PARKS AMERICA, INC 10-K

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. The following discussion should be read in conjunction with our consolidated financial statements for the year ended September 27, 2020 provided in this Annual Report on Form 10-K. Certain statements contained herein may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, as discussed more fully herein. The forward-looking information set forth in this Annual Report on Form 10-K is based on management’s current views and assumptions regarding future events, and speak only as of the date of this report. We assume no obligation to update any of these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting these forward-looking statements, except as required by applicable law, including the securities laws of the United States and the rules and regulations of the SEC. More information about potential factors that could affect our business and financial results is included in the section entitled "RISK FACTORS" in this Annual Report on Form 10-K. 12 Overview Through our wholly owned subsidiaries, we own and operate three regional theme parks and are in the business of acquiring, developing and operating local and regional theme parks and attractions in the United States. Our wholly owned subsidiaries are Wild Animal Safari, Inc., a Georgia corporation (“Wild Animal – Georgia”), Wild Animal, Inc., a Missouri corporation (“Wild Animal – Missouri”), and Aggieland-Parks, Inc., a Texas corporation (“Aggieland Wild Animal – Texas”). Wild Animal – Georgia owns and operates the Wild Animal Safari theme park in Pine Mountain, Georgia (the “Georgia Park”). Wild Animal – Missouri owns and operates the Wild Animal Safari theme park located in Strafford, Missouri (the “Missouri Park”). Aggieland Wild Animal – Texas owns and operates the Aggieland Wild Animal Safari theme park near Bryan/College Station, Texas (the “Texas Park”). On April 27, 2020, we acquired substantially all the assets of Aggieland Safari LLC and related entities (“Aggieland Safari”). For additional information see “NOTE 3. ACQUISITION” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on this matter. Our Parks are open year round but experience increased seasonal attendance, typically beginning in the latter half of March through early September. As a result, our combined third and fourth quarter net sales have historically ranged from 68% to 72% of our annual net sales. The table below outlines our annual net sales, reported and adjusted income before income taxes, and net cash provided by operating activities for the last five fiscal years. During the past five fiscal years, our Georgia Park in particular has benefitted from several positive factors including strong and stable management, the addition of online ticket sales in June 2015, growth and positive economic conditions in the greater Atlanta area, as well as positive guest perceptions of this Park. Our strong results through fiscal 2019 and the resulting improvements in our financial position provided us with the resources to pursue and ultimately close the Aggieland Safari acquisition. Fiscal Year 2020 2019 2018 2017 2016 Total net sales $9,507,264 $6,184,254 $6,046,758 $6,238,264 $5,026,435 % change 53.70% 2.30% -3.10% 24.10% 14.80% Reported income before income taxes 3,693,869 1,495,438 1,422,592 2,035,954 1,210,833 % change 147.00% 5.10% -30.10% 68.10% 79.40% % of total net sales 38.90% 24.20% 23.50% 32.60% 24.10% Adjusted income before income taxes (*) 3,669,496 1,575,882 1,553,124 1,955,954 1,278,921 % change 132.90% 1.50% -20.60% 52.90% 89.40% % of total net sales 38.60% 25.50% 25.70% 31.40% 25.40% Net cash provided by operating activities 3,680,401 1,858,158 1,767,243 1,827,187 1,463,333 % change 98.10% 5.10% -3.30% 24.90% 39.20% % of total net sales 38.70% 30.00% 29.20% 29.30% 29.10% * - Excludes $24,373 of tornado related insurance proceeds in 2020, $80,444 of tornado damage asset write-offs and costs in 2019, $130,532 of deferred financing costs write-offs in 2018, a $80,000 settlement gain in 2017, and judgment award charges of $68,088 in 2016. The rapid acceleration of the COVID-19 pandemic in the United States occurred at the beginning of our 2020 fiscal year annual high season. We began to see a significant reduction in paid attendance at our Georgia and Missouri Parks beginning the week of March 9, 2020. Effective April 3, 2020, both Parks were closed to the public as a result of shelter-in-place mandates in Georgia and Missouri. Prior to our acquisition of our Texas Park, its operations were also closed to the public for the majority of April 2020 due to a shelter-in-place mandate in Texas. 13 In compliance with respective state issued guidelines, our Georgia Park and our Texas Park each reopened on May 1, 2020, and our Missouri Park reopened on May 4, 2020. Attendance levels have been strong at each of our three Parks from mid-May through the end of our 2020 fiscal year end, which has continued to the early part of our 2021 fiscal year. We believe the strong year-over-year attendance growth each of our Parks experienced during the last five months of our 2020 fiscal year is a reflection of the principally outdoor nature of the family-friendly, wild animal education and entertainment experience provided at each of our Parks. The experience offered at each of our Parks is particularly attractive during the COVID-19 pandemic as potential guests are seeking outdoor entertainment options. While we have seen many repeat customers since reopening in May 2020, we have also experienced an increase in first time visitors seeking an outdoor entertainment alternative. We believe this has increased the local and regional awareness for each of our Parks, which we believe will have longer-term, positive ramifications for our business. However, there is also the possibility of longer-term negative impacts to our business, results of operations and cash flows, and financial condition as a result of the COVID-19 pandemic. These negative impacts include changes in customer behavior and preferences causing significant volatility or reductions in attendance at one or more of our Parks, increases in operating expenses to comply with additional hygiene-related protocols, limitations in our ability to recruit and maintain staffing, limitations on our employees ability to work and travel, and significant changes in the economic or political conditions in the areas our Parks are located. Despite our efforts to manage these impacts, the ultimate impact may be material, and will depend on a number of factors beyond our control, including the duration and severity of the COVID-19 pandemic and actions by governmental authorities taken to contain its spread and mitigate its public health effects. There is also the potential for our attendance levels to decline after other attractions have reopened to full capacity once the COVID-19 pandemic has run its course or vaccines are in use and made widely available. We are committed to leveraging the strong operating model we have established at our Georgia Park, with a focus on increasing attendance, as well as increasing the average revenue generated per guest visit via concession and gift shop revenues. Among our highest priorities over the next several years is continuing the integration our Texas Park. Because our Texas Park first opened to the public in May 2019, we believe there remains tremendous potential to increase attendance by increasing the local and regional awareness of this facility via advertising and promotion. We are pleased with the expanded attendance at our Missouri Park during the latter half of our 2020 fiscal year. We plan on leveraging the increased exposure of this facility to continue to build on this recent success. Our business plan includes expansion via the acquisition of additional local or regional theme parks and attractions, if attractive opportunities arise. We believe acquisitions, if any, should not unnecessarily encumber the Company with additional debt that cannot be justified by current operations. We may also pursue contract management opportunities for themed attractions owned by third parties. By using a combination of equity, debt and other financing options, we intend to carefully monitor stockholder value in conjunction with the pursuit of growth. Strong growth in our annual operating cash flow over the past five to six years has provided us with incremental cash flow, and provided us with the financial strength to complete the Aggieland Safari acquisition. However, our current size and operating model leave us little room for error. Any future capital raised by us is likely to result in dilution to existing stockholders. It is possible that cash generated by, or available to, us may not be sufficient to fund our capital and liquidity needs for the near-term. Consolidated and Segment Results of Operations For the Year Ended September 27, 2020 as Compared to the Year Ended September 29, 2019 We manage our operations on an individual location basis. Discrete financial information is maintained for each Park and provided to our corporate management for review and as a basis for decision-making. The primary performance measures used to allocate resources are Park earnings before interest and tax expense, and free cash flow. We use this measure of operating profit to gauge segment performance because we believe this measure is the most indicative of performance trends and the overall earnings potential of each segment. 14 The following table shows our consolidated and segment operating results for the years ended September 27, 2020 and September 29, 2019: Georgia Park Missouri Park Texas Park Consolidated Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 2020 2019 2020 2019 2020 2019 2020 2019 Total net sales $6,878,994 $5,228,291 $1,449,781 $955,963 $1,178,489 n/a $9,507,264 $6,184,254 Segment income (loss) from operations 4,113,926 2,686,369 84,836 (295,634) 433,916 n/a 4,632,678 2,390,735 Segment operating margin % 59.80% 51.40% 5.90% -30.90% 36.80% n/a 48.70% 38.70% Corporate expenses (783,671) (846,398) Other income, net 27,788 27,104 Interest expense (182,926) (76,003) Income before income taxes $3,693,869 $1,495,438 Total Net Sales The Company’s total net sales for the year ended September 27, 2020 increased by $3.32 million or 53.7%, to $9.51 million versus $6.18 million for the year ended September 29, 2019. Our Parks’ combined attendance based net sales increased by $3.34 million or 54.7%, while animal sales decreased by $13,701. Excluding our Texas Park, acquired on April 27, 2020, our attendance based net sales increased by $2.17 million or 35.5%, while animal sales decreased by $23,640. Each of our Parks was closed to the public during the majority of April 2020 as a result of COVID-19 pandemic related state level shelter-in-place mandates. Subsequent to reopening in early May 2020, each Park experienced strong attendance level growth versus the prior year. Our Georgia Park’s attendance based net sales increased by $1.68 million or 32.4%, to $6.84 million, while animal sales decreased by $24,652 to $36,856. Our Missouri Park’s attendance based net sales increased by $492,806 or 52.6%, to $1.43 million, and animal sales increased by $1,012 to $19,483. Subsequent to the acquisition of our Texas Park, it has generated attendance based sales of $1.17 million and animal sales of $9,939. For the year ended September 27, 2020, attendance at our Georgia Park and our Missouri Park increased by approximately 33.5% and 47.6%, respectively. Segment Operating Margin Our consolidated segment operating margin increased by $2.24 million, resulting in segment income from operations of $4.63 million for the year ended September 27, 2020 compared to segment income from operations of $2.39 million for the year ended September 29, 2019. Excluding our recently acquired Texas Park, our segment income from operations increased by $1.81 million. Our Georgia Park’s segment income was $4.11 million, an increase of $1.43 million, principally as a result of higher attendance based net sales, partially offset by higher cost of sales and higher compensation expense. Our Missouri Park generated a segment operating income of $84,836, a net increase of $380,470. Excluding an insurance recovery of $24,373 for tornado damage during our 2020 fiscal year, as well as the associated asset write-offs and expenses of $80,444 during our 2019 fiscal year, our Missouri Park’s segment operating income increased by $275,653, primarily as a result of higher attendance based net sales and lower other asset write-offs, partially offset by higher cost of sales, and higher compensation, insurance and depreciation expenses. Subsequent to its acquisition on April 27, 2020, our Texas Park generated segment income of $433,916. Corporate Expenses Corporate spending decreased by $62,727 to $783,671 during the year ended September 27, 2020, primarily due to lower professional fees and compensation expenses, partially offset by higher insurance expense. Professional fees for the year ended September 27, 2020 included approximately $93,200 associated with Aggieland Safari acquisition due diligence and related services, as well as approximately $38,700 in legal fees associated with the Marlton books and records matter. Professional fees for the year ended September 29, 2019, included $75,000 in consulting fees and approximately $46,300 in legal fees associated with the Marlton books and records matter. Compensation expense in our 2019 fiscal year included approximately $88,000 pursuant to the death benefit terms of the 2017 Meikle Employment Agreement. Other Income, Net Other income, net, was $27,788 for the year ended September 27, 2020, compared to $27,104 for the year ended September 29, 2019, an increase of $684, as oil and gas mineral rights income from our Texas property offset lower interest income. 15 Interest Expense Interest expense, including the amortization of loan fees, was $182,926 for the year ended September 27, 2020, an increase of $106,923, primarily as a result of debt incurred related to the acquisition of our Texas Park on April 27, 2020. Income Taxes For the year ended September 27, 2020, we generated income before income taxes of $3.69 million and recorded a tax provision of $926,400, for an effective tax rate of approximately 25.1%. For the year ended September 29, 2019, we generated income before income taxes of $1.50 million and recorded a tax provision of $398,900, for an effective tax rate of approximately 26.7%. For additional information, see “NOTE 8. INCOME TAXES” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information on this matter. Net Income and Income Per Share Our net income for the year ended September 27, 2020 was $2.77 million or $0.04 per basic share and per fully diluted share, an increase of $1.67 million as compared with a net income of $1.10 million or $0.01 per basic share and per fully diluted share, for the year ended September 29, 2019. For the year ended September 27, 2020 September 29, 2019 Net income $ 2,767,469 $ 1,096,538 Tornado damage and expenses, net (24,373) 80,444 Tax impact - tornado damage and expenses 5,120 (16,890) Adjusted net income $ 2,748,216 $ 1,160,092 As shown in the table above, several one-time items impacted our year-over-year net income comparison. Our 2020 fiscal year included an insurance recovery of $24,373 associated with tornado damages at our Missouri Park, which resulted in $80,444 of asset write-offs and clean up expenses during our 2019 fiscal year. Excluding the after-tax effect of these items, our 2020 and 2019 fiscal year adjusted net income would have been $2.75 million and $1.16 million, respectively, resulting in an increase in adjusted net income of $1.59 million. Excluding these items, the increase in our adjusted net income is attributable to a $1.43 million increase in segment income for our Georgia Park, a $275,653 net increase in the segment income of our Missouri Park, $433,916 of segment income generated by our Texas Park, and a $62,727 decrease in Corporate expenses, partially offset by a $106,923 increase in interest expense, and a $505,490 increase in our income tax provision. Financial Condition, Liquidity and Capital Resources Financial Condition and Liquidity Our primary sources of liquidity are cash generated by operations and borrowings under our loan agreements. Historically our slow season starts after Labor Day in September and runs until Spring Break, which typically beginning in the latter of March. The first and second quarters of our fiscal year have historically generated negative cash flow, requiring us use cash generated from prior fiscal years, as well as borrowing on a seasonal basis, to fund operations and prepare our Parks for the busy season during the third and fourth quarters of our fiscal year. As a result of our improved cash position, during our 2020 and 2019 fiscal years we did not utilize any seasonal borrowing. As a result of the initial negative impacts of the COVID-19 pandemic on our attendance revenues, we took actions to reduce spending while our Parks were closed to the public during the majority of April 2020. We also secured Paycheck Protection Program (“PPP”) loans primarily to support the payroll for our employees during the Park closures and uncertainties of when we would be able to reopen our Parks. The PPP was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020, and is administered by the U.S. Small Business Administration (the “SBA”). During the next twelve to eighteen months our focus will be on running our Parks in a manner that supports the health and safety of our guests, employees and animals, at the same time prudently managing our cash flows. Any significant slowdown in revenues or unusual capital outlays may require us reduce spending and potentially seek additional capital. Our working capital was $3.86 million as of September 27, 2020, compared to $3.45 million as of September 29, 2019. This increase in working capital primarily reflects cash flow provided by operating activities, partially offset by net cash invested in the Aggieland Safari acquisition and other capital investment spending, as well as scheduled term loan payments during our 2020 fiscal year. 16 Total loan debt, including current maturities, as of September 27, 2020 was $7.02 million compared to $1.36 million as of September 29, 2019. The increase in total loan debt is the result of the Texas Park acquisition on April 27, 2020 and PPP loans entered into during our 2020 fiscal year, partially offset by scheduled payments against our 2018 term loan during the year ended September 27, 2020. There were no borrowings on our bank line of credit (“LOC”) as of September 27, 2020 and September 29, 2019, respectively. As of September 27, 2020, we had equity of $11.73 million and total loan debt of $7.02 million, resulting in a debt to equity ratio of 0.60 to 1.0, compared to 0.15 to 1.0 as of September 29, 2019. Operating Activities Net cash provided by operating activities was $3.68 million and $1.86 million, for our 2020 and 2019 fiscal years, respectively, resulting in an increase of $1.82 million, primarily as a result of a higher net income, higher net non-cash expenses and lower net working capital uses, largely due to higher deferred revenues, as well as higher accrued income taxes and sales tax. Investing Activities During our 2020 fiscal year we acquired Aggieland Safari, investing approximately $6.37 million of cash. Our 2020 fiscal year also included $525,409 of capital improvements at our Parks, compared to $554,039 spent on capital improvements during our 2019 fiscal year. During our 2020 fiscal year, property and equipment investing at our Georgia Park included improvements to our drive-through roads, improvements and additions to animal shelters and exhibits, spending on annual requirements for our rental vehicle fleet, and various animal acquisitions. For our Missouri Park, 2020 fiscal year property and equipment investments included the completion of a new giraffe barn and primate night house, various animal acquisitions, fencing improvements and the acquisition of various equipment. For our Texas Park, 2020 fiscal year property and equipment investments included various park maintenance equipment and animal acquisitions. For our Georgia Park, 2019 fiscal year spending on property and equipment included improvements to our drive-through roads, new roofs for our ticket/concession and gift shop buildings, improvements and additions to animal shelters and exhibits, spending on annual requirements for our rental vehicle fleet, additions to our park maintenance equipment, and various animal acquisitions. For our Missouri Park, 2019 fiscal year spending on property and equipment included new guest restrooms, various animal acquisitions, and improvements to several animal shelters and exhibits. Financing Activities During our 2020 fiscal year, net cash provided by financing activities related to our Aggieland acquisition totaled $4.94 million and $188,087 was provided by PPP loans. Cash used in financing activities for scheduled payments against our 2018 Term Loan were $207,135 for our 2020 fiscal year, compared to $197,097 for our 2019 fiscal year. Borrowing Agreements On April 27, 2020, we acquired Aggieland Wild Animal – Texas, financing the transaction with the 2020 Term Loan from First Financial Bank (“First Financial”) and the Aggieland Seller Note. The 2020 Term Loan in the original principal amount of $5,000,000 from First Financial is secured by substantially all of the Aggieland Wild Animal – Texas assets, as well as guarantees from the Company and its subsidiaries. The 2020 Term Loan bears interest at a rate of 5.0% per annum, has a maturity date of April 27, 2031, with interest only payable monthly through April 2021. We paid a total of approximately $62,375 in fees and expenses in connection with the 2020 Term Loan. The Aggieland Seller Note represents a deferred portion of the purchase price, has a face value of $750,000, bears no interest, has a maturity date of June 30, 2021, and is secured by a second priority subordinated lien and security interest in the acquired mineral rights and the animal inventory. We applied a 2.5% discount rate to determine a fair value of $728,500 for the Aggieland Seller Note as of April 27, 2020 and the resulting $21,500 discount will be amortized as interest expense over the 14 month period until the note matures. Including the remaining unamortized discount, the recorded value of the Aggieland Seller Note as of September 27, 2020 was $736,015. 17 On July 11, 2018, through our wholly owned subsidiary Wild Animal – Georgia, we completed the 2018 Refinancing with Synovus Banks (“Synovus”). The 2018 Refinancing included the 2018 Term Loan in the original principal amount of $1.60 million and a LOC of up to $350,000 (the “2018 LOC”). The 2018 Term Loan bears interest at a rate of 5.0% per annum and is payable in monthly payments of approximately $22,672, based on a seven year amortization period. The 2018 Term Loan has a maturity date of June 11, 2021, with an option to renew at 5.0% per annum for an additional 49 month term. The 2018 LOC bears interest at a rate of 4.75% and interest only payments are due monthly. The 2018 LOC matures on July 11, 2021, with an option to renew for an additional three-year term. The 2018 Term Loan and the 2018 LOC are secured by a security deed on the assets of Wild Animal – Georgia. We used the proceeds of the 2018 Term Loan, along with available cash of $1.25 million, to refinance the then outstanding balance of the 2013 Refinancing Loan. We paid a total of approximately $15,680 in fees and expenses in connection with the 2018 Refinancing. The outstanding balance of the 2018 Term Loan was $1,164,113 as of September 27, 2020. As a result of the significant negative economic impacts and uncertainties caused by the COVID-19 pandemic, Wild Animal – Georgia and Wild Animal – Missouri each applied for PPP loans. On April 14, 2020 and April 16, 2020, we received two unsecured PPP loans totaling $188,087. Including accrued interest, the principal outstanding our PPP loans was $188,925 as of September 27, 2020. The PPP was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020, and is administered by the U.S. Small Business Administration (the “SBA”). The term of the PPP loans is two years, with an interest rate of 1.0% per annum. All payments are deferred for the first six months of these PPP loans, with accrued interest being added to the principal during the payment deferral period. After the initial six-month deferral period, monthly principal and interest payments will be due until maturity for any portion of the PPP loans not forgiven. Under the terms of the CARES Act, some or all of the PPP loan proceeds are eligible to be forgiven. The amount of the PPP loans eligible to be forgiven are based on the use of the proceeds for payroll costs, mortgage interest, rent or utility costs, and the maintenance of employee and compensation levels, subject to limitations and ongoing rulemaking by the SBA. While not assured, we anticipate a substantial portion of our PPP loan proceeds have been used for costs that are eligible for forgiveness, based on the current SBA guidelines and we intend to apply for such forgiveness in the first half of our 2021 fiscal year. Subsequent Events None Off Balance Sheet Arrangements We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures. Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are set forth in “NOTE 2. SIGNIFICANT ACCOUNTNG POLICIES” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K, which should be reviewed as they are integral to understanding our results of operations and financial position. Our critical accounting policies are periodically reviewed with the Audit Committee of the Board of Directors of the Company. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of any contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to long-lived assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Although actual results historically have not deviated significantly from those determined using our estimates, our results of operations or financial condition could differ, perhaps materially, from these estimates under different assumptions or conditions. 18 Long-lived Assets, including Property and Equipment Property and equipment are stated at cost. Improvements and replacements are capitalized when they extend the useful life, increase capacity or improve the efficiency of the assets. Repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is provided on the straight-line method and is based on the estimated useful economic lives of the respective assets. We make subjective assessments as to these useful lives for purposes of determining the amount of depreciation to record annually with respect to our investments in property and equipment. These assessments have a direct impact on our net income or loss, as a change in the estimated useful economic lives of our investments in property and equipment would increase or decrease depreciation expense, thereby decreasing or increasing net income or loss. We review long-lived assets whenever circumstances change such that the recorded value of an asset may not be recoverable and therefore impaired. Revenue Recognition We recognize revenues when a performance obligation has been satisfied by transferring control of promised services or products to our guests/customers in an amount that reflects the amount the Company has received or expects to receive in exchange for those services or products. Accounting for Income Taxes We account for income taxes under the asset and liability method, under which deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to reverse. We review our deferred tax assets to determine whether their value can be realized based upon available evidence. A valuation allowance is established when we believe that it is more likely than not that some portion of our deferred tax assets will not be realized. Significant judgment is required in determining our provision or benefit for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We record deferred tax assets, primarily resulting from net operating loss carry-forwards, to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent results of operations. In the event we determine it is more likely than not we will not realize our deferred tax assets we establish a valuation allowance. Contingencies We have various contingencies, as described in “NOTE 9. COMMITMENTS AND CONTINGENCIES” of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. We are not aware of any other legal matters involving the Company, however, there can be no assurance that all proceedings that may currently be brought against us are known by us at this time. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements and related notes are set forth at pages F-1 through F-18. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None