<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 March 31, 1997
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[ ] 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
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(Exact name of small business issuer as specified in its charter)
Delaware 75 - 2571032
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(State of incorporation or organization) (IRS Employer
Identification No.)
13150 Coit Road, Suite 125, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (972) 671-1133
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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
March 31, 1997: 20,093,347
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Transitional Small Business Disclosure Format (Check One): Yes No xx
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
31-MAR-97 31-DEC-96
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ASSETS UNAUDITED
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 493,112 $ 364,965
Restricted cash 193,607 183,529
Accounts receivable 323,870 291,597
Inventories, at cost 76,777 81,557
Prepaid Expenses 185,333 99,328
Notes receivable - current 118,708 135,824
Current deferred tax asset 19,030 19,030
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TOTAL CURRENT ASSETS 1,410,437 1,175,830
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PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,477,134 1,492,255
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OTHER ASSETS:
Deposits 78,658 76,488
Long-term deferred tax asset 539,448 539,448
Revenue interest rights 273,913 286,753
Trade name, contract rights and organizational costs, net of
accumulated amortization 218,510 258,583
Goodwill and merger costs 1,165,399 1,183,607
Notes Receivable-long-term 49,173 49,173
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2,325,101 2,394,052
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TOTAL ASSETS $ 5,212,672 $ 5,062,137
=========== ===========
LIABILITY AND STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,024,857 $ 1,005,349
Notes payable - current 1,347,277 1,385,597
Income Taxes Payable 178,017 32,017
Preferred stock dividends payable 780,000 780,000
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TOTAL CURRENT LIABILITIES 3,330,151 3,202,963
NOTES PAYABLE-LONG-TERM 850,773 898,756
NOTES PAYABLE TO CERTAIN STOCKHOLDERS-LONG-TERM 1,593,194 1,757,706
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TOTAL LIABILITIES $ 5,774,118 $ 5,859,425
STOCKHOLDERS' EQUITY:
Class A preferred stock,$3.00 par value, 10% annual cumulative dividend
1,600,000 shares authorized, 1,287,000 and 1,287,000 shares issued,
at March 31, 1997 and December 31, 1996 $ 3,861,000 $ 3,861,000
Preferred stock, $.01 par value, 10,000,000 shares authorized 8,000,000
series "B" issued at March 31, 1997 and December 31, 1996. 80,000 80,000
Common stock, $.01 par value, 25,000,000 shares authorized, 20,093,347
shares issued at March 31, 1997 and December 31, 1996 200,935 200,935
Additional paid-in-capital (deficit) (3,257,090) (3,257,090)
Retained earnings (deficit) (1,446,291) (1,682,133)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ (561,446) $ (797,288)
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,212,672 $ 5,062,137
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
QUARTER ENDED
31-MAR-97 31-MAR-96
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<S> <C> <C>
REVENUE:
Video Poker Revenue $3,786,053 $3,082,416
Truck Stop and Convenience Store 1,586,726 1,235,930
Cruise Revenue 282,654 -
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5,655,433 3,722,125
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COST AND EXPENSES:
Cost of Revenues 3,547,918 2,819,894
General and Administrative Expenses 1,520,533 1,184,923
Interest Expense 69,754 43,502
Depreciation and Amortization 164,864 144,388
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5,303,069 4,192,707
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OPERATING INCOME (LOSS) 352,364 125,639
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OTHER REVENUE (EXPENSE), NET 29,480 41,802
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INCOME BEFORE PROVISION FOR INCOME TAXES 381,844 167,441
PROVISION FOR INCOME TAXES (146,000) (36,000)
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NET INCOME $ 235,844 $ 131,441
LESS: Preferred Stock Dividends - (120,000)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 235,844 $ 11,441
========== ==========
EARNINGS PER SHARE $ 0.01 $ 0.00
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE QUARTERS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
31-MAR-97 31-MAR-96
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 235,844 $ 131,441
Adjustments to reconcile net income to net cash:
Depreciation and amortization 164,864 144,388
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (32,273) 106,301
(Increase) decrease in inventories 4,780 (8,751)
(Increase) decrease in prepaid expenses (86,005) 18,445
(Increase) decrease in deposits (2,170) (7,299)
Increase (decrease) in income taxes payable 146,000 -
Increase (decrease) in accounts payable and accrued liabilities 19,508 (132,788)
--------- ---------
Net cash provided (used) by operating activities 450,548 251,737
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (72,624) (11,384)
Proceeds to borrowers (4,431) (38,652)
Repayment by borrowers 15,547 155,971
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Net cash provided (used) by investing activities (61,508) 105,935
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (250,815) (279,266)
--------- ---------
Net cash provided (used) by financing activities (250,815) (279,266)
--------- ---------
NET INCREASE (DECREASE) IN CASH 138,225 78,406
CASH - beginning of period 548,494 696,119
--------- ---------
CASH - ending of period $ 686,719 $ 774,525
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements
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<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
MARCH 31, 1997 AND 1996
-----------------------
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, 1996.
NOTE 2. ACQUISITION OF ASSETS
- -----------------------------
On June 10, 1996, the Company acquired 100% of the issued and outstanding
capital stock of GalaxSea Cruises and Tours, Inc. ("GalaxSea") and 100% of the
issued and outstanding capital stock of I.T. Cruise, Inc. ("I.T. Cruise") from
International Tours, Inc. ("International"). Both corporations were wholly
owned subsidiaries of International.
GalaxSea was acquired by virtue of a merger with a newly created wholly owned
subsidiary of the Company under the terms of which the Company issued 4,934,106
shares of Common Stock and 8,000,000 shares of a newly designated series of the
Company's preferred stock, par value $.01 per share, designated as Series B
Convertible Preferred Stock ("Series B Preferred Stock"). The 8,000,000 shares
of Series B Preferred Stock are entitled to one vote for each share issued and
will vote together with the Common Stock as one class, and not as a separate
class (except as mandated by law). As a result of this acquisition,
International is the largest stockholder of the Company, owning approximately
44% of the voting stock. Simultaneously with the closing of the merger with
GalaxSea, 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 continues to exist as accrued
dividends payable.
I.T. Cruise was acquired in exchange for $100,000 cash and a promissory note in
the principal amount of $1,400,000 payable by the Company to International. The
promissory note bears interest at nine percent per annum, is payable in 31 equal
monthly installments of $50,000 each and one final installment of $27,414.22,
and is secured by a pledge of the outstanding capital stock of GalaxSea and I.T.
Cruise owned by the Company.
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. GAI had
been in the business of franchising "cruise only" retail travel stores since
1988. 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.
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 900 travel agency locations.
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<PAGE>
Effective July 1, 1996 the Company entered into a sub-lease agreement with New
Orleans Video Poker, Inc. (NOVP) to manage the Diamond Jubilee Video Poker
Casino and Truck-Stop in New Orleans, LA. This agreement provides for a 50/50
split between the Company and NOVP of the net cash flow generated by the Diamond
Jubilee. The agreement further provides for the Company to assume the
outstanding liabilities of NOVP, exclusive of notes payable to the principals of
NOVP, with all with the operating assets becoming the property of the Company.
The Company has the option to purchase NOVP's 50% share of the cash flow for the
remaining balance on the notes to NOVP principals; which are reduced on a
monthly basis from cash flow distributions. The transaction also included the
issuance of 450,000 shares of common stock in the Company to NOVP.
NOTE 3. PRESENT CASH SHORTFALL
- ------------------------------
As of April 1, 1997, the Company was four months in arrears, at regular payments
of $50,000 per month (a total of $200,000), in payments to International on the
promissory note issued to International by the Company as partial consideration
for the I.T. Cruise acquisition. The note had an original principal balance of
$1,400,000, requires monthly payments of principal and interest of $50,000, had
an unpaid principal balance of $1,158,215 at March 31, 1997, and is secured by a
pledge of the outstanding capital stock of I.T. Cruise and GalaxSea owned by the
Company. The Company is current in payment of all other indebtedness and
payables. Until such time as the regular scheduled payments on the International
note recommence and the International note is current, all payments will be
suspended on the subordinated debentures issued by the Company in connection
with the redemption of 313,000 shares of Class A Preferred Stock. , which have
aggregate remaining principal balances of $895,476 at April 1, 1997, require
aggregate payments of principal and interest of $11,250 per month, and are
expressly made subordinate to the International note as well as other senior
debt of the Company. See, also, the discussion of the Company's default under
certain debt instruments described in Item 2 - "Management's Discussion and
Analysis of Plan of Operation -Liquidity and Capital Resources - Present Cash
Shortfall."
NOTE 4. LEASE TERMINATION
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OM Operating, L.L.C. has a lease for an initial term of five years (commencing
May 1, 1992) on King's Lucky Lady truck stop in Port Barre, Louisiana. OM
Operating L.L.C. ("Operator") has the option to renew the lease for three
additional five year terms, subject to the parties negotiating a percentage
rental for the renewal period acceptable to both parties. The parties have thus
far been unable to negotiate an acceptable renewal percentage rental and the
landlord has delivered notice to Operator that the lease will terminate
effective April 30, 1997 and that Operator will no longer have any right to
operate the video poker casino after such date. Operator has retained legal
counsel to seek the courts protection and judgement on this matter, and will
commence litigation to attempt to retain the lease for the renewal period; court
dates have been set for June 4 and 5, 1997, but there can be no assurance that
Operator will prevail. If it does not prevail, Operator's rights to operate the
video poker casino will terminate effective as of April 30, 1997.
NOTE 5. EARNINGS PER SHARE
- --------------------------
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
establishes standards for computing and presenting earnings per share ("eps").
Under SFAS No. 128, primary eps is replaced with basic eps. Basic eps is
computed by dividing income available to common shareholders by the weighted
average shares outstanding; no dilution for any potentially convertible shares
is included in the calculation. Fully diluted eps, now called diluted eps, is
still required; however, when applying the treasury stock method, the average
stock price is used rather than the greater of the average or closing stock
price for the period. The adoption of this statement will have no material
impact on the Company's calculation of earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997.
THIS SPACE INTENTIONALLY LEFT BLANK
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
PRESENT CASH SHORTFALL. As of April 1, 1997, the Company was four months in
arrears (a total of $200,000) in payments to International on the promissory
note issued to International by the Company as partial consideration for the
I.T. Cruise acquisition. The note had an original principal balance of
$1,400,000, requires monthly payments of principal and interest of $50,000, had
an unpaid principal balance of $1,158,215 at March 31, 1997, and is secured by a
pledge of the outstanding capital stock of I.T. Cruise and GalaxSea owned by the
Company. The Company is current in payment of all other indebtedness and
payables.
The cash flow currently being generated by the Company is presently not
sufficient to allow it to make the required payments on the International note
and to continue to remain current on its other indebtedness and payables.
Consequently, International has agreed to allow the $200,000 accrued and owed to
it to continue to remain outstanding (with interest accruing thereon) until the
earlier of January 1, 1998 or the time that excess cash flow is available to
pay such amount (or any portion thereof) and, further, has granted relief to the
Company to allow it to pay the lesser of $50,000 per month or excess available
cash flow, until January 1, 1998, at which time any accrued amounts will be due
and payable and the regular $50,000 scheduled monthly payments will recommence.
Until such time as the regular scheduled payments on the International note
recommence and the International note is current, all payments will be suspended
on the subordinated debentures issued by the Company in connection with the
redemption of 313,000 shares of Class A Preferred Stock, which have aggregate
remaining principal balances of $895,476 at April 1, 1997, require aggregate
payments of principal and interest of $11,250 per month, and are expressly made
subordinate to the International note as well as other senior debt of the
Company. The Company believes that the relief granted by International will
allow it to meet its cash flow obligations during 1997. Further, the Company
plans to enter into negotiations with International and the holders of the
subordinated debentures to attempt to negotiate a revised payment schedule for
all of the Company's indebtedness to such persons which will accommodate the
Company's expected cash flow. Any such revised schedule will need to be
flexible enough to anticipate revenue fluctuations due to seasonal changes in
revenue and to anticipate the loss of the King's Lucky Lady truck stop and video
poker casino, any required restructuring of the Company's revenue and profits
interests in OM Operating, L.L.C., and any loss of additional video poker
devices at any of the Company's video poker casinos as a result of reduced fuel
sales. The Company believes it will be able to negotiate a satisfactory revised
payment schedule by the middle of the second quarter of 1997, but there can be
no assurance. If not, it is possible that the Company might continue to
experience certain cash shortfalls in 1998, depending on the level of revenues
generated from the Company's operations. It is not possible to predict whether
such cash shortfalls might be experienced, but the Company believes its cruise
operations will contribute positive cash flow as it continues to mature and it
is possible that no cash shortfalls will be experienced even if no revised
payment schedule is negotiated, although there can be no assurance.
OM Operating, L.L.C. has a lease for an initial term of five years (commencing
May 1, 1992) on King's Lucky Lady truck stop in Port Barre, Louisiana. OM
Operating L.L.C. ("Operator") has the option to renew the lease for three
additional five year terms, subject to the parties negotiating a percentage
rental for the renewal period acceptable to both parties. The parties have thus
far been unable to negotiate an acceptable renewal percentage rental and the
landlord has delivered notice to Operator that the lease will terminate
effective April 30, 1997 and that Operator will no longer have any right to
operate the video poker casino after such date. Operator has retained legal
counsel to seek the courts protection and judgement on this matter, and will
commence litigation to attempt to retain the lease for the renewal period; court
dates have been set for June 4 and 5, 1997, but there can be no assurance that
Operator will prevail. If it does not prevail, Operator's rights to operate the
video poker casino will terminate effective as of April 30, 1997.
If the lease is renewed, under the lease Operator is responsible for all
expenses, utilities, maintenance and repairs and all taxes on the personal
property. The rental payable during the initial five year term is equal to 20%
of the net revenues generated from the video poker devices; net revenues being
defined as all money played in the devices less winnings paid out and all fees
and taxes paid to the state. During any renewal period, all lease terms remain
the same except the percentage rental is subject to renegotiation at the
commencement of each renewal period, as noted above. All or a portion of the
lease may be assigned with the landlord's consent, which cannot be unreasonably
withheld.
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<PAGE>
The structure of Operator and the various interests (including revenue and
profits interests) of the Company in Operator are being reviewed by the
Louisiana Gaming Control Board. Any adverse ruling by the Louisiana Gaming
Control Board could further compound the Company's cash flow situation and
possibly result in the inability to meet its scheduled debt payments, even as
revised. The Company does not believe the review will result in material
adverse changes in Operator's structure, but it cannot predict the results of
the review until the review is completed.
The Company will seek to meet its long-term liquidity needs primarily through
cash flow from operations, restructuring its payment obligations on certain debt
described above, 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 if it is able to satisfactorily restructure its payment obligations
as described above, 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.
GENERAL CONDITION. The Company ended the first quarter of fiscal 1997 with
$686,719 in cash and other current assets amounting to $723,718, including
accounts receivable of $323,870, inventories and prepaid expenses of $262,110,
current notes receivable of $118,708 and a current deferred tax asset of
$19,030. The Company's total liabilities were $5,628,118 at March 31, 1997,
including accounts payable and accrued liabilities of $1,056,874, current notes
payable of $1,347,277, long-term notes payable of $2,443,967 and preferred stock
dividends payable of $780,000. The Company's liabilities decreased $231,307
from $5,859,425 at December 31, 1996 to $5,628,118 at March 31, 1997. This
decrease was comprised of a decrease in current liabilities of $18,812,
reductions in liabilities on long and short-term debt to banks and equipment
manufacturers totaling $83,818, payments on the Ozdon notes issued for the stock
purchase of the Gold Rush of $80,940, note reductions related to the acquisition
of I.T. Cruise and GalaxSea of $41,004, payments on promissory notes payable to
Class A Preferred shareholders of $13,300 and payments on pre-Merger liabilities
of Western Natural Gas Company ("WNGC") of $34,437.
Accounts payable and accrued liabilities of $1,056,874 included $456,903 in
trade payables, state franchise taxes of $214,430, casino distributions of
$216,928, payroll and payroll taxes of $117,088, income tax payable of $32,017
and accrued interest of $19,509.
The current portion of other notes payable totaling $1,347,277 includes $533,694
related to the acquisition of I.T. Cruise and GalaxSea; the stock purchase note
from the Gold Rush acquisition amounting to $339,978; $198,782 payable to a bank
for the construction of the Pelican Palace and the purchase of the Lucky
Longhorn; $196,866 payable to Class A preferred shareholders; WNGC current notes
payable of $34,441; and $43,516 in equipment leases and other notes.
Long-term debt of $2,443,967 includes $777,340 payable to a bank for the
construction of the Pelican Palace and the purchase of the Lucky Longhorn;
$703,108 payable to Class A Preferred shareholders; $676,559 related to the
acquisition of I.T. Cruise and GalaxSea; $248,574 for the stock purchase note
on the Gold Rush acquisition; and $38,386 in equipment leases and other notes.
The remaining pre-Merger liabilities of WNGC constitute a note payable with a
balance of $34,441 as of March 31, 1997; this note is also guaranteed by a
director of the Company. The amount paid on WNGC pre-Merger liabilities totaled
$34,437 during the first quarter of 1997.
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.
Effective July 1, 1996 the Company entered into a sublease agreement with New
Orleans Video Poker, Inc. ("NOVP") to sublease and manage The Diamond Jubilee
video poker casino and truck stop in New Orleans, Louisiana. This sublease
provides for a 50/50 split between the Company and NOVP of the net cash flow
generated by the Diamond Jubilee. The sublease further provides for the Company
to assume the outstanding liabilities of NOVP, exclusive of notes
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<PAGE>
payable to the principals of NOVP, as the purchase price for 50 video poker
devices and an automated teller machine. The Company has the option to purchase
NOVP's 50% share of the cash flow for the remaining balance on the notes to NOVP
principals (approximately $535,000 at March 31, 1997); which are reduced on a
monthly basis from cash flow distributions. The transaction also included the
issuance of 450,000 shares of common stock in the Company to NOVP.
At March 31, 1997, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,477,134. At March
31, 1997 equipment (net) resulting from the Company's acquisition of I.T.
Cruise and GalaxSea, totaled $41,018, up from the 1996's year end of $5,605 due
to the opening of GalaxSea's offices in Coral Springs, Florida. As of March 31,
1997, the Company had paid the remaining balance of $19,796 on all notes to
video poker equipment manufacturers.
Effective June 10, 1996, the Company acquired GalaxSea and 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 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.
Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 1996. It
is expected that the profit margins may continue to 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.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which
establishes standards for computing and presenting earnings per share ("eps").
Under SFAS No. 128, primary eps is replaced with basic eps. Basic eps is
computed by dividing income available to common shareholders by the weighted
average shares outstanding; no dilution for any potentially convertible shares
is included in the calculation. Fully diluted eps, now called diluted eps, is
still required; however, when applying the treasury stock method, the average
stock price is used rather than the greater of the average or closing stock
price for the period. The adoption of this statement will have no material
impact on the Company's calculation of earnings per share. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997.
THIS SPACE INTENTIONALLY LEFT BLANK
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<PAGE>
RESULTS OF OPERATIONS
NET INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997
Company operations resulted in net income before income taxes of $381,844 for
the three months ended March 31, 1997, an increase of $214,403 or 128% from
1996's $167,441. Through May of 1996 the Company recorded the 70% revenue
interest it received in the Pelican Palace as a repayment of a note receivable.
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. The note receivable was reduced by $146,971
in the first quarter of 1996 and $236,616 for the year ended December 31, 1996.
Effective June 1, 1996 the Company began recording income from GalaxSea and I.T.
Cruise marketing operations. The Company also began recording additional video
poker income as of July 1, 1996 from the Diamond Jubilee. The Company's
aggregate operating profit before interest, taxes, depreciation and amortization
amounted to $616,462 for the three months ended March 31, 1997, up 73% from
1996's $355,331.
REVENUES TOTALED $5,655,433 THROUGH MARCH 31, 1997 COMPARED TO $4,318,346 FOR
1996, UP 31%.
VIDEO POKER revenues totaled $3,786,053 through March 31, 1997, up $703,637, or
23% from 1995's $3,082,416. Growth in revenue was mainly due to the Diamond
Jubilee's contribution of $622,463. Increased revenue was also realized from
the Stelly's Southern Gold - $104,247; the Gold Rush - $60,559; the Pelican
Palace - $17,082; and King's Lucky Lady - $16,126. Heavy competitive pressure
continued on the Lucky Longhorn and the Pelican Palace, as the result of an
additional riverboat on Lake Charles. The Lucky Longhorn posted a decline in
revenue of $95,940 for the quarter, with the Pelican Palace experiencing minimal
growth. A decrease in revenue from Route Operations resulted from competition
and a reduction in video poker devices from 1996's level.
Video poker revenue production by location for 1997 and 1997 was as follows:
Lucky Longhorn, Vinton, LA -$875,016 in 1997 and $970,956 in 1996, down 10%;
Pelican Palace, Toomey, LA - $737,575 in 1997 and $720,493 in 1996, up 2%;
King's Lucky Lady, Porte Barre, LA - $581,844 in 1997 and $565,718 in 1996, up
3%; Gold Rush, in Opelousas, LA - $752,045 in 1997 and $691,486 in 1996, up 9%;
Stelly's-LeBeau, LA - $109,096 in 1997 and $4,849 in 1996 due to discontinued
operations as of January 4, 1996; Route Operations - South, LA - $108,015 in
1997 and $128,915 in 1996, down 16%. The Diamond Jubilee contributed $622,463
in video poker revenues for the three months ended March 31, 1997, with no
activity for 1996.
RETAIL revenues from fuel and convenience store, and food and beverage
operations amounted to $1,586,726 in 1997 compared to 1996's $1,235,931, an
increase of 28%. Fuel and convenience store sales amounted to $1,213,367
compared to $930,988 in 1996, up 30%. Growth of 40% occurred at the Gold Rush,
which reported $695,220 in revenue for the first quarter of 1997 compared to
1996's $500,745; and King's generated $518,148, up 20% from 1996's $430,243.
Food and beverage sales increased 22% to $373,359 compared to $304,943 in 1996.
Food and beverage for each location was as follows: King's $203,117 in 1997
compared to 1996's $178,534; Pelican Palace - $57,443 in 1997 versus $47,382 in
1996; Gold Rush - $92,970 in 1997 compared to $79,026 in 1996; and the Diamond
Jubilee produced $19,827 for the first quarter of 1997.
CRUISE REVENUES for the three months ended March 31, 1997 totaled $282,654.
This amount represents an accrual of $103,043 for overrides and commissions on
cruise sales volume resulting from I.T. Cruise's contracts with International;
and the accrual of GalaxSea's franchise system revenues, comprised of $80,370 in
overrides and commissions, $27,713 in monthly license fees, franchise sales fees
of $1,000, marketing fees totaling $64,733 and convention and training fees of
$5,796.
CASINO AND TRUCK STOP OPERATIONS
The Gold Rush generated average daily revenue per device (50 devices) of $167
through March 31, 1997 compared to $152 for the first quarter of 1996. The Gold
Rush's operating profit for the first quarter of 1997 was approximately
$295,531, up 16%, representing 48% of the Company's aggregate operating profit.
This compares to 1996's operating profit of $253,969 which represented 71% of
the Company's aggregate operating profit for the first quarter of 1996.
-10-
<PAGE>
The Lucky Longhorn generated average daily revenue per device (50 devices) of
$194 through March 31, 1997 compared to 1996's $213. During the month of
January 1997 operations were suspended for 3 days due to an ice storm. The
Lucky Longhorn has eighteen competitors in its market area, including four river
boats, one of which was added in 1996. Also affecting the local market, is the
Las Vegas style Native American casino, which opened during 1994, and then
almost doubled its gaming capacity during the third quarter of 1995. In the
first quarter of 1997 the Company's share of the operating profit from the
Longhorn was approximately $186,405, up 9%, representing 30% of the Company's
aggregate operating profit. This compares to operating profit for 1996 of
approximately $170,965, or 48% of the Company's aggregate operating profit.
King's Lucky Lady generated average daily revenue per device (50 devices) of
$129 through March 31, 1997 compared to 1996's $124. King's Lucky Lady's
operating profit was approximately $145,582, up 51%, representing 24% of the
Company's aggregate operating profit. This compares to operating profit for
1996 of approximately $96,725, or 27% of the Company's aggregate operating
profit. As noted above, Operator has received notice from the landlord that the
lease for King's Lucky Lady is terminated, but Operator has retained legal
counsel to seek the courts protection and judgement on this matter, and has
commenced litigation to attempt to retain the lease for the renewal period.
There is the possibility that such lease will be lost for failure to negotiate
terms agreeable to both parties.
The Pelican Palace generated average daily revenue per device (50 devices) of
$164 through March 31, 1997 compared to 1996's $158. During the month of
January 1997 operations were suspended for 3 days due to an ice storm. The
Pelican was subject to the same competitive pressures as the Longhorn during
1996. In 1996, the Company's share of the operating profit from the Pelican was
approximately $142,525 compared to 1995's $39,939, an increase of 257%; this
represents 23% versus 11% in 1996 of the Company's aggregate operating profit.
During the first quarter of 1996 the Company received distributions of $146,971
of the Pelican Palace's operating profit in payment of the Company's note
receivable from Curray, which was satisfied in May of 1996.
The Diamond Jubilee generated average daily revenue per device (on an average of
43.3 devices) of $159 through March 31, 1997. Operating profit was approximately
$35,345, representing 6% of the Company's aggregate operating profit. This
operating profit represents the Company's 50% share of the net cash flow
generated by the Diamond Jubilee. The Diamond Jubilee did not have sufficient
fuel sales necessary to operate 50 video poker devices under Louisiana
regulations, and as of February 1, 1997 the Company was required to remove 10
devices from operations until increased fuel sales are maintained. In order to
increase fuel sales, the Company will be required to make a substantial
investment to include a convenience store and additional gasoline pumps. The
Company is presently negotiating with NOVP and the landlord to share such costs
if any such improvements are desired. There can be no assurance that such
improvements will be made and, if not made, it is not likely that the fuel sales
will increase to a level to allow reinstallation of the 10 devices.
Stelly's Southern Gold generated average daily revenue per device (16 devices)
of $76 through March 31, 1997. Operations were suspended on January 4, 1996 as a
result of the truck parking and compliance issue and subsequently re-opened on
November 22, 1996. Only $4,849 in video poker revenue was recorded in the first
quarter of 1996. A first quarter operating profit was approximately $17,216
for 1997, representing 3% of the Company's aggregate operating profit. At
December 31, 1996 and March 31, 1997, Stelly's did not have sufficient fuel
sales necessary to operate 16 video poker devices under Louisiana regulations,
and Stelly's may be required to cease operating the 16 devices until increased
fuel sales are maintained. If the 16 devices are removed, it may be difficult
to increase fuel sales necessary to reinstall the devices and, therefore, the
Company may lose its ability to operate the video poker casino at Stelly's.
Route Operations posted operating profit for the first quarter of $15,242, a
decrease of 17% from 1996's $18,307; this represents 2% and 5% respectively of
the Company's aggregate operating profit. At March 31, 1997, the Company had 22
devices operating within 10 locations; the Company had 34 devices operating
within 15 locations during the first quarter of 1996.
-11-
<PAGE>
CRUISE OPERATIONS
The Company recorded first quarter revenue from cruise marketing operations
totaling $282,654, resulting in an operating profit of $33,661, representing 5%
of the Company's aggregate operating profit. GalaxSea's revenues amounted to
$179,611, with an operating loss of approximately $60,137; revenues from I.T.
Cruise were $103,043, with an operating profit of approximately $93,798.
EXPENSES TOTALED $5,273,589 THROUGH MARCH 31, 1997 COMPARED TO $4,150,905 FOR
1996, UP 27%.
VIDEO POKER operations recorded a direct cost of revenue amounting to $2,187,940
for the first quarter of 1997 compared to $1,787,993 in 1996, an increase of
22%. This includes fees paid to the State of Louisiana of $1,289,884 (34.1% of
video poker revenue) in 1997 and $1,048,934 (34.0% of video poker revenue) in
1996, and profit sharing payments as defined in operating and management
contracts of $898,056 (23.7% of video poker revenue) in 1997 and $739,059
(24.0% of video poker revenue) in 1996.
RETAIL operations posted a cost of revenue related to fuel, convenience store,
food and beverage operations totaling $1,303,832 (82.2% of truck stop and
convenience store sales) for the first quarter of 1997, compared to $1,031,901
(83.5% of truck stop and convenience store sales) for the first quarter of 1996.
This improvement in the cost of sales margin was the result of increased sales
volumes and favorable pricing. Higher fuel sales for 1997, amounting to
$1,019,642, were up 30%, with a gross margin of 6.1%, constituting 64.3% of the
Company's retail sales, compared to 1996's fuel sales of $782,847, with a gross
margin of 3.3%, contributing 63.3% of the Company's retail sales. In order to
comply with State regulations governing truck stops, the Company continued to be
very competitive in its marketing and pricing of fuel during the first quarter
of 1997, in order to increase or maintain the level of fuel sales. 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.
Convenience store retail sales amounted to $193,725, were up 31% for the first
quarter of 1997, with a cost of sales margin of 67.1% compared to 1996's
$148,111, with a cost of sales margin of 71.3%. In addition, food and beverage
operations improved its gross margin on sales totaling $373,359 for the first
quarter of 1997, with a cost of sales margin of 47.8%, compared to sales in 1996
of $304,943, with a cost of sales margin of 48.2%. The need to remain
competitive at all locations requires the setting 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 50 seat restaurants on a 24 hour basis in order to operate 19
or more video poker machines.
CRUISE operations recorded a direct cost of revenue amounting $56,146 for the
first quarter of 1996. This was comprised of marketing, training and
promotional expenses totaling $47,990 and royalty fees of $8,156.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $1,520,533 for the three months
ended March 31, 1997 increased 28%, compared to $1,184,923 in 1996,
representing 26.9% and 31.8% of total revenue for 1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION amounted to $164,864 for the first quarter of 1997
compared to $144,388 in 1996. Due to a reclassification of goodwill related to
the merger with WNGC to a deferred tax asset, as a result of the 1996 year end
audit, amortization was reduced by $45,000 from the 1996 and 1995 levels as
reported for the first quarter for these prior years. The merger of GalaxSea
and I.T. Cruise resulted in the amortization of goodwill totaling $59,181 for
the first quarter of 1997. Interest expense amounted to $69,754 for the first
quarter of 1997 and $43,502 in 1996. Other revenue and expense (net) was
$29,480 in 1997, compared to $41,802 in 1996.
COMPARISON OF 1996 TO 1995
Video poker revenues increased from $3,082,416 in 1996 to $3,786,053 in 1997, up
$703,637 or 23%, due mainly from the sub-lease agreement on the Diamond Jubilee
and the re-opening of Stelly's Southern Gold, which generated incremental
revenue of $622,463 and $104,247 respectively. Heavy competitive pressure
continued on the Lucky Longhorn and the Pelican Palace, as the result of an
additional riverboat on Lake Charles. The Lucky Longhorn posted a decline in
revenue of $95,940, or 10% for the quarter, with the Pelican Palace experiencing
growth of 2%.
Revenues from fuel and convenience store, food and beverage operations amounted
to $1,586,726 in 1997 compared to 1996's $1,235,931, an increase of 28%. The
cost of revenue related to fuel, convenience store, food and beverage
-12-
<PAGE>
operations increased $271,931, or 26% from $1,031,901 in 1996 to $1,303,832 in
1997. This margin improvement was the result of higher sales volume and
favorable pricing.
General operating and administrative expenses were $1,520,533 in 1997 and
$1,184,923 for 1996, an increase of $335,610, or 28%. This overall increase
resulted from new operations. The Diamond Jubilee added operating expenses
totaling $146,028, Cruise Operations $192,847 and Stelly's reopening added
$15,246 to operating expenses for the first quarter. All other operating
expenses (net) were down $18,511, or 2%. The increase in the Federal Minimum
Wage from $4.75 per hour to $5.15 per hour went into effect on October 1, 1996.
Depreciation and amortization amounted to $164,864 for the first quarter of 1997
compared to $144,388 in 1996, an increase of $20,476, or 14%. Depreciation and
amortization on video poker operations, which includes of video poker machines,
leasehold improvements and revenue interest rights, amounted to $76,410 in 1997
compared to $84,361 for 1996. Depreciation and amortization on corporate,
truck stop and convenience store operations totaled $17,100 in 1997 and $60,027
for 1996. Due to a reclassification of goodwill related to the merger with WNGC
to a deferred tax asset, amortization was reduced by $45,000 from 1996. The
merger of GalaxSea and I.T. Cruise resulted in the amortization of goodwill and
depreciation totaling $71,354 in 1997. Interest expense was $69,754 in 1997
and $43,502 for 1996, an increase of $26,252, or 60%, which was due to the note
to International and the subordinated debentures resulting from the purchase of
GalaxSea and I.T. Cruise. Other revenue and expense (net) of $29,480 in 1997
compares to $41,802 for 1996.
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, regulatory
review of licenses and retention of licenses without material changes to the
existing structure of Operator, the availability and cost of financing, and,
renegotiation of debt instruments, lease renewals and agreements, to name a few.
THIS SPACE INTENTIONALLY LEFT BLANK
-13-
<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 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.
See, also, the discussion of the Company's default under certain debt
instruments described in Item 2 - "Management's Discussion and Analysis or Plan
of Operation - Liquidity and Capital Resources - Present Cash Shortfall."
THIS SPACE INTENTIONALLY LEFT BLANK
-14-
<PAGE>
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:
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.
THIS SPACE INTENTIONALLY LEFT BLANK
-15-
<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: May 13, 1997
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 686,719
<SECURITIES> 0
<RECEIVABLES> 442,578
<ALLOWANCES> 0
<INVENTORY> 76,777
<CURRENT-ASSETS> 1,410,437
<PP&E> 3,365,427
<DEPRECIATION> 1,888,293
<TOTAL-ASSETS> 5,212,672
<CURRENT-LIABILITIES> 3,330,151
<BONDS> 0
3,861,000
80,000
<COMMON> 200,935
<OTHER-SE> (4,703,381)
<TOTAL-LIABILITY-AND-EQUITY> 5,212,672
<SALES> 5,655,433
<TOTAL-REVENUES> 5,655,433
<CGS> 3,547,918
<TOTAL-COSTS> 1,520,533
<OTHER-EXPENSES> (29,480)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,754
<INCOME-PRETAX> 381,844
<INCOME-TAX> 146,000
<INCOME-CONTINUING> 381,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,844
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
