|
Incorporated by reference to Exhibit 3(c) of Form 10-KSB for the year ended December 31, 1999. | |
G
|
Incorporated by reference to Exhibit 8.12 of Form 10-KSB for year ended December 31, 1997. | |
L
|
Incorporated by reference to Exhibit 8.15 of Form 10-KSB for year ended December 31, 2004. | |
M
|
Incorporated by reference to Exhibit 8.16 of Form 10-KSB for year ended December 31, 2004. | |
N
|
Incorporated by reference to Exhibit 8.17 of Form 10-KSB for year ended December 31, 2004. | |
O
|
Incorporated by reference to Exhibit 10.3 of Form 10-KSB for year ended December 31, 2004. * | |
P
|
Incorporated by reference to Exhibit 10.4 of Form 10-KSB for year ended December 31, 2004. * | |
U
|
Incorporated by reference to Exhibit 14 of Form 10-KSB for year ended December 31, 2005. | |
V
|
Incorporated by reference to Exhibit 10.6 of Form 10-K for year ended December 31, 2009. | |
W
|
Incorporated by reference to Exhibit 10.7 of Form 10-K for year ended December 31, 2009. | |
X
|
Incorporated by reference to Exhibit 10.8 of Form 10-K for year ended December 31, 2009. |
* | - Indicates a management contract or compensatory plan or agreement. |
27