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EX-32.1 - EX-32.1 - CALL NOW INC | d82302exv32w1.htm |
EX-31.1 - EX-31.1 - CALL NOW INC | d82302exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM
10-Q
(Mark One)
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION
FILE NO. 0-27160
CALL NOW, INC.
(Exact name of Registrant as specified in its charter)
Nevada (State or other jurisdiction of incorporation or organization) |
65-0337175 (IRS Employer Identification No.) |
|
1 Retama Parkway, Selma, TX (Address of principal executive offices) |
78154 (Zip Code) |
Registrants telephone number, including area code: (210) 651-7145
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
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 (S.232.405 of this chapter) during the preceding 12 months
(or for such shorter time period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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.
Large accelerated filer o | Accelerated file o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
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
Registrant had 2,013,877 shares of common stock issued and outstanding as of May 5, 2011.
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
CALL NOW, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Consolidated Balance Sheets
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 57,809 | $ | 189,340 | ||||
Accounts receivable, net |
777,460 | 777,460 | ||||||
Marketable securities related party |
3,361,187 | 2,449,509 | ||||||
Marketable securities other |
3,569,651 | 3,638,437 | ||||||
Other current assets |
288,641 | 232,007 | ||||||
Total current assets |
8,054,748 | 7,286,753 | ||||||
Furniture, Equipment and Improvements (less accumulated
depreciation of $10,201 and $9,220 respectively) |
9,420 | 10,401 | ||||||
Other Assets: |
||||||||
Marketable securities Retama Development Corp. |
133,000 | 133,000 | ||||||
Investments |
116,279 | 116,279 | ||||||
Notes and interest receivable Retama Development Corp. |
405,515 | 409,728 | ||||||
Deferred tax asset |
2,125,237 | 2,048,940 | ||||||
Total other assets |
2,780,031 | 2,707,947 | ||||||
Total Assets |
$ | 10,844,199 | $ | 10,005,101 | ||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||
Current Liabilities: |
||||||||
Accounts payable and accrued expenses |
532,043 | 532,536 | ||||||
Margin loan payable related party |
5,885,286 | 5,777,021 | ||||||
Deferred taxes payable |
184,696 | | ||||||
Total current liabilities |
6,602,025 | 6,309,557 | ||||||
Long-term Note Payable and Accrued Interest Related Party, net of current portion |
14,841,800 | 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 outstanding |
3,327 | 3,327 | ||||||
Additional paid-in-capital |
7,091,120 | 7,091,120 | ||||||
Treasury stock, at cost, 1,313,198 shares |
(14,372,488 | ) | (14,372,488 | ) | ||||
Accumulated other comprehensive income (loss) |
358,526 | (197,783 | ) | |||||
Retained (deficit) |
(3,850,226 | ) | (3,495,497 | ) | ||||
Total Call Now stockholders (deficit) |
(10,769,741 | ) | (10,971,321 | ) | ||||
Non-controlling interest |
170,115 | 158,115 | ||||||
Total (deficit) |
(10,599,626 | ) | (10,813,206 | ) | ||||
Total Liabilities and Equity (Deficit) |
$ | 10,844,199 | $ | 10,005,101 | ||||
See notes to consolidated financial statements.
2
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Consolidated Statements of Operations
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Revenues |
||||||||
Reimbursement of payroll and payroll related expenses |
$ | 983,827 | $ | 1,000,916 | ||||
Management fees |
60,000 | 60,000 | ||||||
Total Revenues |
1,043,827 | 1,060,916 | ||||||
Expenses |
||||||||
Payroll and payroll related expenses |
983,827 | 1,000,916 | ||||||
Corporate general and administrative operations |
205,184 | 215,328 | ||||||
Total expenses |
1,189,011 | 1,216,244 | ||||||
Net Operating (Loss) |
(145,184 | ) | (155,328 | ) | ||||
Other Income (Expenses) |
||||||||
Interest income related party |
8,806 | 139,907 | ||||||
Interest income other |
59,020 | 6,130 | ||||||
Gain on sales of marketable securities related party |
| 2,068,000 | ||||||
Gain on sales of investment other |
| 12,179 | ||||||
Interest expense related party |
(441,316 | ) | (330,955 | ) | ||||
Total other income (expense), net |
(373,490 | ) | 1,895,261 | |||||
Income (loss) before non-controlling interest and income taxes |
(518,674 | ) | 1,739,933 | |||||
Income tax expense (benefit) |
(175,946 | ) | 589,612 | |||||
Net income (loss) including non-controlling interest |
(342,728 | ) | 1,150,321 | |||||
Less: Net income attributable to non-controlling interest |
12,000 | 12,000 | ||||||
Net Income (Loss) Attributable to Call Now |
$ | (354,728 | ) | $ | 1,138,321 | |||
Per Share Data |
||||||||
Basic and diluted income (loss) per share attributed to
Call Now common shareholders |
$ | (.18 | ) | $ | .40 | |||
Weighted average common shares outstanding: |
||||||||
Basic |
2,013,877 | 2,837,317 | ||||||
Dilutive |
2,013,877 | 2,837,317 |
See notes to consolidated financial statements.
3
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating Activities |
||||||||
Net income (loss) including non-controlling interest |
$ | (342,728 | ) | $ | 1,150,321 | |||
Adjustments to reconcile net income (loss) to
net cash (used) by operating activities: |
||||||||
Net realized (gains) on sales of marketable securities related party |
| (2,068,000 | ) | |||||
Net realized (gains) on sales of long-term investments other |
| (12,179 | ) | |||||
Bad debt allowance |
60,000 | 60,000 | ||||||
Deferred income taxes |
(175,946 | ) | 589,612 | |||||
Depreciation |
981 | 981 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
(60,000 | ) | (60,000 | ) | ||||
Other current assets |
(54,660 | ) | 9,775 | |||||
Accounts payable and accrued expenses |
(493 | ) | (767 | ) | ||||
Net Cash (Used) by Operating Activities |
(572,846 | ) | (330,257 | ) | ||||
Investing Activities |
||||||||
Proceeds from sale of note receivable Retama Development Corp. |
| 5,222,893 | ||||||
Proceeds
from sales of available-for-sale marketable securities related party |
| 4,480,000 | ||||||
Proceeds from other long-term investments |
| 88,880 | ||||||
Purchase of marketable securities |
| (3,950,000 | ) | |||||
Purchase of other long-term investments |
| (155,000 | ) | |||||
Net Cash Provided by Investing Activities |
| 5,686,773 | ||||||
Financing Activities |
||||||||
Proceeds from margin loan related party |
108,265 | 6,211,299 | ||||||
Payments on margin loan related party |
| (13,936,367 | ) | |||||
Proceeds from long-term debt related party |
333,050 | 14,053,486 | ||||||
Purchase of treasury stock related party |
| (11,404,600 | ) | |||||
Net Cash Provided (Used) by Financing Activities |
441,315 | (5,076,182 | ) | |||||
Net Change in Cash and Cash Equivalents |
(131,531 | ) | 280,334 | |||||
Cash and cash equivalents at beginning of year |
189,340 | 17,452 | ||||||
Cash and Cash Equivalents at End of Quarter |
$ | 57,809 | $ | 297,786 | ||||
Supplemental Disclosures |
||||||||
Interest paid in cash |
$ | 108,266 | $ | 199,469 | ||||
Income tax paid in cash |
| |
See notes to consolidated financial statements.
4
Table of Contents
CALL NOW, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 1 BASIS OF PRESENTATION
Nature of Business: 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. Its name was changed to Phone One
International, Inc. in January 1994 and to Call Now, Inc. in December 1994, and its domicile was
changed 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 until 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.
The accompanying unaudited consolidated financial statements of the Company have been prepared
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the accompanying consolidated
financial statements reflect all adjustments of a normal recurring nature considered necessary to
present fairly the Companys financial position, results of operations and cash flows for such
periods. The accompanying interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2010. Results of operations for interim periods
are not necessarily indicative of results that may be expected for any other interim periods or the
full fiscal year.
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.
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.
Noncontrolling Interests: The Company accounts for noncontrolling interests (NCIs) in partially
owned consolidated subsidiaries as a separate component of equity. Increases and decreases in the
parents ownership interest that leave control intact are treated as equity transactions, rather
than as step acquisitions or dilution gains or losses; and that losses of a partially owned
consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit
balance.
Marketable Securities: The Company classifies its marketable security investment portfolio as
either held to maturity, available-for-sale, or trading. At March 31, 2011, all of the Companys
marketable securities were available-for-sale. Securities classified as 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.
Other-than-temporary impairments are recognized through earnings if the Company has the intent to
sell the security or if it is more likely than not that the Company will be required to sell the
security before recovery of our amortized cost basis. Even if the Company does not expect to sell
a security, the Company must also evaluate expected cash flows to be received and determine if a
credit loss has occurred. In the event of a credit loss, only the amount associated with the
credit loss is recognized through earnings. The amount of loss relating to other factors is
recorded in accumulated other comprehensive income.
Securities that do not trade in an active market are valued based on the best information available
to Management. Impairments are reviewed at the end of each reporting period. Gains or losses from
the sale or redemption of the marketable securities are determined using the specific
identification method.
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
5
Table of Contents
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.
NOTE 2 STOCK BASED COMPENSATION
The Company does not have a stock-based compensation plan; however, in past years, certain options
have been granted (non-qualified stock options) to its Directors and Officers. The Company does
not currently have any unexercised options outstanding.
NOTE 3 MARGIN LOAN PAYABLE RELATED PARTY
The Company has a margin loan payable to Penson Financial Services, Inc. (PFSI), a wholly owned
subsidiary of Penson Worldwide, Inc. (PWI), which accrues interest at 7.45% as of March 31, 2011.
The balance of the margin loan was $5,885,286 at March 31, 2011 and $5,777,021 at December 31,
2010. The margin loan is collateralized by the Companys marketable securities. The Company paid
interest on the margin loan for the three months ended March 31, 2011 and 2010 of $108,266 and
$199,469, respectively.
NOTE 4 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 on 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. The
balance of the note at March 31, 2011 is $13,322,00 plus $1,519,800 in accrued interest. 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.
NOTE 5 INCOME TAXES
During 2004, the Internal Revenue Service (the IRS) notified the RDC that it was conducting an
examination of the tax-exempt status of the municipal bonds issued in connection with the RDCs
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, stating that the interest on the bonds is
not excludable from the gross income of their holders. The RDC filed a protest of such
determination and requested that the matter be referred to the Office of Appeals of the IRS. 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 earned by the Company on the RDC Series A bonds in the total amount of
$588,000.
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
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Series B bonds held by the Company to taxable bonds. The Company received final execution by the
IRS of the closing documents in March 2010 and made the first payment of $133,750 in June 2010, per
the agreement.
NOTE 6 EARNINGS PER SHARE ATTRIBUTABLE TO CALL NOW, INC.
Basic earnings per share are 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 per share are excluded from the calculation.
The following reconciles the components of the earnings per share (EPS) computation.
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
Three Months Ended March 31, 2011 |
||||||||||||
Basic EPS: |
||||||||||||
Net (loss) attributed to Call Now, Inc. |
$ | (354,728 | ) | 2,013,877 | $ | (0.18 | ) | |||||
Effect of dilutive options |
| | | |||||||||
Dilutive EPS Attributed to Call Now, Inc. |
$ | (354,728 | ) | 2,013,877 | $ | (0.18 | ) | |||||
Three Months Ended March 31, 2010 |
||||||||||||
Basic EPS: |
||||||||||||
Net income attributed to Call Now, Inc. |
$ | 1,138,321 | 2,837,317 | $ | 0.40 | |||||||
Effect of dilutive options |
| | | |||||||||
Dilutive EPS Attributed to Call Now, Inc. |
$ | 1,138,321 | 2,837,317 | $ | 0.40 | |||||||
NOTE 7 MARKETABLE SECURITIES
The carrying amounts of marketable securities as shown in the accompanying balance sheets and their
approximate market values are as follows at March 31, 2011 and December 31, 2010:
Gross | Gross | Carrying/ | ||||||||||||||
Unrealized | Unrealized | Market | ||||||||||||||
March 31, 2011 | Cost | Gains | (Losses) | Value | ||||||||||||
Current Assets, available-for-sale: |
||||||||||||||||
PWI common stock, see Note 8 and Note 16 |
$ | 2,416,448 | $ | 944,739 | $ | | $ | 3,361,187 | ||||||||
Municipal bonds |
4,076,574 | | (506,923 | ) | 3,569,651 | |||||||||||
6,493,022 | 944,739 | (506,923 | ) | 6,930,838 | ||||||||||||
Non-current Assets, available-for-sale: |
||||||||||||||||
RDC Series A bonds |
27,594 | 105,406 | | 133,000 | ||||||||||||
Total available-for-sale marketable securities |
$ | 6,520,616 | $ | 1,050,145 | $ | (506,923 | ) | $ | 7,063,838 | |||||||
Gross | Gross | Carrying/ | ||||||||||||||
Unrealized | Unrealized | Market | ||||||||||||||
December 31, 2010 | Cost | Gains | (Losses) | Value | ||||||||||||
Current Assets, available-for-sale: |
||||||||||||||||
PWI common stock, see Note 8 and Note 16 |
$ | 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 marketable securities |
$ | 6,520,618 | $ | 138,466 | $ | (438,138 | ) | $ | 6,220,946 | |||||||
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Unrealized gains and losses on marketable securities available-for-sale at March 31, 2011 and
December 31, 2010 are shown net of income taxes as a component of stockholders equity.
The Company has several marketable securities in an unrealized loss position at March 31, 2011.
The unrealized loss on those securities at March 31, 2011 is $506,923 and the market value is
$3,569,651. The Company does not consider these investments to be other-than-temporarily impaired.
See also Note 16 Subsequent Events for additional information.
NOTE 8 MARKETABLE SECURITIES RELATED PARTY
In February 2010, the Company completed a transaction with the Companys Chairman and majority
shareholder, Christopher J. Hall, where the Company, in part, transferred to Mr. Hall 500,000
shares of Penson Worldwide, Inc. (PWI) (Nasdaq:PNSN) common stock valued at $4,480,000, or $8.96
per share. The Company continues to own 500,922 shares of PWI common stock a market value of
$3,361,187 at March 31, 2011, based on a closing stock price of $6.71 per share. At December 31,
2010 the Company held 500,922 shares of PWI common stock with a market value of $2,449,509 based on
a year-end closing stock price of $4.89 per share. 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 $5,885,286 at March 31, 2011 and $5,777,021 at December 31, 2010. The President of Call
Now, Inc. is a Director of Penson Worldwide, Inc. See also Note 16 Subsequent Events for additional information.
In exchange for the shares of PWI transferred to Mr. Hall the Company received, in part, $3,200,000
face amount of Leon County FL Educational Facilities Authority (Southgate Dormitory) Series B,
7.625% due 9/1/28 bonds, valued at $2,080,000 at the time of the exchange, or $.65/$1.00, and
$2,200,000 face amount of Cambridge Student Housing Financing Revenue Series C, 9.70% due 11/1/39
bonds, valued at $1,870,000 at the time of the exchange, or $.85/$1.00. Please refer to Note 15
Related Party Transactions in this form 10-Q for complete details of this transaction.
The Company owns $133,000 face amount of the Retama Development Corporation Special Facilities
Revenue bonds, Series A (Series A Bonds) at March 31, 2011 and December 31, 2010, which are
classified as long-term. The Series A Bonds are secured by a senior lien on the Retama Park
racetrack facility. The face amount of the total Series A Bonds outstanding is $6,045,000 at March
31, 2011 and December 31, 2010.
The Company owns $43,962,500 face amount of the Retama Development Corporation Special Facilities
Revenue Series B (Series B Bonds) at March 31, 2011 and December 31, 2010. The Companys entire
position of Series B bonds have been pledged as collateral for the Promissory Note described in
Note 4 Note Payable Related Party. The Series B Bonds are secured by the excess cash flow of
the Retama Park racetrack facility that is subordinate to the Series A Bonds and the Funding
Agreement (discussed in Note 10). The face amount of the Series B Bonds outstanding is $86,925,000
at March 31, 2011 and December 31, 2010. The Companys carrying value in the Series B bonds was
written down to its cost basis of $1,077,463 in 2004 due to a reclassification of the position from
available-for-sale to held-to-maturity and additionally written down to $0 in 2006. See further
discussion in Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations, Retama Park Racetrack Series B Bonds below.
NOTE 9 INVESTMENTS
The Companys other investments have not incurred any significant changes since December 31, 2010.
For more information, see the discussion in the Companys Annual Report on Form 10-K for the year
ended December 31, 2010 and under Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q.
NOTE 10 NOTES AND INTEREST RECEIVABLE RETAMA DEVELOPMENT CORPORATION
As part of the RDCs bankruptcy and debt refinancing in 1996 and 1997, the Company entered into an
agreement with the RDC that required the Company to fund any operating losses of the RDC for a
period of up to 2 years (the Funding Agreement). As more fully detailed in Note 15 Related
Party Transactions in this Form 10-Q, in March 2010 the Company transferred to Christopher J. Hall,
the Companys Chairman and majority shareholder, the full principal and interest value of the
Funding Agreement, valued at $3,627,569 in principal and $1,727,859 in accrued interest, with cash
and additional securities in exchange for a portion of two unrelated municipal bond issues and
shares of the Companys stock. Following this transaction, the Company no longer has an interest
in the Funding Agreement.
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. In fiscal year ended December 31,
2010 the Company elected to not recognize the interest income from this note due to the financial
condition of the RDC. However, on March 3, 2011 the Company received
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payment of interest on the loan from inception through February 1, 2011. As a result of the
payment received, interest was also recognized for the remainder of this fiscal quarter ending
March 31, 2011. The loan will continue to be reviewed for impairment on a quarterly basis.
NOTE 11 INTERST INCOME RECOGNITION RETAMA DEVELOPMENT CORPORATION
During each accounting period, the Company evaluates whether to recognize 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. In 2009, the Company recognized the accrued
interest on the RDC note as income through September 30, 2009; however, effective October 1, 2009,
the Company elected to suspend recognition of interest income 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. Following the transaction on February 25, 2010 and further detailed in
Note 15 Related Party Transaction, the Company reversed its decision and recognized the accrued
interest on the RDC note from October 1, 2009 through February 25, 2010, when the note was
transferred to Christopher J. Hall. As noted above, interest is being recognized on the new
$400,000 advance to the RDC, but will be reevaluated on quarterly basis.
NOTE 12 CONTINGENCY
Investment Company Act
Management has taken the position that the Company is not an investment company required to
register under the Investment Company Act of 1940. If it was established that the Company was 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 may 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 that the Company was an unregistered
investment company.
NOTE 13 COMPREHENSIVE INCOME ATTRIBUTED TO CALL NOW, INC.
Comprehensive income includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The components of comprehensive income are as
follows:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net income (loss) attributed to Call Now, as reported |
$ | (354,728 | ) | $ | 1,138,321 | |||
Other comprehensive income (loss): |
||||||||
Change in fair market value of available-for-sale securities |
842,892 | (3,371,486 | ) | |||||
Income tax effect |
(286,583 | ) | 1,146,305 | |||||
Total comprehensive income (loss) attributed to Call Now |
$ | 201,581 | $ | (1,086,860 | ) | |||
NOTE 14 FAIR VALUE MEASUREMENTS
ASC topic 820 established 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 defined by the standard 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. |
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The Company follows the provisions of ASC topic 820-10 for nonfinancial assets and liabilities
measured at fair value on a non-recurring basis. As it relates to the Company, this applies to
impaired other investments. Impairments are based on expected future cash flows and other
considerations. The Company has designated these assets as level 3.
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 are accounted for at
fair value. Financial assets and liabilities are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement.
March 31, 2011 | ||||||||||||||||
Recurring Fair Value Measures | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: |
||||||||||||||||
Marketable securities related party |
$ | 3,361,187 | $ | | $ | | $ | 3,361,187 | ||||||||
Marketable securities other |
3,569,651 | | | 3,569,651 | ||||||||||||
Marketable securities Retama Dev. Corp. Series A |
| | 133,000 | 133,000 | ||||||||||||
Liabilities: |
||||||||||||||||
None |
$ | | $ | | $ | | $ | |
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 Dev. Corp. Series A |
| | 133,000 | 133,000 | ||||||||||||
Liabilities: |
||||||||||||||||
None |
$ | | $ | | $ | | $ | |
The Companys financial instruments relate to its available-for-sale marketable securities, which
are valued using quoted market prices. Adjustments to fair value are recorded in other
comprehensive income until the investment is sold.
The following table sets forth a reconciliation of changes in the fair market value of financial
assets classified as level 3 in the fair value hierarchy.
Marketable Securities - | ||||||||
Retama Development Corp. | Total | |||||||
Balances as of January 1, 2011 |
$ | 133,000 | $ | 133,000 | ||||
Total losses (realized or unrealized): |
||||||||
Included in earnings |
| | ||||||
Included in other comprehensive income |
| | ||||||
Purchases, issuances and settlements |
| | ||||||
Transfers in and out of level 3 |
| | ||||||
Balance as of March 31, 2011 |
$ | 133,000 | $ | 133,000 | ||||
Change in unrealized gains or losses in earnings (or changes in net
assets) relating to asset still held as of March 31, 2011 |
$ | | $ | | ||||
NOTE 15 RELATED PARTY TRANSACTIONS
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 8% 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 4%. 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,
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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, 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 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.
On September 16, 2010 the Company increased the PWI Promissory Note by $400,000 to a total of
$14,322,000. The interest rate and maturity of the note remain unchanged except that $400,000 plus
interest was due on December 30, 2010, with the balance maintaining the original maturity of
February 25, 2012. Repayment of the $400,000 including accrued interest was made on November 12,
2010. Additionally, the terms of PWI carried interest in the Retama Development Corporation Series
B bonds have been changed as follows: If the Company irrevocably repays the Promissory Note prior
to the second anniversary of the issuance but after the first anniversary, and there is no default
or event of default prior to such repayment, the carried interest will be reduced to 15%.
Refer also to Note 3 Margin Loan Payable Related Party, Note 8 Marketable Securities
Related Party and Note 10 Notes and Interest Receivable Retama Development Corporation above
for additional details pertaining to additional related party relationships.
NOTE 16 SUBSEQUENT EVENTS
Following the close of the Companys fiscal first
quarter ended March 21, 2011, the value of the Companys
investment in Penson Worldwide, Inc. (Nasdaq: PNSN) dropped from $3,361,187 as of March 31, 2011 to
$1,562,877 at the close of business on May 12, 2011 due to a drop in
the stock price from $6.71/share to $3.12/share.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward Looking Statements
The following discussion and analysis of financial condition and results of operations may contain
forward-looking statements that involve a number of risks and uncertainties. Actual results in
future periods may differ materially from those expressed or implied in such forward-looking
statements. This discussion and analysis should be read in conjunction with the unaudited interim
consolidated financial statements and the notes thereto included in this report, and our Annual
Report on Form 10-K for the year ended December 31, 2010. Results of operations for interim
periods are not necessarily indicative of results that may be expected for any other interim
periods or the full fiscal year.
Overview
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.
Retama Park Racetrack
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: live racing; 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. Effective January 1, 2010, the
management agreement was extended to November 1, 2020.
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. While the Company
will continue to accrue the management fee, as of October 1, 2009, Company management has
determined to take an allowance for bad debt for the fee given payment has not been received by the
Company in several years
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 $6,045,000 Senior Series A
Bonds and $86,925,000 Subordinate Series B 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 and additional loans
through the Funding Agreement. (See Notes to Consolidated Financial Statements, Note 8
Marketable Securities Related Party and Note 10 Notes and Interest Receivable Retama
Development Corporation for additional details.)
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. 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 returns on the Series B Bonds in the event
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 is documented by promissory
notes secured by a mortgage on the Retama Park racetrack real estate and facilities which is
subordinated only to the RDC Series A Bonds and converted Series B Bonds, if any.
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.
The status of the racing industry in Texas is similar to many other states around the country as
Texas racing facilities continue
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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 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 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 anticipated that the profit from this operation would 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 at this time, no
legislation has moved forward in the current legislative session. Retama Park is experiencing
strong competition from other gaming alternatives from the on-line gaming and surrounding states
with other forms of gaming, as well as from other entertainment venues in its market area. We
expect these factors to continue to adversely affect the liquidity of REG in the absence of
legislation allowing additional gaming.
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.
Retama Park Racetrack Series B Bonds
In 2004, in accordance with ASC topic 320, the Company reclassified the Series B bonds from
available-for-sale to held-to-maturity, resulting in a write down of the bonds value from market to
their original cost basis of $1,077,463. In accordance with ASC topic 320, 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. Despite the accounting treatment of the Series B bonds, the Company believes that
these bonds maintain an intrinsic value based on an assessment of the underlying security of the
investment. Specifically, based on an appraisal of the real estate by an independent, third party
appraisal company that was updated in the third quarter of fiscal year 2010, there is value in the
real estate available to the Series B bonds in excess of the current priority debt obligations.
Additionally, the bonds are secured by an assignment of one-half (50%) of the Enhancements of the
racing license for Retama Park. Enhancements are defined as any right, benefit or entitlement
arising under the license, such as additional gaming rights that would allow the operation of a
casino-type facility, that has not been assigned to Retama Development Corporation to conduct horse
racing and simulcasting. While an assessment of the value of 50% of the Enhancements is much more
subjective in nature, it is worth noting that the other Class 1 racetracks in Texas have announced
capital acquisitions of all or a portion of their operation by nationally recognized casino
companies Lone Star Park in Grand Prairie with Global Gaming Solutions, LLC and Sam Houston Race
Park in Houston with Penn National Gaming, Inc.
Penson Worldwide, Inc.
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 a related party to the Company as Thomas R. Johnson, President and CEO of Call
Now, Inc. is also a member of the Board of Directors of both. 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.
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 shares, of the PWI shares in the IPO resulting in a pre-tax 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. In August 2008, the Company sold
30,000 shares of PWI common stock, leaving a balance of 1,100,922. In August 2009, the Company
sold 100,000 shares of PWI common stock, leaving a balance of 1,000,922. In March 2010, the
Company transferred to Christopher J. Hall, the Companys Chairman and majority shareholder,
500,000 shares of PWI common stock in exchange for certain municipal bonds and Company common
stock. (See Notes to Consolidated Financial Statements, Note 15 Related Party Transactions for
additional details.) Following this transaction, the Company owns
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500,922 shares of PWI common stock, which represents an approximate 1.76% ownership interest as of
March 31, 2011. As of March 31, 2011 the recognized other comprehensive income from the increase
in value of the PWI common stock was approximately $945,000. Following the close of the Companys fiscal first
quarter ended March 21, 2011, the value of the Companys
investment in PWI dropped from $3,361,187 as of March 31, 2011 to
$1,562,877 at the close of business on May 12, 2011 due to a drop in the stock price from $6.71/share to $3.12/share.
The Company has a margin loan payable to Penson Financial Services, Inc. (PFSI), a wholly owned
subsidiary of Penson Worldwide, Inc. (PWI). 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, nor did the Company make any
additional deposits into the margin account for the remainder of the fiscal year ended December 31,
2009. In February 2010 the Company entered into a Promissory Note in favor of PWI (the PWI Note)
in the principal amount of $13,922,000, the proceeds of which were used to satisfy the Companys
margin requirement. On September 16, 2010 the Company borrowed an additional $400,000 against the
PWI Note, bringing the balance to $14,322,000.
The PWI Note accumulates 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 irrevocably repays the Promissory Note
prior to the second anniversary of the issuance but after the first anniversary, and there is no
default or event of default prior to such repayment, the carried interest will be reduced to 15%.
The carried interest percentages were adjusted from 8%, 4% and 0%, respectively, as an additional
term of the $400,000 loan by PWI on September 16, 2010. 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 Cambridge at Auburn
On December 11, 2006 the Company entered into a partnership agreement to provide ninety-five
percent (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 Cambridge). 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. As the limited partner, the Company is entitled to receive a
preferred return of its capital contribution plus a ten percent (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 fifty percent (50%) to the general partner and fifty percent (50%) to the
limited partner. Through September 30, 2010 and December 31, 2009, the Companys investment
totaled approximately $1.296 million and $1.081 million, respectively. Due to a significant number
of dormitory units constructed by Auburn University that were completed just prior to the 2009-2010
school year, occupancy at The Cambridge suffered a significant decline, with current occupancy at
approximately 26%. 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 2010-2011 school did not
rebound as much as anticipated, reaching approximately 65%. Additionally, due to a lack of
available cash, the Company as limited partner was also unable to continue to fund operating losses
and debt service payments during this fiscal quarter. 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
commencement 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 fiscal third quarter ended September 30, 2010.
TNO Holdings, LLC
During the course of 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 has 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 continues
to own two Oklahoma municipal bond issues secured by three nursing home facilities.
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Critical Accounting Policies
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, as well as reliance on independent
appraiser reports on the valuation of certain of our debt securities. We believe our estimates and
assumptions to be reasonable under the circumstances. However, actual results could differ form
those estimates under different assumptions or conditions.
Valuation of Marketable Securities
Investments in publicly traded equity securities are generally based on quoted market prices.
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 have been valued at $133,000, which represents the pro rata share of the underlying
value of the collateral (the Retama Park horse track facility). 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 the market value of the
shares held by the Company at the close of business on March 31, 2011, the last trading day of the
fiscal quarter. Based on a closing price of $6.71 per share and a position of 500,922 shares, the
Companys holdings of PWI common stock is valued at $3,361,187. The Company held 500,922 shares
of PWI common stock as of December 31, 2010 and the holdings were valued at $2,449,509 at that
time, based on a closing price of $4.89 per share. Following the close of the Companys fiscal first
quarter ended March 21, 2011, the value of the Companys
investment in PWI dropped from $3,361,187 as of March 31, 2011 to
$1,562,877 at the close of business on May 12, 2011 due to a drop in the stock price from $6.71/share to $3.12/share.
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 any interest that has been recognized as income, and report the total amount as
other assets in our consolidated balance sheet. As more fully detailed in Note 15 Related Party
Transactions of the unaudited financial statements for the period ending March 31, 2011, in
February 2010 the Company transferred to Christopher J. Hall, the Companys Chairman and majority
shareholder the full principal and interest value of the Funding Agreement, valued at $3,627,569 in
principal and $1,727,859 in interest, with cash and additional securities in exchange for a portion
of two unrelated municipal bond issues and shares of the Companys stock. Following this
transaction, the Company no longer has an interest in the Funding Agreement.
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. In fiscal year ended December 31,
2010 the Company elected to not recognize the interest income from this note due to the financial
condition of the RDC. However, on March 3, 2011 the Company received payment of interest on the
loan from inception through February 1, 2011. As a result of the payment received, interest was
also recognized for the remainder of this fiscal quarter ending March 31, 2011. The loan will
continue to be reviewed for impairment on a quarterly basis.
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 did not record any impairment losses during this quarter ended March 31,
2011.
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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. In 2009, the Company
recognized the accrued interest on the RDC note as income through September 30, 2009; however, as
of October 1, 2009, the Company elected to suspend further recognition of interest income until
events and circumstances dictated 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 commencing October 1, 2009. Following the transaction further detailed in
Note 15 Related Party Transactions in this Form 10-Q, the Company has recognized the accrued
interest on the RDC note from October 1, 2009 through February 25, 2010, when the note was
transferred to Christopher J. Hall.
Income Taxes
Deferred tax assets and liabilities are recorded based on the difference between the tax basis of
assets and liabilities and their carrying amount for financial reporting purposes, as measured by
the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company follows ASC topic 740, Accounting for Uncertainty in Income Taxes", which defines the
confidence level that a tax position must meet in order to be recognized in the financial
statements. This standard 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 standard 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 this standard and the amount previously taken or expected to be taken in a tax
return.
Risk Factors
In addition to the other information set forth in this quarterly report, you should carefully
consider the factors discussed in Part I, Item 1A in our Annual Report on Form 10-K for the year
ended December 31, 2010, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition or operating
results.
THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO MARCH 31, 2010
RESULTS OF OPERATIONS
a. Revenues and Other Income
Revenue
The Companys revenue for the three months ended March 31, 2011 was $1,043,827, compared to
$1,060,916 for the three months March 31, 2010. Retama Entertainment Group, Inc. (REG), an 80%
owned subsidiary of the Company, is engaged as the management company of the Retama Park racetrack
located in Selma, TX. The owner of the facility, the Retama Development Corporation (the RDC),
reimburses REG for the majority of payroll and payroll related expenses, plus a monthly management
fee of $20,000. It is important to note that the financial performance of Retama Park does not
directly impact and is not included in the Companys financial statements. As a result of this
arrangement, the majority of the Companys revenue consists of the reimbursement of REGs payroll
expenses. Therefore, the similarity in revenue for the three months ended March 31, 2011 as
compared to the three months ended March 31, 2010, reflects similar staffing levels at Retama Park
for the comparable periods.
Interest Income
Interest income for the three months ended March 31, 2011 was $67,826, compared to $146,037 for the
three months ended March 31, 2010. As further detailed in Note 15 Related Party Transactions in
this Form 10-Q, the Company exchanged the RDC Funding Agreement for interest bearing municipal
bonds. The decline in interest income is attributed to one of the municipal bonds accepted in
exchange for the Funding Agreement currently does not pay interest, and therefore, interest is not
accrued.
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b. Expenses
Cost and Other Expenses of Revenues
Operating expenses for the three months ended March 31, 2011 was $1,189,011 compared to $1,216,244
for the three months ended March 31, 2010. Expenses have remained consistent for the current
quarter as compared to the year ago quarter due to similar staffing levels at Retama Park and
operating expenses of the Company. While the Company will continue to accrue the $20,000 monthly
management fee, as of October 1, 2009, Company management has determined to take an allowance for
bad debt for the fee given payment has not been received by the Company in several years.
Income Tax
The Company recognized a federal income tax benefit for the three months ended March 31, 2011 of
$175,946 compared to a federal income tax expense of $589,612 for the three months ended March 31,
2010. The Companys total federal income tax does not approximate the expected corporate tax rate
due primarily to non-taxable municipal bond interest income. The income tax benefit for the three
months ended March 31, 2011 reflects the Companys operating loss during the time period. The
income tax expense for the three months ended March 31, 2010 reflects the capital gain realized in
the exchange of 500,000 shares of Penson Worldwide, Inc. as part of the transaction detailed in
Notes to Consolidated Financial Statements, Note 15 Related Party Transactions above.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2011, the Companys operating activities used cash of
$572,846 compared to $330,257 cash used for the three months ended March 31, 2010. The increase in
cash used is largely attributed to greater capital gains realized on the sale of marketable
securities the first quarter of 2010 as compared to the first quarter of 2011.
The Company maintains an investment account that utilizes a margin loan collateralized by the
Companys marketable securities. Typically, the Company had the ability to borrow up to 75% of the
value of the securities held as collateral in the margin account and has utilized this borrowing
availability to provide operating liquidity. In September 2009 PFSI determined that, for margin
account purposes due to, among other reasons, the lack of trading activity, the Retama Development
Corporation Series B Bonds should require a 100% margin requirement, effectively making these bonds
non-marginable. Although the Company has successfully restructured this margin account (see Note
15 Related Party Transactions), the Companys margin loan availability remains constrained. See
below for a comparison of the margin loan availability as of December 31, 2010 as compared to March
31, 2011.
As of December 31, 2010 | As of March 31, 2011 | |||||||
Margin value of Retama Series B Bonds |
$ | | $ | | ||||
Margin value of all other marketable securities |
$ | 6,130,097 | $ | 6,971,759 | ||||
Total margin value of marketable securities |
$ | 6,130,097 | $ | 6,971,759 | ||||
Maximum loan based on 75% loan-to-value |
$ | 4,597,573 | $ | 5,228,819 | ||||
Margin loan outstanding |
$ | 5,777,021 | $ | 5,885,286 | ||||
Margin loan availability (call) |
$ | (1,179,447 | ) | $ | (656,467 | ) |
Following the close of the Companys fiscal first
quarter ended March 21, 2011, the value of the Companys
investment in PWI dropped from $3,361,187 as of March 31, 2011 to
$1,562,877 at the close of business on May 12, 2011 due to a drop in the stock price from $6.71/share to $3.12/share.
In response to the Companys continued operating losses and current constriction of borrowing
availability under its margin account, the Company is pursuing solutions including assessing the
sale of certain assets and marketable securities in order to provide additional liquidity, such as
the sale of the Estates at Canyon Ridge in November 2010.
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 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 receive substantial
payments. We believe 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. It should also be noted that the loans
provided to the RDC have historically been funded from draws against our margin accounts. Given
the current status of our margin account as detailed above and our limited ability to derive
liquidity, it seems unlikely that the Company will be able to provide additional funding from draws
on the margin account in the foreseeable future unless we are successful in liquidating other
assets of the Company.
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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.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
There are no recently issued accounting pronouncements which we believe will have a material impact
on our financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Because we are a smaller reporting company, this Item is not applicable to us.
ITEM 4. 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 Quarterly Report on Form 10-Q. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of March 31, 2011 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.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the
quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
Because we are a smaller reporting company, this Item is not applicable to us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. RESERVED
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
The following exhibits are filed as part of this report:
Exhibit No. | Title of Document | |
31.1
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Call Now, Inc. |
||||
/s/ Thomas R. Johnson | ||||
Thomas R. Johnson | ||||
Chief Executive Officer and Chief Financial Officer May 12, 2011 | ||||
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