August 14, 1996
SECURITIES AND EXCHANGE COMMISSION
450 5th Street, N.W.
Judiciary Plaza
Washington, D.C. 20549-1004
Re: North American Gaming and Entertainment Corporation (the "Company")
Form 10-QSB for the Quarter Ended June 30, 1996
Commission File No. 0-5474
Our File No.: 15006-160
Ladies and Gentlemen:
On behalf of the Company, enclosed for electronic filing please find one
copy of Form 10-QSB for the quarter ended June 30, 1996.
Please call the undersigned with any questions or comments. Collect calls
will be accepted at 214/419-8311.
Yours truly,
/s/ Mike Parsons
---------------------
Mike Parsons
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ______________ to _______________
Commission file number 0-5474
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75 - 2571032
(State of incorporation or organization) (IRS Employer
Identification No.)
777 E. 15th Street, Plano, Texas 75074
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (214) 423-9113
----------------
Check whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days.
Yes xx No __
Number of shares of common stock, par value $.01 per share, outstanding as of
June 30, 1996: 19,645,695
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
30-Jun-96 31-Dec-95
ASSETS UNAUDITED
CURRENT ASSETS:
Cash $ 594,192 $ 531,996
Restricted cash 153,950 164,123
Accounts receivable 120,093 92,791
Inventories, at cost 72,799 59,891
Prepaid Insurance 54,087 47,075
Notes receivable - current 224,741 253,035
Income taxes receivable 116,634
Current deferred tax asset 15,421 10,161
----------- -----------
TOTAL CURRENT ASSETS 1,235,283 1,275,706
----------- -----------
PROPERTY AND EQUIPMENT,
net of accumulated depreciation 1,413,952 1,660,542
----------- -----------
OTHER ASSETS:
Deposits 55,045 47,246
Revenue interest rights 312,433 338,113
Goodwill and merger costs 2,502,216 720,451
Notes Receivable-long-term 109,350 57,115
----------- -----------
2,979,044 1,162,925
----------- -----------
TOTAL ASSETS $5,628,279 $4,099,173
=========== ===========
LIABILITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 656,718 $ 795,711
Notes payable - current 1,499,296 2,096,065
Preferred stock dividends payable 780,000 580,000
------------ -----------
TOTAL CURRENT LIABILITIES 2,936,014 3,471,776
NOTES PAYABLE-LONG-TERM 960,462 143,884
NOTES PAYABLE TO CERTAIN STOCKHOLDERS-LONG-TERM 2,298,094 665,450
------------ -----------
TOTAL LIABILITIES $6,194,570 $4,281,110
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized, 1,287,000 and
1,600,000 Class A - $3.00 par value,
shares issued, at 6/30/96 and 12/31/95,
respectively $3,861,000 $4,800,000
8,000,000 Series B - $.01 par value,
shares issued at June 30, 1996 80,000
Common stock, $.01 par value, 25,000,000
shares authorized, 19,645,595, and
14,711,589 shares issued at 6/30/96 and
12/31/95, respectively 196,435 147,094
Additional paid-in-capital (deficit) (3,017,900) (3,334,543)
Retained earnings (deficit (1,685,826) (1,794,488)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY $ (566,291) $ (181,937)
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $5,628,279 $4,099,173
============ ============
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
30-Jun-96 30-Jun-95 30-Jun-96 30-Jun-95
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Video Poker Revenue $2,971,055 $3,091,251 $6,053,471 $6,152,412
Truck Stop and Convenience Store 1,511,356 630,874 2,747,286 1,777,498
Cruise Revenue 58,975 58,975
------------- ----------- ----------- -----------
4,541,386 3,722,125 8,859,732 7,329,910
------------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of Revenues 2,929,682 2,470,112 5,749,576 4,816,610
Direct Operating Expenses 998,129 810,814 2,023,770 1,676,102
General and Administrative Expenses 145,406 160,838 304,688 311,400
Interest Expense 97,631 73,795 141,133 150,841
Depreciation and Amortization 198,555 187,127 342,943 361,712
------------- ----------- ----------- ------------
4,369,403 3,702,686 8,562,110 7,316,665
------------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 171,983 19,439 297,622 13,245
------------- ------------- ------------ -------------
OTHER REVENUE (EXPENSE), net 48,234 31,556 90,036 78,602
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES 220,217 50,995 387,658 91,847
PROVISION FOR INCOME TAXES (43,000) (35,820) (79,000) (35,820)
------------- ------------- -------------- -------------
NET INCOME $ 177,217 $ 15,175 $ 308,658 $ 56,027
LESS: Preferred Stock Dividends (80,000) (120,000) (200,000) (240,000)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 97,217 $(104,825) $ 108,658 $ (183,973)
============ ============ =========== ============
EARNINGS PER SHARE - assuming no dilution $ 0.01 $ (0.01) $ 0.01 $ (0.01)
============== ============== ============== ==============
</TABLE>
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
30-JUN-96 30-JUN-95
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 308,658 $ 91,847
Adjustments to reconcile net income to net cash:
Depreciation and amortization 342,943 361,712
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 87,804 5,931
(Increase) decrease in inventories (12,923) (10,029)
(Increase) decrease in prepaid insurance (12,271) (22,304)
(Increase) decrease in deposits (7,799) (31,405)
Increase (decrease) in accounts payable and
accrued liabilities (138,905) (240,042)
----------- ----------
Net cash provided (used) by operating activities 567,507 155,710
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,931,928) (119,608)
Proceeds to borrowers (217,072) (138,848)
Repayment by borrowers 274,081 392,653
----------- ---------
Net cash provided (used) by investing activities (1,874,919) 134,197
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on subordinated debt (336,820)
Issuance of common stock 49,341 375,741
Issuance of preferred stock 80,000
Redemption of preferred stock (939,000)
Additional paid-in-capital 316,643
Increase (decrease) in notes payable 1,852,451 (793,588)
Dividends paid
----------- --------
Net cash provided (used) by financing activities 1,359,435 (754,667)
----------- --------
NET INCREASE (DECREASE) IN CASH 52,023 (464,760)
CASH - beginning of period 696,119 1,018,781
----------- ---------
CASH - ending of period $748,142 $ 554,021
=========== =========
The accompanying notes are an integral part of the financial statements
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1996 AND 1995
Note 1. OPINION OF MANAGEMENT
The preceding financial information has been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC") and,
in the opinion of the Company, includes all normal and recurring adjustments
necessary for a fair statement of the results of each period shown. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to SEC rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995 and the Company's FORM 8-K, filed June 10, 1996.
Note 2. LEGISLATIVE ACTION
In April 1996, the Louisiana Legislature approved a local-option bill which
gives the voters in each parish the right to decide during the November 5, 1996,
general election what forms of gaming they want to continue in their parish. The
Company anticipates being able to operate under its current licenses until July
1999, if the parishes where its properties are located do not approve the
continuation of truck stop video poker.
Note 3. ACQUISITION OF ASSETS
On June 10, 1996, Company acquired 100% of the issued and outstanding capital
stock of I.T. Cruise, Inc. ("I.T. Cruise") and 100% of the issued and
outstanding capital stock of GalaxSea Cruises and Tours, Inc. ("GalaxSea") from
International Tours, Inc. ("International"). Both corporations were wholly-owned
subsidiaries of International.
I.T. Cruise is an Oklahoma corporation that was formed in 1993. I.T. Cruise has
served as the cruise marketing division of International since that time. The
principal business of I.T. Cruise is to coordinate cruise marketing programs
between the various major cruise lines and International's network of
approximately 1,400 travel agency locations. I.T. Cruise enters into contracts
with the cruise lines that provide for favorable commission structures and
marketing support for the International network. The contracts also provide for
I.T. Cruise to receive an override payment based on the cruise sales volume of
the International network. I.T. Cruise has a twenty year contract with
International pursuant to which International granted I.T. Cruise the exclusive
right to provide such services to International's network of travel agency
locations. The contracts with the cruise lines generally are negotiated on an
annual basis.
GalaxSea is an Oklahoma corporation that was formed in September 1995. Effective
October 1, 1995, GalaxSea acquired substantially all of the operating assets of
GalaxSea Associates, Inc. (GAI), a Florida corporation. GalaxSea currently has
23 franchisees in its system. Each franchisee pays a monthly license fee, rather
than a royalty percentage based on that agency's annual cruise sales volume. The
principal business of GalaxSea will continue to be the granting of franchises
for the operation of travel vacation stores that specialize in the marketing and
selling of cruise travel, tours and related travel arrangements according to the
concept and business system developed by GalaxSea and GAI. GalaxSea has
contracts with most major cruise lines which provide for GalaxSea to receive
override payments based on the cruise sales of all GalaxSea franchisees. These
contracts also generally provide for favorable commission structures for the
franchisees.
As part of the acquisition of GalaxSea by the Company, GalaxSea and
International entered into a long-term joint marketing agreement, pursuant to
which GalaxSea will have access to market its Add-on franchises to
International's network of approximately 1,400 travel agency locations. The
Company's primary goals with GalaxSea are to expand the system by adding
franchisees and to increase the cruise sales volume of all stores.
Effective June 1, 1996 the Company began recording revenue and expense from I.T.
Cruise and GalaxSea. As a result of this transaction, the Company recorded
$1,629,341 in goodwill which will be amortized over a sixty month period.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Liquidity and Capital Resources
The Company ended its second quarter with $748,142 in cash and other current
assets amounting to $471,720, including inventories and prepaid expenses
totaling $142,307 and receivables of $344,834. The Company's liabilities totaled
$6,194,570 at June 30, 1996, including accounts payable and accrued liabilities
of $656,718, current notes payable of $1,499,296, long-term notes payable of
$3,258,556 and preferred stock dividends payable of $780,000. This represents an
increase of $1,913,460 from $4,281,110 at December 31, 1995. This increase was
comprised of payments totaling $758,996 which were applied to: long and
short-term debt to banks and equipment manufacturers amounting to $238,709;
principal reduction on the Gold Rush casino and truck stop amounting to
$381,294; and a reduction in accounts payable and accrued liabilities totaling
$138,993 offset by an increase in liabilities recorded at June 30, 1996 related
to the acquisition of GalaxSea Cruises and Tours, Inc. (GalaxSea) and IT Cruise,
Inc.(I.T. Cruise) amounting to $1,533,461, the redemption of Class A Preferred
Stock of $939,000 and the final accrual of preferred dividends payable which
added $200,000. This transaction placed an agreed moratorium on the accrual of
dividends for two years, effective June 1, 1996, and obtained from the holders
of Class A Preferred stock the right to force conversion of the remaining
1,287,000 shares of Class A Preferred Stock into 8,240,000 shares of Common
Stock at any time within the next two years.
Accounts payable and accrued liabilities of $656,718 included $230,177 in trade
payables, payroll and payroll taxes of $66,572, casino distributions of
$176,355, state franchise taxes of $151,859 and accrued interest of $31,755.
The current portion of notes payable totaling $1,499,296, includes: various
notes related to the purchase of I.T. Cruise and GalaxSea totaling $627,511; the
stock purchase resulting from the Gold Rush acquisition amounting to $320,252;
current notes payable of $155,353; video poker machine debt of $127,306; notes
related to the partial redemption of Preferred Stock amounting to $52,631;
equipment leases and other notes totaling $29,722; and $186,521 payable to a
bank, originally obtained for the construction of the Pelican Palace and the
purchase of the Lucky Longhorn, which was previously collateralized by the
Pelican Palace, and recently rewritten on a five year amortization with the Gold
Rush being substituted as collateral for the note.
Long-term notes payable of $3,258,559 include: $923,839 payable to a bank,
originally obtained for the construction of the Pelican Palace and the purchase
of the Lucky Longhorn, refinanced as noted above; the stock purchase debenture
related to the acquisition of GalaxSea and I.T. Cruise totaling $905,950; the
debenture for the partial redemption of Class A Preferred Stock amounting to
$886,369; the stock purchase debenture resulting from the Gold Rush acquisition
amounting to $505,778; and equipment leases and other notes totaling $36,623.
The Company believes it will be able to generate cash flow from operations to
service all debt according to the terms and conditions specified in debt
instruments. In addition, the Company believes cash flow from operations will be
sufficient to pay accrued preferred dividends on the Company's Class A Preferred
Stock, totaling $780,000, once current obligations on notes and debentures are
satisfied. The Company also believes that it will be able to generate or obtain
the necessary capital from outside sources for expansion projects, but there are
no assurances that current economic conditions will prevail.
The remaining pre-Merger liabilities of WNGC constitute a note payable with a
remaining balance of $155,353 at June 30, 1996; this note is also guaranteed by
a director of the Company. The amount paid on WNGC pre-Merger liabilities
totaled $38,000 during the six months ended June 30, 1996.
In July 1993, OM Investors, Inc. committed to loan $1,450,000 to the Curray
Corporation (Curray) for the construction of the Pelican Palace truck stop and
video poker facility in Toomey, Louisiana. Construction was commenced in 1993
and substantially completed in March 1994. The $1,450,000 loan was evidenced by
a promissory note payable to the Company which was paid-in-full as of May 31,
1996. Under the Operating and Financing Agreement with Curray, 70% of the net
income from the operation of the facility was dedicated to the repayment of the
note. Now that the note receivable from Curray is paid-in-full, net income will
be split 50% to the Company and 50% to Curray.
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<PAGE>
At June 30, 1996, property and equipment (net) at truck stop, video poker and
office facilities totaled $1,413,952. As of June 30, 1996, the Company owed
video poker equipment manufacturers a total principal amount of $127,306
pursuant to four promissory notes secured by such machines and equipment. These
notes require total monthly principal and interest payments of $22,213. During
the six months ended June 30, 1996, promissory notes to equipment manufacturers
were reduced by $159,735.
During the fourth quarter of 1995, the Company retained a Certified Highway
Engineer to evaluate its video poker facilities for the purpose of complying
with State regulations, which require a minimum of 50,000 square feet of paved
truck parking. The Company committed to fund approximately $187,000 to bring the
following properties into compliance: the Pelican Palace in Toomey, Louisiana;
King's Lucky Lady in Port Barre, Louisiana; the Gold Rush in Opelousas,
Louisiana; and Stelly's Southern Gold in LeBeau, Louisiana. The Company also
entered into agreements with a contractor to pave the parking areas defined as
necessary to comply with State regulations for each property. The paving was
completed before January 1, 1996 at all locations. State inspectors approved the
Pelican Palace, King's Lucky Lady and the Gold Rush, but did not approve
Stelly's Southern Gold, at which the engineer had certified 51,250 square feet
was paved. State inspectors disallowed 7,800 square feet, claiming that
additional driveways were needed to accommodate easier access to the highway,
and suspended operations of the video poker casino on January 4, 1996. The
Company protested the findings of the State inspectors, but gained no
satisfaction. The State also required that the establishment license be
re-applied for and re-issued, which made it necessary to gain re-approval from
the local Fire Marshall before the video poker operation could reopen. The
Company has paved an additional 10,000 square feet and has complied with all
items which State inspectors have identified for correction. There can be no
assurances as to when State approval may be given to re-open this property.
Effective June 10, 1996, the Company acquired GalaxSea Cruises and Tours, Inc.
("GalaxSea") and I.T. Cruise, Inc. ("I.T. Cruise"), companies engaged in the
cruise travel industry. Cruise revenue as reported is presented on an accrual
basis, and is estimated based on the receipt of quarterly cash payments of
previous years actual revenue; adjusted for seasonal variations. Cruise revenue
is comprised of overrides and commissions on cruise sales generated by I.T.
Cruise from the International Tours, Inc. network and GalaxSea's franchise
system. The Cruise lines make payments of overrides and commissions on a
quarterly basis which are received 30-45 days following the end of each quarter.
Bonus overrides and commissions are paid by the cruise lines on an annual basis,
which are received 30-45 days into the next calendar year. GalaxSea franchisees
are billed monthly for license fees.
The Company will seek to meet its long-term liquidity needs primarily through
cash flow from operations, additional borrowings from the Company's traditional
lending sources and possible sales of equity or debt securities. While the
Company believes it will be able to generate and obtain the necessary capital to
meet such needs, there can be no assurance that all of such capital will be
available on terms acceptable to the Company, which could delay or cause the
Company to postpone certain planned activities.
There has been a significant increase during the last two years in the number of
gaming establishments opening for operation in Louisiana and Mississippi, and
competition for the business of gaming patrons has become very intense. As a
result, it is expected that the profit margins, which may be expected by gaming
establishments like the Company will be adversely affected, and that various
gaming establishments may be forced to close because they cannot compete
effectively at such reduced margins. The Company believes it will be able to
maintain a competitive position by carefully managing expenses and cash flow,
but there can be no assurance.
During the past year, there has been a perceived increase in anti-gaming
sentiment in Louisiana within certain segments of the population and with
certain politicians. The Company cannot predict whether such anti-gaming
sentiment will result in further changes to the gaming laws of Louisiana, or an
outright ban on certain forms of gaming, including truck stop video poker
casinos. The State of Louisiana generates substantial revenues from license fees
and taxes on the gaming industry, so the loss of portions of these revenues
would most likely be carefully examined in connection with any proposed
limitations on gaming. In April 1996, the Louisiana Legislature approved a
local-option bill which gives the voters in each parish the right to decide
during the November 5, 1996, general election what forms of gaming they want to
continue in their parish. The Company anticipates being able to operate under
its current licenses until July 1999, if the parishes where its properties are
located do not approve the continuation of truck stop video poker. The Company
continues to monitor these proceedings and provides input as appropriate. The
Company also continues to review other gaming opportunities outside Louisiana
for purposes of diversification.
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Results of Operations
Net Income for the second quarter ended June 30,1996.
Company operations resulted in net income before income taxes of $387,658 for
the six months ended June 30,1996, an increase of $295,811, or 322% from 1995's
$91,847. The Company recorded the 70% revenue interest it received in the
Pelican Palace as a repayment of a note receivable, which amounted to $236,616
through May 31,1996 . This note receivable has been satisfied, therefore fifty
percent of the operating profit generated at the Pelican Palace after May 31,
1996 is now recorded as income to the Company. Effective June 1, 1996 the
Company began recording income from GalaxSea and IT Cruise operations, which
amounted to $12,185 through June 30, 1996.
Revenues totaled $8,859,732 for the six months ended June 30, 1996, compared to
$7,329,910 for 1995, up 21%.
Video Poker revenues amounted to $6,053,471 through June 30,1996, down 2% from
1995's $6,152,412. Discontinued operations at Landry's Silver Fox and Stelly's
Southern Gold, and increased competitive pressure at the Lucky Longhorn, King's
Lucky Lady, the Pelican Palace and Route Operations, resulted in a combined
decrease of $1,436,266 in Video Poker revenue from 1995 to 1996. This was
off-set by the acquisition of the Gold Rush which generated $1,337,325 through
June 30, 1996.
Video Poker revenue production by location for the six months ended June 30,
1996 and 1995 respectively, was as follows: Lucky Longhorn, Vinton, LA -
$1,909,081 in 1996 and $2,211,964 in 1995; Pelican Palace, Toomey, LA -
$1,406,485 in 1996 and $1,425,753 in 1995; the Gold Rush - Opelousas, LA,
generated $1,337,325 in 1996; King's Lucky Lady, Porte Barre, LA - $1,154,420 in
1996 and $1,231,835 in 1995; Route Operations - South, LA - $241,312 in 1996 and
$333,520 in 1995; Stelly's Southern Gold - LeBeau, LA - $4,849 in 1996 and
$202,446 in 1995; Landry's Silver Fox, Jeanerette, LA - discontinued operations
in 1996 and $746,894 in 1995;
Fuel, convenience store, food and beverage operating revenues amounted to
$2,747,286 for the six months ended June 30, 1996 compared to 1995's $1,177,498,
an increase of 133%. Fuel and convenience store sales amounted to $2,083,966 for
the six months ended June 30, 1996 compared to $693,778 in 1995. Food and
beverage sales totaled $663,320 for the six months ended June 30, 1996 compared
to $483,720 in 1995. The Gold Rush generated total retail revenues of
$1,353,230; at King's Lucky Lady, combined retail revenues were $1,285,835, an
increase of 22% over 1995's $1,056,398; and the Pelican Palace produced retail
revenues of $108,221, up 8% from $100,121 in 1995.
Cruise revenues for the six months ended June 30, 1996 totaled $58,975. This
amount represents an accrual of $40,000 for overrides and commissions on cruise
sales volume resulting from I.T. Cruise's contracts with International Tours,
Inc.; and the accrual of GalaxSea's franchise system revenues, comprised of
$8,000 in overrides and commissions and $10,975 in monthly license fees.
Casino Operations:
The Gold Rush generated total revenue of $2,690,555 for the first six months of
1996. Average daily Video Poker revenue per device (50 devices) was $147 for the
six months ended June 30, 1996. Combined retail revenues amounted to $1,353,230
for the six months ended June 30, 1996: truck stop - $1,179,083; food and
beverage - $174,147. Operating profit from the Gold Rush amounted to $499,792,
representing 46% of the Company's aggregate operating profit for the 1996
period, which is defined as Revenues less Cost of Revenues and Direct Operating
Expense as illustrated in the consolidated statement of operations.
King's Lucky Lady generated total revenue of $2,440,255 for the first six months
of 1996 compared to $2,288,233 in 1995, up 7%. Average daily Video Poker revenue
per device (50 devices) was $127 for the six months ended June 30,1996 compared
to 1995's $136. Combined retail revenues were $1,285,835, an increase of 22%
over 1995's $1,056,398: truck stop - $904,883, an increase of 30% over 1995's
$693,778; food and beverage - $380,952, up 5% from $362,620 in 1995. During the
third quarter of 1995, another competitor opened 14 miles away with thirty-five
video poker machines. This new casino is promoting heavily to attract local
clientele, and is having a direct impact on King's as well as the Gold Rush. The
Company anticipates continued competitive pressure which will make it difficult
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<PAGE>
to regain market share. Operating profit from King's amounted to $233,739, a
decrease of 23% from 1995's $303,782; this represents 22% and 36%, respectively,
of the Company's aggregate operating profit.
The Lucky Longhorn generated total revenue of $1,909,081 for the first six
months of 1996 compared to $2,211,964 in 1995. Average daily Video Poker revenue
per device (50 devices) was $210 for the first six months compared to 1995's
$244. The Longhorn has eighteen competitors in its market area, including four
riverboats, of which one was licensed in June of 1996 and two were added during
1995. In addition, after a major full-scale Native American casino opened in
1994, absorbing a substantial portion of market share, it then almost doubled
its gaming capacity during the third quarter of 1995, which significantly
affected the Longhorn's results for the first six months of 1996. Operating
profit from the Longhorn for the six months ended June 30, 1996 was $370,511, a
decrease of 12% from 1995's $419,997; this represents 34% and 50%, respectively,
of the Company's aggregate operating profit.
The Pelican Palace generated total revenue of $1,514,706 for the first six
months 1996 compared to $1,525,874 in 1995, down 1%. Average daily Video Poker
revenue per device (50 devices) was $155 for the first six months compared to
1995's $158. Combined retail revenues totaled $108,221, up 8% from $100,121 in
1995. The Pelican Palace was subject to the same competitive pressures as the
Lucky Longhorn during the first six months ended June 30, 1996. Operating profit
from the Pelican Palace was $120,241 for 1996, an increase of 37% from 1995's
$88,023; this represents 11% of the Company's aggregate operating profit for
1996 and 1995. However, as noted above, the Company also received distributions
of $236,616 of the Pelican Palace's operating profit during 1996 in payment of
the Company's note receivable from Curray; which was paid-in-full as of May 31,
1996. As of June 1, 1996, fifty percent of the operating profit generated at the
Pelican Palace was recorded as income to the Company.
Route Operations generated total revenue of $241,312 in 1996 and $333,520 in
1995. Operating profit for the six months ended June 30, 1996 was $34,667, a
decrease of 30% from 1995's $49,744; this represents 3% and 6%, respectively, of
the Company's aggregate operating profit. Increased competition resulted in
discontinued operations at certain tavern sites, resulting in the sale of
fourteen video poker machines. The Company currently has 27 devices operating
within 12 locations.
Stelly's Southern Gold was closed for the majority of the first and second
quarters of 1996 as a result of the truck parking compliance issue discussed
above. Only $4,849 in Video Poker revenue was recorded in 1996 compared to
$202,446 in 1995. A year-to-date operating loss totaling $20,249 was the result
of additional license application fees, engineering costs, device fees,
insurance and property taxes.
Landry's Silver Fox - operations were discontinued as of December 31, 1995. 1995
revenues for the first and second quarters amounted to $746,894 for Video Poker
and $20,979 for retail sales. Operating profit amounted to $102,080 for the six
months ended June 30,1995, representing 12% of the Company's aggregate operating
profit.
Travel Operations:
Cruise revenues recorded for the month ended June 30, 1996 totaled $58,975. The
resulting operating profit was $12,185 with an operating margin of 20.7%.
Expenses totaled $8,534,954 for the six months ended June 30, 1996 compared to
$7,316,665 for 1995, up 17%.
The direct cost of revenue related to Video Poker operations includes fees paid
to the State of Louisiana of $2,060,861, down 1% in 1996 from $2,083,422 in
1995, and profit sharing payments as defined in operating and management
contracts of $1,413,006, down 23% in 1996 from 1995's $1,826,272. This decline
in profit share payments resulted from lower Video Poker revenue at the Lucky
Longhorn, the Pelican Palace and King's Lucky Lady, and discontinued operations
at Stelly's Southern Gold and Landry's Silver Fox.
The cost of revenue related to retail sales from fuel, convenience store, food
and beverage operations totaled $2,272,215, the cost of goods sold being 82.7%
of retail sales in 1996; compared to 1995's $907,371, the cost of goods sold
being 77.1% of retail sales. This increase was mainly due to the addition of the
Gold Rush, which added $1,172,965 to the retail cost of revenues. At King's
Lucky Lady, the retail cost of revenue totaled $1,033,008 for the six months
ended
- 9 -
<PAGE>
June 30, 1996 compared to 1995's $834,337. The increased margin in cost of sales
resulted from a higher proportion of fuel sales, which amounted to $1,747,811 in
1996 compared to $569,383 in 1995, constituting 63.6% of the Company's retail
sales in 1996 versus 48.4% in 1995. In order to comply with State regulations
governing truck stops, the Company is being very aggressive in its marketing
with very competitive fuel prices. The regulations require a minimum sales level
of 100,000 gallons per month per location, in order to maintain a complement of
50 video poker machines. In addition, food and beverage operations demonstrated
an improvement in the margin of cost of goods sold to 46.1% in 1996 from 52.0%
in 1995. Continued competitive pressure on all locations requires the marketing
of lower price points, which in turn results in a significant number of sales at
a low dollar value. The State regulations governing truck stops also require the
Company to operate three low volume restaurants on a 24 hour basis in order to
maintain a complement of 50 video poker machines. All of these factors
contribute significantly to the Company's low gross margin on sales.
Direct operating expenses for the six months ended June 30, 1996 totaled
$2,023,770, up 21%, or $347,668, from 1995's $1,676,102; this represents 22.8%
and 22.9% of total revenue for 1996 and 1995 respectively. The majority of this
increase, $469,939, was due to the addition of the Gold Rush, which added
$294,558 to payroll related expenses and $175,381 to other direct operating
expenses. Lower expense levels as a result of discontinued operations at
Landry's Silver Fox and Stelly's Southern Gold totaled $206,657 and $30,269
respectively for the six months ended June 30, 1996. All other operations
experienced a 3.8% growth in the cost of operations, up $54,256 from 1995 to
1996.
The direct cost of Cruise marketing franchise operations amounted to $46,790 for
the month of June 1996.
General and administrative expenses for the six months ended June 30, 1996
totaled $304,688, down 23% from 1995's $311,400 demonstrating an improved cost
margin to 3.4% of total revenue from 4.3% of total revenue in 1995.
Interest expense for the six months ended June 30,1996 was $141,133 in 1996,
down $9,708, or 6%, from 1995's $150,841, as a result of the rapid reduction of
debt in 1995, which continued into the first quarter of 1996. Depreciation and
amortization of video poker machines, leasehold improvements and goodwill for
the six months ended June 30, 1996 amounted to $342,943, down 5% from 1995's
$361,712. Other revenue and expense, net, of $90,036 in 1996, includes rental
income, interest income and ATM commissions; this compares to $78,602 for 1995.
Forward Looking Statements - Certain statements included in this Management's
Discussion and Analysis are forward looking statements that predict the future
development of the Company. The realization of these predictions will be subject
to a number of variable contingencies, and there is no assurance that they will
occur in the time frame proposed. The risks associated with the potential
actualization of the Company's plans include: regulatory changes, regulatory
approvals, the availability and cost of financing, to name a few.
- 10 -
<PAGE>
PART II. OTHER INFORMATION
Items 2, 4 and 5 are omitted from this report as inapplicable.
Item 1. Legal Proceedings
On August 25, 1995, the Company filed a petition for declaratory judgement in
the 14th Judicial District Court, Calcasieu Parish, Louisiana, seeking the
court's interpretation of the Act of Contract and Agreement (the "Contract")
under which Operator operates the Lucky Longhorn video poker casino. At issue is
whether the Operator deducts the full 32.5% net device revenue tax, or only
22.5% (which was the statutory rate prior to the amendment of the statute
effective July 1, 1994), in calculating net revenues for distribution under the
Contract. The other party to the Contract filed an answer to the Company's suit
on November 28, 1995 claiming that only the old rate should be deducted, and
claiming that Operator was in default for deducting the higher rate and that the
Contract should therefore be terminated. No trial date has been set, and
settlement discussions are ongoing. The Company believes the issue will be
resolved satisfactorily, but there can be no assurance in this regard.
Item 2. Changes in Securities
On June 10, 1996, the Company issued 4,934,106 shares of its common stock, par
value $.01 per share ("Common Stock"), and 8,000,000 shares of a newly
designated series of its preferred stock, par value $.01 per share, designated
as Series B Convertible Preferred Stock ("Series B Preferred Stock"), to
International Tours, Inc. ("International") in consideration for 100% of
GalaxSea and I.T. Cruise, the stock of the two subsidiaries of International
acquired by the Company. Both corporations were wholly-owned subsidiaries of
International. The 8,000,000 shares of Series B Preferred Stock are entitled to
one vote for each share issued and they vote together with the Common Stock as
one class, and not as a separate class, and are convertible into 8,000,000
shares of Common Stock. As a result of the issuance of the 4,934,106 shares of
Common Stock and 8,000,000 shares of Series B Preferred Stock to International,
International owns approximately 44% of the voting stock (Common Stock and
Series B Preferred Stock combined as one class) of the Company, which may be
deemed to have resulted in a change of control of Companyww. As a result,
International is the largest shareholder of the Company, owning approximately
44% of the voting stock.
Item 3. Default Upon Senior Securities
Simultaneously with the acquisition of GalaxSea and I.T. Cruise, the Company
also restructured its existing, outstanding Class A Preferred Stock by redeeming
313,000 of the 1,600,000 outstanding shares for a $939,000 subordinated
debenture, placing an agreed moratorium on the accrual of dividends for two
years and obtaining from the holders of Class A Preferred stock the right to
force conversion of the remaining 1,287,000 shares of Class A Preferred Stock
into 8,240,000 shares of Common Stock at any time within the next two years. In
the event of any such forced conversion, as part of the merger transaction,
International was granted anti-dilution protection and will, upon the issuance
of such shares of Common Stock to the former holders of Class A Preferred Stock,
be entitled to an additional 5,452,854 shares of Common Stock without further
consideration, in order to maintain its percentage ownership of voting stock at
44%. The $780,000 of dividends on the Class A Preferred Stock accumulated and
accrued through May 31, 1996 will exist as accrued dividends payable.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as part of this Quarterly Report on Form
10-QSB:
- 11 -
<PAGE>
Exhibit
Number Description of Exhibits
3.1.1 Certificate of Incorporation of the Company, as amended, filed as
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1986 (the "1986 Form 10-K"), and
incorporated herein by reference.
3.1.2 Certificate of Amendment of Certificate of Incorporation of the
Company dated April 18, 1994, filed as Exhibit 3.1.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 Form 10-K"), and incorporated herein
by reference.
3.1.3 Certificate of Amendment of Certificate Incorporation of the
Company effecting one-for-three reverse stock split filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K dated
October 17, 1994, and incorporated herein by reference.
3.1.4 Certificate of Amendment of Certificate Incorporation of the
Company effecting name change, increase of authorized shares,
authorization of Class A preferred stock and stock ownership
limitations filed as Exhibit 3.1 to the Company's Current Report
on Form 8-K dated October 17, 1994, and incorporated herein by
reference.
3.1.5 Form of "Certificate of Designation, Preferences and Rights of
Series B Convertible Preferred Stock" creating the Series B
Preferred Stock, filed as Exhibit 10.1.4 to the Company's Current
Report on Form 8-K dated June 10, 1996, and incorporated herein by
reference.
3.2 Amended and Restated Bylaws of the Company filed as Exhibit 3.3 to
the Company's Current Report on Form 8-K dated October 17, 1994,
and incorporated herein by reference.
*27.1 Financial Data Schedule required by Item 601 of Regulation S-B.
- - ----------------------
* Filed herewith.
(b) A Form 8-K was filed on June 25, 1996, reporting an event dated June 10,
1996, which Form 8-K covered the following items:
Item 1 - Changes in Control of Registrant
Item 2 - Acquisition or Disposition of Assets
Item 7 - Financial Statements and Exhibits
- 12 -
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
SIGNATURES
-------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
(Registrant)
By: /s/ George J. Akmon
----------------------
George J. Akmon
Executive Vice-President &
Chief Financial Officer (Principal
Financial and Chief Accounting
Officer)
Date: August 13, 1996
I:\WPWIN\10Q\2Q9610Q.WPD
- 13 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 30, 1996 and the consolidated statements of
operations and cash flows for the six months ended June 30, 1996, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 748,142
<SECURITIES> 0
<RECEIVABLES> 344,834
<ALLOWANCES> 0
<INVENTORY> 72,799
<CURRENT-ASSETS> 1,235,283
<PP&E> 2,976,445
<DEPRECIATION> 1,562,493
<TOTAL-ASSETS> 5,628,279
<CURRENT-LIABILITIES> 2,936,014
<BONDS> 3,258,556
<COMMON> 196,435
0
3,861,000
<OTHER-SE> (4,703,726)
<TOTAL-LIABILITY-AND-EQUITY> (566,291)
<SALES> 8,859,732
<TOTAL-REVENUES> 8,859,732
<CGS> 5,749,576
<TOTAL-COSTS> 8,562,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141,133
<INCOME-PRETAX> 387,658
<INCOME-TAX> 79,000
<INCOME-CONTINUING> 308,658
<DISCONTINUED> 0
<EXTRAORDINARY> 200,000
<CHANGES> 0
<NET-INCOME> 108,658
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
