<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 September 30, 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
--------------
777 East 15th Street, Plano, Texas 75074
(Former address of principal executive offices)
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
September 30, 1997: 20,093,347
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Transitional Small Business Disclosure Format (Check One): Yes No xx
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
30-SEPT.-97 31-DEC-96
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ASSETS UNAUDITED
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 482,251 $ 364,965
Restricted cash 183,961 183,529
Accounts receivable 364,108 291,597
Inventories, at cost 162,401 81,557
Prepaid Expenses 99,660 99,328
Notes receivable - current 41,198 135,824
Current deferred tax asset 19,030 19,030
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TOTAL CURRENT ASSETS 1,352,609 1,175,830
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PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,393,574 1,492,255
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OTHER ASSETS:
Deposits 96,223 76,488
Long-term deferred tax asset 523,491 539,448
Revenue interest rights 248,233 286,753
Trade name, contract rights and organizational costs, net of
accumulated amortization 194,510 258,583
Goodwill and merger costs 1,047,037 1,183,607
Notes Receivable-long-term 49,173 49,173
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2,158,667 2,394,052
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TOTAL ASSETS $ 4,904,850 $ 5,062,137
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LIABILITY AND STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 1,274,591 1,005,349
Notes payable - current 1,354,623 1,385,597
Income Taxes Payable 29,517 32,017
Preferred stock dividends payable 780,000 780,000
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TOTAL CURRENT LIABILITIES 3,438,731 3,202,963
NOTES PAYABLE-LONG-TERM 730,790 898,756
NOTES PAYABLE TO CERTAIN STOCKHOLDERS-LONG-TERM 1,400,156 1,757,706
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TOTAL LIABILITIES 5,569,677 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 September 30, 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 September 30, 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 September 30, 1997 and December 31, 1996 200,935 200,935
Additional paid-in-capital (deficit) (3,248,576) (3,257,090)
Retained earnings (deficit) (1,558,186) (1,682,133)
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TOTAL STOCKHOLDERS' EQUITY (664,827) (797,288)
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,904,850 $ 5,062,137
=========== ===========
</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 OPERATIONS
(UNAUDITED)
FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
30-SEPT.-97 30-SEPT.-96 30-SEPT.-97 30-SEPT.-96
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<S> <C> <C> <C> <C>
REVENUE:
Video Poker Revenue $3,575,643 $ 3,463,115 $11,201,920 $9,516,586
Truck Stop and Convenience Store 2,043,576 1,600,192 5,370,586 4,347,478
Cruise Revenue 339,043 249,897 1,093,183 308,872
---------- ----------- ----------- ----------
5,958,262 5,313,204 17,665,689 14,172,936
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COST AND EXPENSES:
Cost of Revenues 3,888,136 3,311,506 11,475,638 9,061,082
General and Administrative Expenses 1,826,740 1,525,411 5,093,224 3,853,869
Interest Expense 103,158 103,613 277,240 244,746
Depreciation and Amortization 198,191 285,108 524,583 628,051
---------- ----------- ----------- ----------
6,016,225 5,225,638 17,370,685 13,787,748
---------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (57,963) 87,566 295,004 385,188
---------- ----------- ----------- ----------
OTHER REVENUE (EXPENSE), NET (13,392) 32,635 32,717 122,671
---------- ----------- ----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES (71,355) 120,201 327,721 507,859
PROVISION FOR INCOME TAXES (57,772) (25,000) (203,772) (104,000)
---------- ----------- ----------- ----------
NET INCOME (LOSS) (129,127) 95,201 123,949 403,859
LESS: Preferred Stock Dividends - - - (200,000)
---------- ----------- ----------- ----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (129,127) $ 95,201 $ 123,949 $ 203,859
========== =========== =========== ==========
EARNINGS PER SHARE $( 0.01) $0.01 $0.01 $0.01
========== =========== =========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
30-SEPT.-97 30-SEPT.-96
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 123,949 $ 403,859
Adjustments to reconcile net income to net cash:
Depreciation and amortization 524,583 628,051
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable ( 72,511) 12,331
(Increase) decrease in inventories ( 80,844) (18,682)
(Increase) decrease in prepaid expenses ( 332) (43,952)
(Increase) decrease in deposits (19,735) (24,693)
Increase (decrease) in accounts payable and accrued liabilities 269,242 34,916
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Net cash provided (used) by operating activities 744,352 991,830
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, intangibles:
North American/OM Operating, LLC-equipment (173,284) 88,552
New Orleans Video Poker-equipment - (121,003)
GalaxSea/I.T. Cruise, Inc. - acquisition - (2,096,188)
Proceeds to borrowers ( 1,876) (260,351)
Repayment by borrowers 96,502 334,369
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Net cash provided (used) by investing activities (78,658) (2,054,621)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock - 49,341
Issuance of preferred stock - 100,000
Redemption of preferred stock - (939,000)
Additional paid-in-capital 8,514 378,596
Increase (decrease) in notes payable (547,976) 1,571,394
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Net cash provided (used) by financing activities (547,976) 1,160,331
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NET INCREASE (DECREASE) IN CASH 117,718 97,540
CASH - beginning of period 548,494 696,119
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CASH - ending of period $ 666,212 $ 793,659
========= ===========
</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
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(UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
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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
- -----------------------------
In January of 1997 the Company formed a subsidiary called "River Port Truck
Stop, Inc." and entered into an agreement with S.W. Day and T. Joe Callaway
("Lessor") to lease property in Port Allen, LA for a period of 50 years. The
terms of the lease call for a monthly base rent payment of $7,000 plus
Additional Rent of 10% of Net Revenue as defined in the lease agreement. Lessor
further agreed that for the first 24 months after the commencement of video
poker operations the Additional Rent would be 5% (rather than 10%) and that
commencing with the 25th month of video poker operations that the Additional
Rent would be 10% of Net Revenue. The Company is planning to build and operate
a video poker casino, restaurant, truck stop and convenience store on the
property. A convenience store and fuel facility is currently in operation, and
effective June 1, 1997 the Company, through its subsidiary River Port Truck
Stop, Inc., began operations. The Company is currently in the facility design
process, and once this phase is complete, applications to secure the proper
permits will be made. Construction is expected to be completed by the end of
the second quarter of 1998.
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
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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.
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
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As of October 1, 1997, the Company was ten principal payments in arrears, at
regular principal and interest payments of $50,000 per month (a total of
$381,900 in principal is past due; interest has been brought current as of
September 30, 1997), 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 $1,157,260 at September 30, 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 which are
required to be paid. 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 $896,346 and accrued
interest of $45,633 at October 1, 1997, require aggregate payments of principal
and interest of $11,250 per month (five months payments, for a total of $56,250,
have not been paid pursuant to the subordinated debenture), 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
- -------------------------
The Company through its consolidated subsidiary, 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 terminated effective April 30, 1997 and that Operator no longer has
any right to operate the video poker casino after such date. Operator has
retained legal counsel and commenced litigation to attempt to retain the lease
for the renewal period. The Company and Operator appeared in court on July 31,
1997 for a hearing on this matter and the judge ordered a continuance as the
landlord's attorney was not prepared to go on with the trial. The landlord's
attorney has redrafted his client's pleadings on the matter to also allege that
the Company is in default under the contract of lease and a new court date has
been set for December 8, 1997. There can be no assurance that Operator will
prevail.
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Operator has been ordered by the court to escrow 50% of monthly operating profit
generated by the facility; $93,895 has been placed in escrow for the period of
May 1997 through September 1997. 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.
NOTE 6. COMPREHENSIVE INCOME
- ----------------------------
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in the financial statements. Comprehensive income is the total of net
income and all other non-owner changes in equity. SFAS No. 130 will be
effective for 1998. Adoption of this standard is not expected to have an effect
on the Company's financial statements, financial position or results of
operations.
THIS SPACE WAS INTENTIONALLY LEFT BLANK
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
PRESENT CASH SHORTFALL. As of October 1, 1997, the Company was ten principal
payments in arrears (a total of $381,900 in principal is past due; interest has
been brought current as of September 30, 1997) 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 $1,157,260 at September 30, 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 which are required to be paid.
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 $381,900 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 $896,346 and accrued interest of $45,633 at
October 1, 1997, require aggregate payments of principal and interest of $11,250
per month (five months in payments for a total of $56,250, have not been paid
pursuant to the subordinated debentures), 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. (see page 9 paragraph #2), 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 end of the first quarter of 1998, 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 terminated effective
April 30, 1997 and that Operator no longer has any right to operate the video
poker casino after such date. Operator has retained legal counsel and commenced
litigation to attempt to retain the lease for the renewal period. The Company
and Operator appeared in court on July 31, 1997 for a hearing on this matter and
the judge ordered a continuance as the landlord's attorney was not prepared to
go on with the trial. The landlord's attorney has redrafted his client's
pleadings on the matter to also allege that the Company is in default under the
contract of lease and a new court date has been set for December 8, 1997. There
can be no assurance that Operator will prevail. Operator has been ordered by the
court to escrow 50% of monthly operating profit generated by the facility;
$93,895 has been placed in escrow for the period of May 1997 through September
1997. If it does not prevail, Operator's rights to operate the video poker
casino will terminate effective as of April 30, 1997.
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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.
The structure of Operator and the various interests (including revenue and
profits interests - see page 8 paragraph #2) 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 third quarter of fiscal 1997 with
$666,212 in cash and other current assets amounting to $686,397, including
accounts receivable of $364,108, inventories and prepaid expenses of $262,861,
current notes receivable of $41,198 and a current deferred tax asset of $19,030.
The Company's total liabilities were $5,569,677 at September 30,1997, including
accounts payable and accrued liabilities of $1,274,591, current notes payable of
$1,354,623, long-term notes payable of $2,130,946 and preferred stock dividends
payable of $780,000. The Company's liabilities decreased $289,748 from
$5,859,425 at December 31, 1996 to $5,569,677 at September 30, 1997. This
decrease was comprised of an increase in accounts payable and accrued
liabilities of $269,242, reductions in liabilities on long and short-term debt
to banks and equipment manufacturers totaling $182,861, payments on the Ozdon
notes issued for the stock purchase of the Gold Rush of $248,364, note
reductions related to the acquisition of I.T. Cruise and GalaxSea of $41,959,
payments on promissory notes payable to Class A Preferred shareholders of
$16,928 and final payments totaling $68,878 on pre-merger liabilities of Western
Natural Gas Company ("WNGC").
Accounts payable and accrued liabilities of $1,274,591 included $707,396 in
trade payables, state franchise taxes of $181,560, casino distributions of
$185,583, payroll and payroll taxes of $134,911 and accrued interest of $65,142.
The current portion of other notes payable totaling $1,354,623 includes $515,249
related to the acquisition of I.T. Cruise and GalaxSea; the stock purchase note
from the Gold Rush acquisition amounting to $355,567; $207,381 payable to a
bank for the construction of the Pelican Palace and the purchase of the Lucky
Longhorn; $203,762 payable to Class A preferred shareholders; and $72,664 in
equipment leases and other notes.
Long-term debt of $2,130,946 includes $671,454 payable to a bank for the
construction of the Pelican Palace and the purchase of the Lucky Longhorn;
$692,584 payable to Class A Preferred shareholders;$642,011 related to the
acquisition of I.T. Cruise and GalaxSea; $65,561 for the stock purchase note on
the Gold Rush acquisition; and $59,336 in equipment leases and other notes.
All pre-merger liabilities of WNGC have been satisfied. 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 June 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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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 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 $511,349 at September 30, 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.
In January of 1997 the Company formed a subsidiary called "River Port Truck
Stop, Inc." and entered into an agreement with S.W. Day and T. Joe Callaway
("Lessor") to lease property in Port Allen, LA for a period of 50 years. The
terms of the lease call for a monthly base rent payment of $7,000 plus
Additional Rent of 10% of Net Revenue as defined in the lease agreement. Lessor
further agreed that for the first 24 months after the commencement of video
poker operations the Additional Rent would be 5% (rather than 10%) and that
commencing with the 25th month of video poker operations the Additional Rent
would be 10% of Net Revenue. The Company is planning to build and operate a
video poker casino, restaurant, truck stop and convenience store on the
property. A convenience store and fuel facility is currently in operation, and
effective June 1, 1997 the Company, through its subsidiary River Port Truck
Stop, Inc., began operations. The Company is currently in the facility design
process, and once this phase is complete, applications to secure the proper
permits will be made. Construction is expected to be completed by the end of
the second quarter of 1998.
At September 30, 1997, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,393,574. At
September 30, 1997 equipment (net) resulting from the Company's acquisition of
I.T. Cruise and GalaxSea, totaled $51,392, up from the 1996's year end of
$5,605 due to the opening of GalaxSea's offices in Coral Springs, Florida. The
Company paid-in-full the remaining balance 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 year's 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 and
1997. 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.
During the first nine months of 1997 the Company was subjected to regulatory
compliance issues which were enforced by the Louisiana State Police. On
February 1, 1997 the Company was ordered to reduce its complement of video poker
devices from 50 to 40 at the Diamond Jubilee for failure to meet minimum fuel
requirements to maintain 50 video poker devices. During the third quarter of
1997 the Diamond Jubilee exceeded the minimum fuel requirements (an average of
100,000 gallons per month), but increased competition has affected the start of
the fourth quarter yielding less than the required minimum for October of 1997,
so the Company continues to operate only 40 devices at the Diamond Jubilee. On
May 28, 1997 the Louisiana State Police suspended the license to operate video
poker machines (16) at Stelly's for failure to meet minimum fuel requirements.
During the month of July 1997 the Louisiana State Police closed two of the
Company's route locations (a loss of 6 devices) as a result of the establishment
owners failing to renew their video poker establishment license.
The Internal Revenue Service has notified the Company that it does not believe
the net operating loss carryforward being deducted by the Company for
calculating taxable income is available to the Company in the manner utilized.
The Company disagrees, but if the Internal Revenue Service does not change its
position and the Company elects not to
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challenge such position, or loses any challenge which it decides to undertake,
the Company will owe taxes for prior years of approximately $246,000 (before
interest and penalty, if applicable) and will pay approximately $110,500 more in
taxes during 1997 than previously anticipated, which will further exacerbate the
Company's cash flow shortfall.
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.
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income in the financial statements. Comprehensive income is the total of net
income and all other non-owner changes in equity. SFAS No. 130 will be
effective for 1998. Adoption of this standard is not expected to have an effect
on the Company's financial statements, financial position or results of
operations.
THIS WAS SPACE INTENTIONALLY LEFT BLANK
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RESULTS OF OPERATIONS
NET INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Company operations resulted in net income before income taxes of $327,721 for
the nine months ended September 30, 1997, a decrease of $180,138 or 35% from
1996's $507,859. Fifty percent of the operating profit generated at the
Pelican Palace is now recorded as income to the Company. Through May of 1996
the Company recorded the 70% revenue interest it received in the Pelican Palace
as a repayment of a note receivable, which was satisfied at that time. 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. On June 1, 1997 the Company began recording retail
revenues as a result of operating the River Port Truck Stop in Port Allen, LA.
The Company's earnings before interest, taxes, depreciation and amortization
(EBITDA) amounted to $1,129,544 for the nine months ended September 30, 1997,
down $251,299, or 18% from 1996's $1,380,843.
REVENUES TOTALED $17,665,689 THROUGH SEPTEMBER 30, 1997 COMPARED TO $14,172,936
FOR 1996, UP 20%.
VIDEO POKER revenues totaled $11,201,920 through September 30, 1997, up
$1,685,335, or 18% from 1996's $9,516,585. Growth in revenue was mainly due to
the Diamond Jubilee's contribution of $1,790,357, up $1,210,843 over 1996's
$579,514. An increase in revenue was also attained by the Gold Rush - $276,478;
the Pelican Palace - $265,155; and Stelly's Southern Gold - $179,004. Heavy
competitive pressure continued on the Lucky Longhorn, as the result of an
additional riverboat on Lake Charles and the raising of the legal drinking age
from 18 to 21 years of age statewide which particularly affected the Lucky
Longhorn because it drew many of its customers from the neighboring Longhorn
Club entertainment facility and overall customer traffic was reduced at both
locations. The Lucky Longhorn posted a decline in revenue of $147,847 for the
nine months ended September 30, 1997. Route Operations revenue decreased
$55,943, resulting from competition and a reduction in the number of video poker
devices. King's video poker revenue declined $42,355 from 1996 to 1997.
Video Poker revenue production by location for the nine months ended September
30, 1997 and 1996 respectively, was as follows: Lucky Longhorn, Vinton, LA -
$2,613,449 in 1997 and $2,761,296 in 1996, down 5%; Gold Rush, Opelousas, LA,
$2,298,067 in 1997 and $2,021,589 in 1996, up 14%; Pelican Palace, Toomey, LA
- - $2,319,581 in 1997 and $2,054,426 in 1996, up 13%; King's Lucky Lady, Porte
Barre, LA - $1,715,548 in 1997 and $1,757,903 in 1996, down 2%; Route
Operations - South, LA - $281,067 in 1997 and $337,009 in 1996, down 17%;
Stelly's Southern Gold - LeBeau, LA - $183,853 in 1997 and $4,849 in 1996 due
to discontinued operations from January 4, 1996 until November 22, 1996 (on May
28, 1997 all machines were removed from Stelly's, as noted above). The Diamond
Jubilee contributed $1,790,357 in video poker revenues for the nine months ended
September 30, 1997; the Company began operations at this property on July 1,
1996 and recorded revenue in 1996 of $579,514 for the three month period ended
September 30, 1996.
RETAIL revenues from fuel and convenience store, and food and beverage
operations amounted to $5,370,585 in 1997 compared to 1996's $4,347,405, an
increase of 24%. Fuel and convenience store sales amounted to $4,208,143
compared to $3,289,408 in 1996, up 28%. Higher fuel sales for 1997, amounting
to $3,503,689, were up 27% from 1996's $2,754,591, constituting 65.2% of the
Company's retail sales, compared to 1996's contribution of 63.4% of the
Company's retail sales. Convenience store retail sales amounted to $704,454,
and were up 32% for the first nine months of 1997 compared to 1996's $534,817.
Growth in convenience store sales of 24% occurred at the Gold Rush, which
reported $2,332,345 in revenue for the first nine months of 1997 compared to
1996's $1,884,353; and King's generated $1,602,392, up 14% from 1996's
$1,405,055. The River Port Truck Stop posted sales of $273,406 for the months
of June through September of 1997. Food and beverage sales increased 10% to
$1,162,442 compared to $1,057,997 in 1996. Food and beverage for each location
was as follows: King's $609,307 in 1997 compared to 1996's $589,915; Pelican
Palace - $192,241 in 1997 versus $175,075 in 1996; Gold Rush - $307,573 in 1997
compared to $272,424 in 1996; and the Diamond Jubilee produced $53,321 for the
first nine months of 1997, compared to $20,583 for three months in 1996.
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<PAGE>
CRUISE REVENUES for the nine months ended September 30, 1997 totaled $1,093,183,
compared to $308,872 for four months of 1996. This amount represents $212,105
for overrides and commissions on cruise sales volume resulting from I.T.
Cruise's contracts with International; and GalaxSea's franchise system revenues,
comprised of $165,283 in overrides and commissions, $120,098 in monthly license
fees, franchise sales fees of $3,150, marketing fees totaling $582,588 and
convention and training fees of $9,959.
CASINO AND TRUCK STOP OPERATIONS
THE GOLD RUSH generated average daily revenue per device (50 devices) of $168
through September 30, 1997 compared to $148 for the first nine months of 1996.
The Gold Rush's operating profit for the first half of 1997 was approximately
$898,458, up 22%, compared to 1996's operating profit of $734,443.
THE LUCKY LONGHORN generated average daily revenue per device (50 devices) of
$191 through September 30, 1997 compared to 1996's $202. 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. The
raising of the legal drinking age statewide from 18 to 21 years of age
particularly affected the Lucky Longhorn because it drew many of its customers
from the neighboring Longhorn Club entertainment facility and overall customer
traffic was reduced at both locations. In the first nine months of 1997, the
Lucky Longhorn's operating profit was approximately $478,622, down 12%, compared
to operating profit for the first nine months of 1996 of approximately $540,578.
KING'S LUCKY LADY generated average daily revenue per device (50 devices) of
$126 through September 30, 1997 compared to 1996's $128. King's Lucky Lady's
operating profit was approximately $358,455, down 6%, compared to operating
profit for 1996 of approximately $381,267. As noted above, Operator has
received notice from the landlord that the lease for King's Lucky Lady is
terminated, but Operator 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
$170 through September 30, 1997 compared to 1996's $150. During the month of
January 1997, operations were suspended for 3 days due to an ice storm. The
Pelican Palace was subject to the same competitive pressures as the Lucky
Longhorn during 1996. In 1997, the Pelican Palace's operating profit was
approximately $413,725 compared to 1996's $191,051, an increase of 117%. In
1996, a portion of the income was applied to the reduction of a note receivable
(noted above).
THE DIAMOND JUBILEE generated average daily revenue per device (on an average of
41.1 devices) of $159 through September 30, 1997; the three months ended
September 30, 1996 averaged $126 per device. Operating profit was approximately
$71,052, compared to 1996's $44,589. 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. The
Company has implemented promotional programs to stimulate fuel sales, resulting
in an increase of 22% over the first quarter to an average of 93,000 gallons per
month for the second quarter and to an average of 105,000 for the third quarter,
but increased competition has affected the start of the fourth quarter yielding
less than the required minimum for October of 1997 (100,000 gallons per month is
necessary for 50 devices), so the Company operated 50 devices from July of 1996
through January of 1997, but has only operated 40 devices since of February 1,
1997. In order to increase fuel sales substantially, 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 could be maintained at the minimum level to operate 50
devices.
STELLY'S SOUTHERN GOLD generated average daily revenue per device (16 devices)
of $78 through May 28, 1997. Stelly's did not have sufficient fuel sales
necessary to operate 16 video poker devices under Louisiana regulations for the
previous three quarters, therefore the Louisiana State Police suspended the
license to operate video poker devices at
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<PAGE>
this facility on May 28, 1997 until increased fuel sales are maintained.
Operating profit recorded through September 30, 1997 was approximately $10,145;
this compares to a loss in 1996 of $20,249. As previously reported, 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.
ROUTE OPERATIONS posted operating profit for the nine months ended September
30, 1997 of $39,234, a decrease of 19% from 1996's $48,668. As of September 30,
1997, the Company had 16 devices operating within 8 locations; the Company had
34 devices operating within 15 locations during the first nine months of 1996.
During the month of July 1997 the Louisiana State Police closed two of the
Company's route locations (a loss of 6 devices) as a result of the establishment
owners failing to renew their video poker establishment license.
CRUISE OPERATIONS
The Company recorded revenue from cruise marketing operations for the nine
months ended September 30, 1997 totaling $1,093,183, resulting in an operating
loss of $86,019. This compares to 1996's recorded revenue of $308,872 and
operating profit of $8,241 for the period of June through September. GalaxSea's
1997 revenues amounted to $881,078, with an operating loss of approximately
$249,442; revenues recorded for I.T. Cruise were $212,105, with an operating
profit of approximately $163,423 for 1997.
EXPENSES TOTALED $17,370,685 THROUGH SEPTEMBER 30, 1997 COMPARED TO $13,787,748
FOR 1996, UP 26%.
VIDEO POKER operations recorded a direct cost of revenue amounting to $6,455,310
for the first nine months of 1997 compared to $5,444,446 in 1996, an increase of
19%. This includes fees paid to the State of Louisiana of $3,817,227 (34.1% of
video poker revenue) in 1997 and $3,243,354 (34.1% of video poker revenue) in
1996, and profit sharing payments as defined in operating and management
contracts of $2,638,083 (23.6% of video poker revenue) in 1997 and $2,201,091
(23.1% of video poker revenue) in 1996.
RETAIL operations posted a cost of revenue related to fuel, convenience store,
food and beverage operations totaling $4,445,703 (82.8% of retail sales) for
the first nine months of 1997, compared to $3,577,669 (82.3% of retail sales)
for 1996. Fuel sales for 1997 were up 27%, with a gross margin of 4.7%,
compared to 1996's 4.3%. 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 nine months of 1997, 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 were up 32% for the first
nine months of 1997 with the cost of sales being 77.5% compared to 86.0% in
1996. Food and beverage operations recorded a combined cost of sales margin of
48.4%, compared to 45.6% in 1996, on a 10% increase in sales. Restaurant
promotions designed to increase fuel sales contributed to this decline in profit
margin along with the pass through of minimum wage cost increases. 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 require operation of 50 seat
(minimum) restaurants on a 24-hour basis in order to operate 19 or more video
poker machines. The Company presently operates three of these low volume
restaurants.
CRUISE operations recorded a direct cost of revenue amounting to $574,245 for
the first nine months of 1997. This was comprised of marketing, training and
promotional expenses totaling $522,968 and royalty fees of $51,277. During 1996
the Company recorded a total of $38,967 in direct costs of revenue.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $5,093,224 for the nine months
ended September 30, 1997 increased 32%, compared to $3,853,869 in 1996,
representing 28.8% and 27.1% of total revenue for 1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION amounted to $524,583 for the first nine months of
1997 compared to $628,051 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
utilization of pre-merger NOL's, amortization was reduced by $135,000 from the
1996 and 1995 levels as reported for the first nine months for these prior
years. The merger of GalaxSea and I.T. Cruise resulted in the amortization of
goodwill totaling $213,718 for the first nine months of 1997 compared to
$112,899 in 1996. Interest expense amounted
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to $277,240 for the first nine months of 1997 and $244,752 in 1996. Other
revenue and expense (net) was $32,717 in 1997, compared to $122,677 in 1996.
COMPARISON OF 1997 TO 1996
VIDEO POKER revenues increased to $11,201,920 in 1997 from $9,516,585 in 1996,
up $1,685,335 or 18%, due mainly from the growth in revenue from the Diamond
Jubilee contributing $1,790,357, up $1,210,243 over 1996's $579,514. An
increase in revenue was also attained by the Gold Rush -$276,478, the Pelican
Palace - $265,155 and Stelly's Southern Gold $179,004 (until Stelly's was closed
again on May 28, 1997).
RETAIL revenues from fuel and convenience store, food and beverage operations
amounted to $5,370,585 in 1997 compared to 1996's $4,347,405, an increase of
24%. Growth in retail sales came from the Gold Rush - $483,141, up 22%; the
River Port convenience store - $273,406; King's - $216,729, up 11%; and the
Diamond Jubilee beverage sales - $32,738. The cost of revenue related to fuel,
convenience store, food and beverage operations increased $868,034, or 24% from
$3,577,669 in 1996 to $4,445,703 in 1997. Promotional pricing continued to
maintain video poker market share and to increase trucker fuel purchases.
CRUISE OPERATIONS recorded revenue for the nine months ended September 30, 1997
of $1,093,183 compared to 1996's $308,872 for a four month period. A combined
operating loss of $86,019 was recorded for 1997 compared to an operating profit
of $8,241 for the period of June through September of 1996. GalaxSea's 1997
revenues amounted to $881,078, with an operating loss of approximately $249,442;
revenues recorded for I.T. Cruise were $212,105, with an operating profit of
approximately $163,423 for 1997.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES were $5,093,224 in 1997 and
$3,853,869 for 1996, an increase of $1,239,355, or 32%. This overall increase
resulted predominately from new operations: Cruise Operations $343,293; the
Diamond Jubilee added operating expenses totaling $301,461; River Port added
$60,159; and Stelly's reopening added $28,511 to operating expenses for the
first nine months of 1997. Professional services, which include legal,
accounting and consulting fees, increased $340,839 over 1996. All other
operating expenses (net) were up $165,092, or 5.0%. Combined truck stop and
casino promotional expenses amounted to $559,370 in 1997, up 33%, or $138,345
from 1996's $421,025, consisting of 3.4% and 3.0% of combined truck stop and
casino revenue for 1997 and 1996 respectively. This increase in promotional
expense was the result of targeted marketing programs to increase fuel sales and
to increase the length of time customers spend in the casino. The increase in
the Federal Minimum Wage from $4.35 per hour to $4.75 per hour went into effect
on October 1, 1996 and was increased again on September 1, 1997 to $5.15 per
hour. This increase was passed through by vendors and contractors which raised
the Company's overall level of direct operating expenses.
DEPRECIATION AND AMORTIZATION amounted to $524,583 for the first nine months of
1997 compared to $628,051 in 1996, a decrease of $103,468, or 16%.
Depreciation and amortization on video poker operations, which includes video
poker machines, leasehold improvements and revenue interest rights, amounted to
$255,965 in 1997 compared to $322,169 for 1996. Depreciation and amortization
on corporate, truck stop and convenience store operations totaled $46,800 in
1997 and $35,327 for 1996. Due to a reclassification of goodwill related to the
merger with WNGC to a deferred tax asset, amortization was reduced by $135,000
from 1996. The merger of GalaxSea and I.T. Cruise resulted in the amortization
of goodwill and depreciation totaling $213,718 in 1997, an increase of $100,819
over 1997 as a result of nine months of amortization compared to four months in
1996. Interest expense was $277,240 in 1997 and $244,752 for 1996, an increase
of $32,488, or 13%, 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 $32,717 in 1997 compares to $122,677 for
1996; this variance is the direct result of the court ordered escrow of 50% of
King's Lucky Lady and Casino's operating profit which totaled $93,895 for May
1997 through September 1997.
FORWARD LOOKING STATEMENTS
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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 WAS INTENTIONALLY LEFT BLANK
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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.
T.B. Guillory et al versus North American Gaming and Entertainment Corporation
and O.M. Operating, LLC, 27th Judicial District Court, St. Landry Parish,
Louisiana: The preliminary question to be decided by the court is whether the
option to renew the term of the contract of lease on Kings Lucky Lady Truck Stop
is in compliance with the requirements of the Louisiana Civil Code governing the
validity of such options. The validity of the option is assailed on grounds
that the alleged failure of the option to stipulate a price renders it invalid.
The result of such invalidity would be that the contract of lease would
terminate on April 30, 1997, the last day of the primary term. The Company and
Operator appeared in court on July 31, 1997 for a hearing on this matter and the
judge ordered a continuance as the landlord's attorney was not prepared to go on
with the trial. The landlord's attorney has redrafted his client's pleadings on
the matter to also allege that the Company is in default under the contract of
lease and a new court date has been established for December 8, 1997. There can
be no assurance that Operator will prevail. Operator has been ordered by the
court to escrow 50% of monthly operating profit generated by the facility; this
amounted to $93,895 for May 1997 through September of 1997. If it does not
prevail, Operator's rights to operate the video poker casino will terminate
effective as of April 30, 1997.
ITEM 3. DEFAULTS 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."
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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.
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
THIS SPACE WAS INTENTIONALLY LEFT BLANK
-18-
<PAGE>
In accordance with 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
--------------------------------
Executive Vice-President &
Chief Financial Officer (Principal
Financial and Chief Accounting
Officer)
Date: November 12, 1997
-19-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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> SEP-30-1997
<CASH> 666,212
<SECURITIES> 0
<RECEIVABLES> 454,479
<ALLOWANCES> 0
<INVENTORY> 162,401
<CURRENT-ASSETS> 1,352,609
<PP&E> 3,475,516
<DEPRECIATION> 2,081,942
<TOTAL-ASSETS> 4,904,850
<CURRENT-LIABILITIES> 3,438,731
<BONDS> 0
3,861,000
80,000
<COMMON> 200,935
<OTHER-SE> (4,806,762)
<TOTAL-LIABILITY-AND-EQUITY> 4,904,850
<SALES> 17,665,689
<TOTAL-REVENUES> 17,665,689
<CGS> 11,475,638
<TOTAL-COSTS> 5,093,224
<OTHER-EXPENSES> (32,717)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 277,240
<INCOME-PRETAX> 327,721
<INCOME-TAX> 203,772
<INCOME-CONTINUING> 327,721
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 123,949
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
