<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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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
--------------
Check whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months, and (2) has been subject to such filing requirements for the past 90
days.
Yes XX No
-- --
Number of shares of common stock, par value $.01 per share, outstanding as of
June 30, 1998: 34,284,822
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Transitional Small Business Disclosure Format (Check One): Yes No XX
-- --
1
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
30-JUN-98 31-DEC-97
------------ ------------
ASSETS UNAUDITED
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 136,199 $ 428,454
Restricted cash - 187,258
Accounts receivable 253,601 361,684
Inventories, at cost 102,773 151,903
Prepaid Expenses 67,750 94,326
Notes receivable - current 15,650 16,009
Current deferred tax asset 19,030 19,030
----------- -----------
TOTAL CURRENT ASSETS 595,003 1,258,664
----------- -----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 750,391 1,351,791
----------- -----------
OTHER ASSETS:
Deposits 381,822 151,768
Long-term deferred tax asset 428,948 428,948
Assets of business that the majority interest
was transferred under contractual agreement 1,546,047 -
Trade name, contract rights and organizational costs, net of
accumulated amortization 143,931 168,418
Goodwill and merger costs 793,834 928,512
Notes Receivable-long-term 15,350 33,523
----------- -----------
3,309,932 1,946,562
----------- -----------
TOTAL ASSETS $ 4,655,326 $ 4,557,017
=========== ===========
LIABILITY AND STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 762,146 $ 1,333,703
Notes payable - current 896,915 1,341,130
Income Taxes Payable - 10,774
Preferred stock dividends payable 780,000 780,000
----------- -----------
TOTAL CURRENT LIABILITIES 2,439,061 3,465,607
LONG-TERM LIABILITIES:
Liabilities of business that the majority interest
was transferred under contractual agreement 1,533,017 -
Notes Payable-long-term 17,182 663,249
Notes Payable to certain stockholders-long-term 1,292,827 1,288,827
----------- -----------
TOTAL LONG-TERM LIABILITIES 2,843,026 1,952,076
----------- -----------
TOTAL LIABILITIES $ 5,282,087 $ 5,417,683
STOCKHOLDERS' EQUITY:
Class A preferred stock,$3.00 par value, 10% annual cumulative dividend
1,600,000 shares authorized, 414,286 and 1,287,000 shares issued,
at June 30, 1998 and December 31, 1997 1,242,858 3,861,000
Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,096,000 and 8,000,000 shares of series "B" issued at June 30, 1998 30,960 80,000
and Dec. 31, 1997
Common stock, $.01 par value, 100,000,000 shares authorized, 34,284,822
and 14,709,342 shares issued at June 30, 1998 and December 31, 1997 342,848 200,957
Additional paid-in-capital (deficit) (731,821) (3,257,112)
Retained earnings (deficit) (1,511,606) (1,745,511)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ (626,761) $ (860,666)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 4,655,326 $ 4,557,017
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
30-JUN-98 30-JUN-97 30-JUN-98 30-JUN-97
-------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUE:
Video Poker Revenue $3,956,806 $ 3,840,224 $ 7,935,851 $ 7,626,277
Truck Stop and Convenience Store 2,102,850 1,740,284 4,045,437 3,327,010
Cruise Revenue 280,592 471,486 509,151 754,140
---------- ----------- ----------- -----------
6,340,248 6,051,994 12,490,439 11,707,427
COST AND EXPENSES:
Cost of Revenues 4,080,650 4,039,557 7,975,546 7,587,502
General and Administrative Expenses 1,849,364 1,745,453 3,616,525 3,266,484
Interest Expense 62,051 104,328 137,679 174,082
Depreciation and Amortization 155,259 161,528 310,353 326,392
---------- ----------- ----------- -----------
6,147,324 6,050,866 12,040,103 11,354,460
---------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 192,924 1,128 450,336 352,967
OTHER REVENUE (EXPENSE), NET (91,042) 16,629 (186,830) 46,109
---------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 101,882 17,757 263,506 399,076
PROVISION FOR INCOME TAXES (17,100) - (29,600) (146,000)
---------- ----------- ----------- -----------
NET INCOME 84,782 17,757 $ 233,906 $ 253,076
LESS: Preferred Stock Dividends - - - -
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ 84,782 $ 17,757 $ 233,906 $ 253,076
========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ 0.00 $ 0.00 $ 0.01 $ 0.01
========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
3
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
30-JUN-98 30-JUN-97
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 233,906 $ 253,076
Adjustments to reconcile net income to net cash:
Depreciation and amortization 310,353 326,392
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 81,395 (168,026)
(Increase) decrease in inventories 22,434 (20,466)
(Increase) decrease in prepaid expenses (17,860) 36,005
(Increase) decrease in deposits (262,422) (13,560)
Increase (decrease) in income taxes payable - 13,447
Increase (decrease) in accounts payable and accrued liabilities 183,864 143,444
---------
Net cash provided (used) by operating activities 551,670 570,312
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (70,929) (113,853)
Proceeds to borrowers 7,746 48,087
Repayment by borrowers (7,500) (8,473)
--------- ---------
Net cash provided (used) by investing activities 70,683 (74,239)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (319,460) (429,811)
--------- ---------
Net cash provided (used) by financing activities (319,460) (429,811)
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NET INCREASE (DECREASE) IN CASH 161,527 66,262
CASH - beginning of period 615,712 548,494
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CASH - ending of period $ 777,239 $ 614,756
($641,040 of which is included in ========= =========
"Assets of business that the majority
interest was transferred under contractual
agreement")
</TABLE>
The accompanying notes are an integral part of the financial statements
4
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Total
Class A Preferred Additional Retained Stockholders'
Preferred Stock Common Paid-in Earnings Equity
Stock Series "B" Stock Capital (Deficit) (Deficit) (Deficit)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $ 3,861,000 $ 80,000 $200,957 $(3,257,112) $(1,682,133) $(797,288)
NET INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997 - - - - (63,378) (63,378)
----------- --------- -------- ----------- ----------- ---------
BALANCE, December 31, 1997 $ 3,861,000 $ 80,000 $200,957 $(3,257,112) $(1,745,511) $(860,666)
----------- --------- -------- ----------- ----------- ---------
CONVERSION OF SERIES "B"
PREFERRED STOCK - (49,040) 49,040 - - -
CONVERSION OF CLASS A
PREFERRED STOCK (2,618,142) - 55,875 2,562,267 - -
ISSUANCE OF ADDITIONAL
COMMON STOCK - - 36,976 (36,976) - -
NET INCOME FOR SIX MONTHS
ENDED JUNE 30, 1998 - - - - 233,905 233,905
----------- --------- -------- ----------- ----------- ---------
BALANCE, JUNE 30, 1998 $ 1,242,858 $ 30,960 $342,848 $ (731,821) $(1,511,606) $(626,761)
=========== ========= ======== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
-----------
JUNE 30, 1998 AND 1997
----------------------
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, 1997.
NOTE 2. ACCOUNTING TREATMENT - RESTRUCTURE AND ASSIGNMENT OF OWNERSHIP OF OM
OPERATING, LLC
The Company and Operator have responded to various concerns of the
Louisiana Gaming Control Board and the Louisiana Video Gaming Division, of the
Gaming Enforcement Section of the Office of the State Police, discussed in Note
9, the Company and Williams restructured Operator effective April 15, 1998.
The restructure included an assignment of ownership interests by the Company
which does not qualify for sale treatment under applicable accounting rules
until Williams' share of distributions of cash flow result in sufficient
payments on the note to make significant reductions thereof. Until that time,
the Company will continue to consolidate the operations of Operator.
The assets and liabilities of operator as June 30, 1998 are as follows:
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 641,040
Accounts Receivable 44,973
Inventory 26,696
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Total Current Assets 712,709
Property, Plant and Equipment, net 546,820
Prepaid Expenses 44,436
Intangibles and other, net 242,081
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TOTAL ASSETS $1,546,046
==========
LIABILITIES
Accounts Payable/Accrued Liabilities $ 775,601
Notes Payable - Current 235,566
----------
Total Current Liabilities 1,011,167
Notes Payable - Long-term 521,850
----------
TOTAL LIABILITIES $1,533,017
==========
</TABLE>
NOTE 3. ACQUISITION OF ASSETS
In January of 1997 the Company formed a subsidiary called "River Port
Truck Stop, Inc." ("RPTS") 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. RPTS assigned the lease to River
Port Truck Stop, LLC ("River Port LLC") on May 19, 1998. River Port LLC is a
Louisiana limited liability company formed on April 13, 1998, by the Company and
Donald I Williams (who own 49.9% and 50.1%, respectively, of the currently
outstanding membership interests) to build and operate a video poker casino,
restaurant, truck stop and convenience store on the leased property. See Note 9,
below. A convenience store and fuel facility is currently in operation, and
effective June 1, 1997 the Company, through its subsidiary RPTS, began
operations, and effective July 21, 1998 the operations were taken over by River
Port LLC. River Port LLC has completed the facility design process and has made
application and has secured the proper permits to build the convenience store,
fuel facility and parking lot. Construction is underway on the convenience store
and it is expected that this portion of the project will be completed by the
middle of the fourth quarter of 1998. The video poker casino is in the final
design and permitting phase and construction will commence during September 1998
with completion targeted for December 1, 1998.
6
<PAGE>
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); International has converted
4,904,000 shares of Series B Preferred Stock into Common Stock, leaving
3,096,000 shares of Series B Preferred Stock outstanding. 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 was entitled, upon the issuance of such shares of Common Stock to the former
holders of Class A Preferred Stock, 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%. On May 4, 1998, the Company delivered notice
to all holders of Class A Preferred Stock that the Class A Preferred Stock would
be converted into Common Stock, subject to approval at the annual meeting of
stockholders to be held on June 4, 1998 of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 100 million shares. This amendment was approved at the
Company's annual meeting of the stockholders and 872,714 shares of Class A
Preferred Stock converted into 5,587,544 shares of Common Stock effective June
4, 1998 and the remaining 414,286 shares of Class A Preferred Stock converted
into 2,652,456 shares of Common Stock effective July 3, 1998. International was
issued 3,697,580 and 1,755,274 shares of Common Stock on June 4, 1998 and July
3, 1998, respectively, in compliance with its anti-dilution agreement respecting
the conversion of Class A Preferred Stock. 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.
NOTE 4. PRESENT CASH SHORTFALL
As of July 1, 1998, the Company was twenty principal payments in
arrears, at regular principal and interest payments of $50,000 per month (a
total of $720,255 of principal and $67,816 in interest payable; interest has not
been paid since November 1, 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 $1,120,854 at June 30, 1998, and is secured by a
pledge of the outstanding capital stock of I.T. Cruise and GalaxSea owned by the
Company. On April 1, 1998, International agreed to allow the $638,071 then
accrued and owed to it to continue to remain outstanding (with interest accruing
thereon) until the earlier of January 1, 1999 or the time that excess cash flow
is available to pay such amount (or any portion thereof) and, further, 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, 1999, 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 are 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 $100,839 at July 1, 1998, and require aggregate payments of
principal and interest of $11,250 per month until July 1, 1997 and $31,114 per
month thereafter. As of July 1, 1998, 15 monthly payments, for a total of
$386,950, have not been made pursuant to the subordinated debentures. The
subordinated debentures and the amounts unpaid are expressly made subordinate to
the International note as well as other senior debt of the Company. Until the
International note is paid in full and the subordinated debentures are paid in
full, the Company is prohibited from paying dividends on its Common Stock. 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."
7
<PAGE>
NOTE 5. LEASE TERMINATION
In T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, L.L.C., 27th Judicial District
Court, St. Landry Parish, Louisiana, the preliminary question to be decided by
the court was whether the option to renew the term of the contract of lease on
King's Lucky Lady Truck Stop was in compliance with the requirements of the
Louisiana Civil Code governing the validity of such options. The validity of
the option was assailed on grounds that the alleged failure of the option to
stipulate a price rendered it invalid. On March 3, 1998, the court rendered
judgment against the Company and OM Operating, L.L.C. ("Operator") on the
grounds that the failure to stipulate a price rendered the option invalid, and
the Company and Operator were ordered to vacate the premises effective April 30,
1997. The Company and Operator have filed an appeal of this judgment, which
appeal is pending. The Company and Operator intend to vigorously pursue this
appeal, but there can be no assurance that the Company and Operator will
prevail. If the judgment is not set aside, the Company and Operator will lose
the right to operate King's Lucky Lady effective April 30, 1997, unless some
other arrangement can be arranged with Guillory. During the course of the
litigation, Operator was ordered by the court to escrow 50% of the monthly
operating profit generated by King's Lucky Lady, and effective from the date of
the judgment on March 3, 1998 Operator is required to escrow 100% of the
operating profit, unless Operator and the Company are able to negotiate a
different arrangement with Guillory or convince the court to modify such
arrangement. As of July 1, 1998, Operator had placed in escrow $388,821 for
the period from May 1997 through June 1998. Operator and the Company plan to
petition the court in September 1998 to grant a management fee for services from
April 30, 1997 through the date the appeal is completely concluded. Presently,
the Company and Operator plan to also assert a claim for damages for unjust
enrichment against Guillory if they do not prevail on the appeal. There can be
no assurance whether the Company will prevail on appeal or otherwise be able to
negotiate a different arrangement with Guillory or be granted relief from the
court to modify any relief granted.
NOTE 6. 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 had no material impact on
the Company's calculation of earnings per share. SFAS No. 128 was effective for
financial statements issued for periods ending after December 15, 1997.
NOTE 7. 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 is
effective for 1998. Adoption of this standard did not have an effect on the
Company's financial statements, financial position or results of operations in
1998.
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the FASB issued SFAS 133 "According for Derivative
Instruments and Hedging Activity," which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999 with earlier
application permitted beginning as early as July 1, 1998. As the Company does
not currently have any derivative instruments adoption of this standard would
not have any impact on its financial statements, financial position or results
of operations.
NOTE 9. RESTRUCTURE OF OM OPERATING, L.L.C. AND RELATED MATTERS
RESTRUCTURE OF OM OPERATING, L.L.C. Effective April 15, 1998, the
Company and Donald I. Williams ("Williams") entered into Amendment No. One (the
"Amendment") to the Operating Agreement (the "Operating Agreement") of Operator
to effect a restructuring of Operator which the Company believes effectively
addresses certain preliminary questions and concerns raised by the Louisiana
Gaming Control Board ("Gaming Control Board") and the Video Gaming Division of
the Gaming Enforcement Section of the Office of State Police within the
Department of Public Safety and Corrections (the "Division") in their review of
Operator's application for renewal of its license to operate video poker
casinos. The Company elected to voluntarily effect the restructure of Operator
even though the Gaming Control Board has not made a final determination whether
Operator's existing structure satisfied the Louisiana residency requirements of
the Louisiana Video Draw Poker Devices Control Law and the Rules and Regulations
promulgated thereunder (the "Louisiana Act"). The Company believed its existing
structure satisfied such residency requirements, but believes the restructure of
Operator will make an even stronger case that Operator satisfies such
requirements and will allay any concerns and questions which the Gaming Control
Board or Division may have in this regard. The Company has submitted to the
Division and Gaming Control Board the Amendment and related documents effecting
the restructure of
8
<PAGE>
Operator for their review in connection with their review of Operator's license
renewal request. There can be no assurance that the Gaming Control Board will
agree with the Company's conclusion that Operator, as restructured, complies
with the residency requirements of the Louisiana Act, but the Company believes
the Gaming Control Board will agree with the restructure and with the Company's
conclusion.
The Amendment deleted several provisions of, and added several new
provisions to, the Operating Agreement, and certain related transactions were
agreed upon to effect the restructure of Operator. Among these provisions and
transactions are the ones discussed in the following paragraphs.
The Company contributed to Operator the Company's right to a 20% special
gross income allocation and distribution in exchange for 99% of the ownership
interests in Operator, and then immediately and simultaneously assigned 50% of
the ownership interests in Operator to Williams in exchange for a $4,000,000
nonrecourse note (the "Note") payable by Williams to the Company, so that
immediately thereafter Williams owns 51% and the Company owns 49% of the
ownership interests in Operator, the Company no longer has a 20% gross income
allocation and distribution right, and Williams owes the Company $4,000,000
pursuant to the Note. The Note is payable solely from cash flow distributions
made by Operator to Williams from the existing five video poker casinos operated
by Operator (less an amount to allow Williams to pay his federal and state
income taxes on Operator's net taxable income attributable to such casinos), and
is secured by his 51% ownership interest and all cash flow distributions made to
him with respect to the five existing video poker casinos. The principal
balance of the Note is automatically reduced pro-rata (at percentages agreed
upon based on 1997 net operating income of each casino) if Operator loses the
right to operate any of the five existing video poker casinos.
Williams and the Company agreed to appoint George J. Akmon, who is the
Executive Vice President and Chief Financial Officer of the Company, as the
Manager of Operator, to replace Williams, the previous Manager. The Manager is
responsible for all routine, daily operational decisions. Decisions such as
incurring debt, selling or buying devices, entering into additional agreements
to operate video poker devices, amending existing agreements, and other
material, nonroutine decisions require the approval of 65% of the ownership
interests in Operator. Until the Note is paid in full, the Company has the
right to remove and appoint a new manager with the concurrence of Williams, and
must at the request of Williams remove and replace any manager who fails to
satisfactorily perform his duties. Once the Note has been paid in full,
managers will be elected by the owners of at least 65% of the ownership
interests in Operator.
On April 15, 1998, the Company and Operator entered into a Consulting and
Administrative Agreement (the "Consulting Agreement") pursuant to which the
Company has agreed to provide consulting and administrative services relating to
the daily management of each of Operator's video poker casinos. The Company
will receive a fee of $400,000 per year for rendering such services, reduced by
$50,000 for each existing video poker casino Operator loses the right to
operate, and increased by $50,000 for each new video poker casino operated by
Operator during the term of the Consulting Agreement. The Consulting Agreement
expires on the later of April 15, 2002 or the date the Note is paid in full,
provided the Company has an option to extend the Consulting Agreement for an
additional six years, unless the Note was not paid in full within six years, in
which case the extension is reduced so the maximum term of such extension, when
added to the original term, does not exceed 12 years. The fee payable during
any extension term is to be agreed upon by the Company and Operator (acting at
the direction of Williams), and if they cannot reach agreement, they have agreed
to submit the issue to binding arbitration so that a reasonable fee will be
determined by binding arbitration.
Williams and Operator also entered into an Employment Agreement on April
15, 1998 pursuant to which Williams will receive an annual salary of $250,000,
will be eligible to participate in any employee benefit plans of Operator, will
be furnished the use of a Company automobile and will be reimbursed for expenses
incurred on behalf of Operator during the course of his employment. The
Employment Agreement terminates on the later of April 15, 2002 or the date the
Note is paid in full.
The Company agreed to lease to Operator the land and buildings constituting
The Gold Rush Truck Stop. The lease will be effective April 15, 1998 and will
be a triple-net lease pursuant to which Operator will be responsible for
property taxes, insurance and all repairs and maintenance, except for the
foundation, outer walls and roof, for which the Company will be responsible.
The lease will require annual rental payments of $400,000 and will be for a term
commencing April 15, 1998 and expiring April 15, 2008, subject to a five year
renewal option if elected by Williams, on behalf of Operator, at which time the
rent will be adjusted based on the change in the Consumer Price Index. The
Company also granted Williams a right of first refusal to purchase the land and
buildings constituting The Gold Rush Truck Stop, or any portion thereof, if the
Company proposes to sell them to a third party. Williams will have the prior
right to purchase the land and buildings, or such portion thereof, upon the same
terms and conditions and at the same price as offered by such third party.
Pursuant to the Amendment, each of Williams (and certain related parties)
and the Company (and certain affiliates) agreed that all video poker gaming
opportunities within Louisiana that either party desires to pursue must first be
presented to Operator for its review and determination whether it desires to
pursue such opportunity. If Operator elects not to purse the opportunity, then
the presenting party will be free to pursue it for a certain specified period
upon terms and conditions substantially equivalent to those presented to
Operator. Williams is also entitled to receive a finder's fee of $50,000 for
each opportunity brought by him to Operator which is consummated by Operator.
The Company and Williams terminated the various rights of first refusal and
purchase options which the Company previously had with regard to the 51%
ownership interest of Williams. Pursuant to the Amendment, if either the
Company or Williams fails to maintain the
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suitability requirements of the Louisiana Act, his or its ownership interests
may be sold to a third party, with the consent of the other party (which consent
may not be unreasonably withheld), upon such terms and conditions as he or it
may negotiate with such third party; provided, if such sale is not accomplished
within specified time periods, the other party has the right to locate a
purchaser (or buy the interest himself or itself) for a purchase price equal to
the allocable share of Operator's net operating income for the preceding
calendar year multiplied by a factor of two. For the period April 14, 1998
through June 30, 1998, operating profits were $173,097, of which 51% were
assignable to Williams.
As long as the suitability standards are being maintained by each party,
each of Williams and the Company is given the right under the Amendment to sell
his or its ownership interests at any time to any third party with the consent
of the other person, which consent may not be unreasonably withheld. If the
Company is selling its ownership interests, it is also entitled to assign the
Consulting Agreement to the purchaser with the consent of Williams, which
consent may not be unreasonably withheld, if such purchaser has expertise to
perform the services being performed by the Company under the Consulting
Agreement.
RIVER PORT TRUCK STOP - PORT ALLEN, LOUISIANA. As part of the Amendment,
the Company and Williams agreed to form River Port LLC to pursue development,
construction, ownership and operation of the River Port Truck Stop in Port
Allen, Louisiana. Initially, River Port LLC will be owned 49.9% by the Company
and 50.1% by Williams, but it is contemplated that additional equity partners
may be admitted so that the ownership interest of each of the Company and
Williams would be reduced pro-rata (after an initial reduction of 0.2% of
Williams' interest) down to 40% each, with other equity partners owning 20%.
On July 21, 1998, the Company and Williams entered into an Operating
Agreement to govern the operations of River Port LLC. Williams and the Company
agreed to appoint George J. Akmon as the Manager of River Port LLC. The
Manager is responsible for all routine, daily operational decisions.
Decisions such as incurring debt, selling or buying devices, entering into
additional agreements to operate video poker devices, amending existing
agreements, and other material, non routine decisions require the approval of
65% of the ownership interests in River Port LLC. Until the Note is paid in
full, the Company has the right to remove and appoint a new manager with the
concurrence of Williams, and must at the request of Williams remove and replace
any manager who fails to satisfactorily perform his duties. Once the Note has
been paid in full, managers will be elected by the owners of at least 65% of the
ownership interests in River Port LLC.
On July 21, 1998, the Company and River Port LLC entered into a Consulting
and Administrative Agreement (the "Consulting Agreement") pursuant to which the
Company has agreed to provide consulting and administrative services relating to
the daily management of River Port LLC's video poker casino. The Company will
receive a fee of $50,000 per year for rendering such services. The Consulting
Agreement expires on the later of April 15, 2002 or the date the Note is paid in
full, provided the Company has an option to extend the Consulting Agreement for
an additional six years, unless the Note was not paid in full within six years,
in which case the extension is reduced so the maximum term of such extension,
when added to the original term, does not exceed 12 years. The fee payable
during any extension term is to be agreed upon by the Company and River Port LLC
(acting at the direction of Williams), and if they cannot reach agreement, they
have agreed to submit the issue to binding arbitration so that a reasonable fee
will be determined by binding arbitration.
Williams, River Port LLC and Operator also entered into an Amendment to
Employment Agreement on July 21, 1998 pursuant to which Williams agreed to
perform the same services for River Port LLC as he is performing for Operator
under the Employment Agreement between him and Operator, and pursuant to which
Operator and River Port LLC agreed to split his annual salary of $250,000 pro
rata based on the number of truck stop video poker casinos operated by each of
them. He will also be reimbursed for expenses incurred on behalf of River Port
LLC during the course of his employment. The Employment Agreement terminates on
the later of April 15, 2002 or the date the Note is paid in full.
Pursuant to the Operating Agreement, if either the Company or Williams
fails to maintain the suitability requirements of the Louisiana Act, his or its
ownership interests may be sold to a third party, with the consent of the other
party (which consent may not be unreasonably withheld), upon such terms and
conditions as he or it may negotiate with such third party; provided, if such
sale is not accomplished within specified time periods, the other party has the
right to locate a purchaser (or buy the interest himself or itself) for a
purchase price equal to the allocable share of River Port LLC's net operating
income for the preceding calendar year multiplied by a factor of two.
As long as the suitability standards are being maintained by each party,
each of Williams and the Company is given the right under the Operating
Agreement to sell his or its ownership interests at any time to any third party
with the consent of the other person, which consent may not be unreasonably
withheld. If the Company is selling its ownership interests, it is also
entitled to assign the Consulting Agreement to the purchaser with the consent of
Williams, which consent may not be unreasonably withheld, if such purchaser has
expertise to perform the services being performed by the Company under the
Consulting Agreement.
Effective July 17, 1998, River Port LLC borrowed $1,750,030 from Cottonport
Bank (the "Bank") for purposes of funding construction of the truck stop and
video poker casino to be owned and operated by River Port LLC. This note bears
interest at an annual rate of 10.25% until December 31, 1998, at which time all
interest must be paid and the Bank has agreed to renew the loan for a five year
term,
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with monthly payments of principal and interest at an interest rate equal of 2%
above the prime rate of Chase. The full amount of the loan is guaranteed by the
company and Operator; $1,000,000 of the loan is guaranteed by Williams and his
spouse; and $750,000 is guaranteed by E.H. Hawes, II, the President and Chief
Executive Officer of the Company, and an unaffiliated individual. The lease of
the property upon which the truck stop and video poker casino is being
constructed has been pledged as collateral for the loan, and the improvements
being constructed thereon have been also pledged as collateral for the loan.
NOTE 10. INCOME TAX AUDIT
Currently, the Internal Revenue Service is challenging the Company's
position with regard to utilization of the Net Operating Loss Carry Forward
originally incurred by the Company's predecessor. The outcome of this challenge
is uncertain and an unfavorable ruling could have a material affect on the
Company's earnings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
PRESENT CASH SHORTFALL. As of July 1, 1998, the Company was twenty
months in arrears (a total of $720,255 of principal and $67,816 in interest
payable) 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 $1,120,854 at July 1, 1998, and is secured by a pledge of the
outstanding capital stock of I.T. Cruise and GalaxSea owned by the Company.
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 $638,071 accrued and owed at
April 1, 1998 to it to continue to remain outstanding (with interest accruing
thereon) until the earlier of January 1, 1999 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, 1999, 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 $100,839 at July 1, 1998. These debentures require aggregate
payments of principal and interest of $11,250 per month until July 1, 1997 and
$31,114 per month thereafter, 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 1998. 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 and the
restructuring of the Company's revenue and profits interests in Operator, 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 fourth
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.
As noted previously, 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. Strict enforcement of the
Louisiana Act and the perceived anti-gaming sentiment in Louisiana within
certain segments of the population and with certain politicians may also impact
the review of Operator and any possible restructuring of Operator, or even a
possible loss of Operator's license to Operate the video poker casinos.
As also noted previously, the Company has been involved in litigation
respecting its continued right to operate King's Lucky Lady Truck Stop, and the
ultimate resolution of such case against the Company and Operator would have an
adverse affect on the Company's cash flow. During the course of the litigation,
Operator was ordered by the court to escrow 50% of the monthly operating profit
generated by King's Lucky Lady, and effective from the date of the judgment on
March 3, 1998 Operator is required to escrow 100% of the operating profit. This
escrow amounted to $249,161 for the six months ended June 30, 1998, the total
escrow amounts to $388,821 for the period from May 1997 through June 30, 1998.
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The Company has funded a portion of the construction of the River Port
Truck Stop and Casino through cash flow from operations for a total of $306,610
for the six months ended June 30, 1998, the total amount of operating cash flow
applied to this project is $346,610 for the period from November 1997 through
June 30, 1998. The Company received reimbursement of this amount from the
proceeds of the loan from Cottonport Bank on August 6, 1998.
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. For comparison purposes the following is presented on a
consolidated basis which includes Operator as presented prior to the
restructure of Operator discussed above. The Company ended the second quarter
of 1998 with $777,239 in cash and other current assets amounting to $574,910,
including accounts receivable of $280,289, inventories and prepaid expenses of
$260,685 and current notes receivable of $33,936. The Company's total
liabilities were $5,282,087 at June 30, 1998, including accounts payable and
accrued liabilities of $1,528,341, current notes payable of $1,141,887, long-
term notes payable of $1,831,859 and preferred stock dividends payable of
$780,000. The Company's liabilities decreased $135,596 from $5,417,683 at
December 31, 1997 to $5,282,087 at June 30, 1998. This variance was comprised of
an increase in accounts payable and accrued liabilities of $183,864 and
reductions in liabilities from other notes payable totaling $32,561, payments on
long and short-term debt to banks totaling $107,822 and payments on the Ozdon
notes issued for the stock purchase of the Gold Rush of $179,077.
Accounts payable and accrued liabilities of $1,528,341 included $741,792 in
trade payables, state franchise taxes of $188,693, casino distributions of
$227,504, payroll and payroll taxes of $184,188, income tax payable of $10,774
and accrued interest of $175,390.
The current portion of other notes payable totaling $1,141,887 includes
$536,261 related to the acquisition of I.T. Cruise and GalaxSea; the stock
purchase note from the Gold Rush acquisition amounting to $155,481; $220,982
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
$25,401 in equipment leases and other notes.
Long-term debt of $1,831,859 includes $499,821 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; $615,593 related to the
acquisition of I.T. Cruise and GalaxSea; and $23,861 in equipment leases and
other notes.
Effective August 4, 1998, Operator and NOVP agreed to expend approximately
$170,000 to buy out the current truck stop operating lease, renovate,
rehabilitate and improve the fuel operations at Stan's Truck Stop and Restaurant
which functions as the qualified truck stop to meet the requirements of
operating video poker devices at the Diamond Jubilee. The landlord agreed to a
reduction in rental payments equal to $85,000 to participate in the funding of
this effort.
Effective July 17, 1998, River Port LLC borrowed $1,750,000 from the Bank,
which loan is guaranteed by the Company and Operator. The loan bears interest
at an annual rate of 10.25% until December 31, 1998, at which time all interest
must be paid and the Bank has agreed to renew the loan for a five year term,
with monthly payments of principal and interest at an interest rate equal to 2%
above the prime rate of Chase.
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. The transaction also included the
issuance of 450,000 shares of common stock in the Company to NOVP.
At June 30, 1998, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,297,211.
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.
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Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 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.
At the general election held on November 5, 1996, all parishes in which the
Company operates video poker casinos voted to continue truck stop video poker.
The local option initiative gave the voters in each parish the right to decide
what forms of gaming they want to continue in their parish. More recently,
certain parishes, which had previously approved truck stop video poker, have
elected to discontinue this form of gaming. If this were to happen in any of
the parishes where the Company operates video poker, it would have a materially
adverse impact on operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This statement provides accounting and reporting standards for
stock-based employee compensation plans and also applies to equity instruments
issued to acquire goods and services from nonemployees. SFAS No. 123 defines a
fair value based method of accounting for employee stock option and similar
equity instruments. Entities may either adopt that accounting method or may
elect to continue the accounting treatment outlined in APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to continue
following Opinion No. 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value based method had been
adopted. SFAS No. 123 is effective for fiscal years beginning after December
15, 1995. The Company will follow Opinion No. 25. Adoption of this statement
will not have a material impact on the consolidated financial statements of the
Company.
RESULTS OF OPERATIONS
NET INCOME FOR THE SIX MONTHS ENDED ENDED JUNE 30, 1998.
Company operations resulted in net income before income taxes of $263,506
for the six months ended June 30, 1998, a decrease of $135,570, or 34%, from
1997's $399,076. On June 1, 1997 the Company began recording retail revenues as
a result of operating the existing convenience store and fuel facility at the
River Port Truck Stop in Port Allen, LA., with a resulting operating loss of
$21,943 through June 30,1998. During 1997 the Company and Operator were subject
to a court order which declared that 50% of the operating profit from King's
Lucky Lady Casino and Truck Stop must be placed in an escrow account effective
May 1, 1997 through March 2, 1998, and 100% from March 3, 1998 until a judgement
is made on the Company's and Operator's appeal. This escrow requirement,
recorded as an expense entitled as a "litigation reserve", amounted to $139,660
through December 31, 1997, with a total of $249,161 added as a result of
operations for the six months ended June 30, 1998. This escrow amounted to
$36,740 for the six months ended June 30, 1997. Excluding the litigation
reserve, net income was $435,816 and $512,667 for the six months ended June 30,
1997 and 1998, respectively, representing an increase of 18% in 1998.
REVENUES TOTALED $12,490,439 THROUGH JUNE 30, 1998 COMPARED TO $11,707,427 FOR
1997, UP 10%.
VIDEO POKER REVENUES totaled $7,935,851 through June 30, 1998, up $309,573,
or 4% from 1997's $7,626,278. Gains were achieved at the Pelican Palace -
$224,900; King's Lucky Lady - $151,935, the Lucky Longhorn $129,073; the Gold
Rush - $85,150 and the Diamond Jubilee - $2,071. These gains were partially
offset by the closure of Stelly's Southern Gold - $183,852 and the reduction of
Route Operations - $99,703 from 1997 to 1998. Video poker revenue production by
location for 1998 and 1997 was as follows:
Pelican Palace, Toomey, LA - $1,748,316 in 1998 and $1,523,416 in 1997, up
15%; resulting in average daily revenue per device (50 devices) of $193 through
June 30, 1998 compared to 1997's $168.
King's Lucky Lady, Port Barre, LA - $1,303,950 in 1998 and $1,152,014 in
1997, up 13%; resulting in average daily revenue per device (50 devices) of $144
through June 30, 1998 compared to 1997's $127.
Lucky Longhorn, Vinton, LA - $1,895,649 in 1998 and $1,766,577 in 1997, up
7%; resulting in average daily revenue per device (50 devices) of $209 through
June 30, 1998 compared to 1997's $195.
Gold Rush, Opelousas, LA - $1,626,887 in 1998 and $1,541,737 in 1997, up
6%; resulting in average daily revenue per device (50 devices) of $180 through
June 30, 1998 compared to $170 for 1997.
Diamond Jubilee, New Orleans, LA - $1,253,144 in 1998 and $1,251,073 in
1997, up 2%; resulting in average daily revenue per device (40 devices) of $173
through June 30, 1998 compared to $166 for 1997( on an average of 41.7 devices).
Route Operations - South LA - $107,906 in 1998 and $207,608 in 1997, down
48%; resulting in average daily revenue per device (13 devices) of $46 through
June 30, 1998 compared to average daily revenue per device (22 devices) of $52
in 1997.
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Stelly's-LeBeau, LA - closed May 28, 1997; six months ended 1997 production
amounted to $183,853, resulting in average daily revenue per device (16 devices)
of $78.
RETAIL REVENUES from fuel and convenience store, food and beverage
operations amounted to $4,045,437 for the six months ended June 30,1998 compared
to 1997's $3,327,010, an increase of 22%.
Combined fuel and convenience store sales for the six months ended June
30,1998 increased $579,586, or 23%, to $3,144,598 compared to $2,565,012 in
1997. Fuel sales for 1998 amounted to $2,560,643, making up 63.3% of the
Company's retail sales, compared to 1997's fuel sales of $2,157,070,
contributing 64.8% of the Company's retail sales. Convenience store retail
sales totaling $583,955 were up 43% for 1998 versus 1997's $407,942. Growth
occurred at the Gold Rush, which reported $1,646,873 in revenue for the six
months ended June 30, 1998 compared to 1997's $1,468,611, up 12%; King's Lucky
Lady generated $1,025,446, down 1% from 1997's $1,034,000; and the River Port
Truck Stop posted sales totaling $472,279 for the six months ended June 30,1998
compared to one month of operation in 1997 totaling $62,401.
Six months ended June 30, 1998 food and beverage sales increased $138,841,
or 18%, to $900,839, compared to $761,998 in 1997. Food and beverage sales for
each location were as follows: King's Lucky Lady $439,587 in 1998 compared to
1997's $406,496, up 8%; Gold Rush - $231,664 in 1998 compared to $198,637 in
1997, up 17%; Pelican Palace - $183,587 in 1998 versus $119,289 in 1997, up
54%; and the Diamond Jubilee - $46,003 in 1998 compared to $37,576 for 1997, up
22%.
CRUISE REVENUES accrued for I.T. Cruise and GalaxSea totaled $509,151 for
the six months ended June 30,1998 compared to 1997's $754,140. I.T. Cruise
revenue resulting from its contracts with International Tours, Inc. amounted to
accrued overrides and commissions of $120,000 for 1998 compared to 1997's
$152,105. The accrual of GalaxSea's franchise system revenues was comprised of
overrides and commissions of $91,045 in 1998 versus $118,030 in 1997; monthly
license fees of $100,505 in 1998 compared to $87,450 in 1997; franchise sales
fees of $2,500 in 1998 compared to $2,650 in 1997; marketing fees totaling
$182,082 in 1998 compared to 1997's $383,162; and convention and training fees
of $13,020 in 1998 compared to $10,743 in 1997.
CASINO AND TRUCK STOP OPERATIONS
CASINO AND TRUCK STOP OPERATIONS recorded direct operating profit of
$1,630,585 for the six months ended June 30, 1998 , an increase of $43,864, or
3%, from 1997's $1,586,721.
The Gold Rush's casino and truck stop operations produced operating profit
of approximately $617,280 in 1998 compared to $581,058 in 1997, up 6%. Fuel
sales averaged approximately 207,000 gallons per month.
The Lucky Longhorn's operating profit was approximately $330,146 in 1998
compared to $353,463 in 1997, down 7%. Operating margins suffered as strong
promotional efforts were implemented to recover market share for the property.
The Lucky Longhorn has fourteen competitors in its market area, including a Las
Vegas style Native American casino and four river boats, one of which was added
in 1997. 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. The Longhorn Club (owed and
operated by lessor) was destroyed by fire on May 10, 1998. Thus far, the
Company has realized a reduction in the video poker revenue as a result of a
slight decline in the number of customers at the Lucky Longhorn. During the
month of January 1997, operations were suspended for 3 days due to an ice storm.
Fuel sales averaged approximately 270,000 gallons per month during 1998.
The Pelican Palace generated operating profit of approximately $321,159 in
1998 compared to 1997's $280,540, an increase of 14%. Strong promotional
efforts were implemented to gain market share in casino and fuel sales. The
Pelican has fourteen competitors in its market area, including a Las Vegas style
Native American casino and four river boats, one of which was added in 1997.
During the month of January 1997, operations were suspended for 3 days due to an
ice storm. In 1997, a portion of the income was applied to the reduction of a
note receivable, which was satisfied in May of 1997. Fuel sales averaged
approximately 160,000 gallons per month during 1998.
King's Lucky Lady's operating profit for 1998 was approximately $315,844
compared to operating profit for 1997 of approximately $247,938, up 27%. Strong
promotional efforts were implemented to gain market share in casino and fuel
sales. See Part II, Item 1 -- Legal Proceedings" for a discussion of the
judgement rendered against Company regarding the validity of its option to renew
the lease on King's Lucky Lady. The Company has filed a suspensive appeal in an
effort to reverse this decision. Fuel sales averaged approximately 131,000
gallons per month during 1998.
The Diamond Jubilee generated operating profit of approximately $52,890 in
1998, compared to 1997's $78,505, down 33%. Two competitors with a total of 80
video poker devices came into the market during 1998 thus diluting The Diamond
Jubilee's market share. The Diamond Jubilee also lost 10 devices after December
31, 1997 due to failure to maintain required fuel sales, and is expected to lose
an additional five devices during the third quarter of 1998, until increased
fuel sales are maintained. Fuel sales averaged approximately 61,000
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gallons per month during the six months ended June 30,1998 compared to 84,000
gallons per month in 1997. Increased price competition has affected sales, which
resulted in less than the required minimum for the fourth quarter 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 Operator and NOVP
have entered into an agreement with the landlord to expend approximately
$170,000 to gain control of the fuel operation and to pay for such improvements.
The landlord has agreed to a reduction in rental payments equal to $85,000 to
assist in this effort. The Company and NOVP will aggressively market the fuel
operation to increase the level of sales in order to maintain the minimum level
to operate 50 devices, 40 devices or even 35 devices. There can be no assurance
that such improvements will result in fuel sales being increased to achieve the
minimum level, or that such sales can be maintained if they reach such levels.
From March 30, 1998 to July 20, 1998 U.S. Highway 11 connecting with U.S. 90
(the highway on which the Diamond Jubilee is located), was closed to commercial
and non-residential traffic, which affected business volume in the casino and
truck stop operation.
Route Operations generated operating profit for 1998 of approximately
$15,209 compared to operating profit for 1997 of approximately $30,058, down
49%. During the six months ended June 30,1998, the Company had 13 devices
operating within 6 locations, compared to 1997, when the Company operated 22
devices within 10 locations. The reduction in the number of route locations is
the result of the expiration of the initial five year operating leases with
tavern owners who have elected to purchase and operate their own video poker
devices. The original operating leases had no provision for renewal.
Stelly's Southern Gold was closed May 28, 1997. Operating profit for the
six months ended June 30, 1997 amounted to $10,347. 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 this
facility on May 28, 1997.
River Port Truck Stop posted an operating loss of $22,791 for the six
months ended June 30, 1998 compared to 1997's recorded operating profit of
$4,812 for one month of operation. The loss was due to a full charge of rent
expense totaling $42,000 for the six months ended June 30,1998. Construction of
a complete truck stop and casino complex is currently in progress on this
leased property. Fuel sales averaged approximately 52,000 gallons per month
during 1998.
CRUISE OPERATIONS
Combined Cruise Operations recorded an operating loss which amounted to
$19,668 for the six months ended June 30,1998, on revenues totaling $509,151,
while 1997's operating loss of $31,804 was recorded based on revenues of
$754,140. The loss in revenue was due to a major promotion for the film "Out-
to-Sea" which generated promotional revenue of approximatley $111,747 during the
second quarter of 1997 and a restructuring of contracts by certain cruise
lines. Marketing fees accrued are the result of a broad based program
coordinated by GalaxSea to produce cruise industry publications and promotions
subscribed to by the cruise lines. The GalaxSea franchise system included 73
franchisees at June 30, 1998 compared to 64 at June 30,1997.
GalaxSea's six months ended June 30, 1998 revenues amounted to $389,151,
with an operating loss of approximately $87,510; revenues recorded for I.T.
Cruise were $120,000, with an operating profit of approximately $67,842 for the
six months ended June 30,1998.
EXPENSES TOTALED $12,040,103 THROUGH JUNE 30, 1998 COMPARED TO $11,354,360 FOR
1997, UP 6%.
VIDEO POKER operations recorded a direct cost of revenue amounting to
$4,488,749 in 1998 and $4,421,678 in 1997, an increase of 1.5%. This includes
fees paid to the State of Louisiana of $2,685,419 (33.8% of video poker revenue)
in 1998 and $2,598,051 (34.1% of video poker revenue) in 1997, and profit
sharing payments as defined in operating and management contracts of $1,803,331
(22.7% of video poker revenue) in 1998 and $1,823,628 (23.9% of video poker
revenue) in 1997.
RETAIL operations recorded an increase of $495,166, or 18%, in the cost
of revenue related to fuel, convenience store, food and beverage operations. The
total for the six months ended June 30, 1998 amounted to $3,262,749 (80.7% cost
margin on retail sales) compared to $2,767,583 (83.2% cost margin on retail
sales) in 1997. Inclued is the River Port Truck Stop's cost of revenue related
to fuel and convenience store of $393,794 (83.4% cost margin on retail sales)
for 1998 compared to $48,396 for June of 1997. Improvements in the cost of
revenue were mainly due to margin improvements on fuel sales which achieved a
92.3% margin in 1998 versus 93.8% in 1997, and food and beverage cost of revenue
improvements from 48.9% in 1997 to 45.7% in 1998.
Fuel cost of goods sold for 1998 amounted to $2,363,843, representing a
cost margin of 92.3%, compared to 1997's fuel cost of goods sold totaling
$2,022,733, with a cost margin of 93.8%. 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 six months ended June 30, 1998,
in order to maintain and/or increase 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.
15
<PAGE>
Convenience store retail cost of goods sold totaling $487,106 (83.4% of
sales) increased 31% in 1998 on growth in sales of 43%. 1997's retail cost of
goods sold totaled $372,580 (91.3% of sales).
Food and beverage cost of goods sold totaled $411,801, up 11% in 1998, with
a margin on sales of 45.7% compared to 1997's $372,270, with a margin on sales
of 48.9%. 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 $224,048
for the six months ended June 30, 1998 compared to 1997's $398,241, a decrease
of 44%. The reduction in cost was mainly due to a major promotion for the film
"Out-to-Sea" for which approximatley $118,779 was recorded during the second
quarter of 1997. 1998's marketing, training and promotional expenses totaled
$181,110 and royalty fees were $42,938. 1997's marketing, training and
promotional expenses amounted to $250,147 with royalty fees of $29,313.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $3,616,525 in 1998 and
$3,266,484 in 1997 increased 11% and represented 29.0% and 27.9% of total
revenue for 1998 and 1997, respectively.
DEPRECIATION AND AMORTIZATION amounted to $310,353 for the six months ended
June 30, 1998 and $326,392 in 1997, a 5% decrease. Interest expense was
$137,679 in 1998 and $174,082 in 1997, a 20% decrease. Net other
revenue/(expense) was ($186,830) in 1998, compared to $46,109 in 1997. The
majority of this expense was due to a total of $249,161 added to the litigation
reserve for the six months ended June, 1998.
COMPARISON OF 1998 TO 1997
VIDEO POKER revenues increased to $7,935,851 in the six months ended June
30, 1998 from $7,626,277 in 1997, up $309,574, or 4%. The Pelican Palace
produced $1,748,316 in 1998 versus $1,523,416 in 1997, an increase of $224,900,
or 15%. King's Lucky Lady recorded video poker revenues of $1,303,950 in 1998
versus $1,152,014 in 1997, up $151,936, or 13%. The Lucky Longhorn generated
$1,895,649 in 1998 compared to $1,766,577 in 1997, up $129,072, or 7%. The Gold
Rush posted $1,626,887 in 1998 compared with $1,541,737 in 1997, up $85,150, or
6%. The Diamond Jubilee produced $1,253,144 in 1998 versus $1,251,073 in 1997,
an increase of $2,071, or 2%. Declines in video poker revenue were experienced
mainly due to the closure of Stelly's Southern Gold on May 28, 1997-six months
ended June 30, 1997 production was $183,853; and the reduction of Route
Operations resulting in $107,906 in 1998 down from $207,608 in 1997, down
$99,702, or 48%.
RETAIL revenues from fuel and convenience store, food and beverage
operations amounted to $4,045,437 for the six months ended June 30,1998 compared
to 1997's $3,327,010, an increase of 22%. The cost of revenue related to fuel,
convenience store, food and beverage operations increased $495,166, or 18% from
$2,767,583 in 1997 to $3,262,749 in 1998, including $393,794 for the River Port
Truck Stop. The cost of revenue excluding the River Port Truck Stop increased
$149,768, or 5.5%.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES totaled $3,616,525 in 1998
and $3,266,484 for 1997, an increase of $350,041, or 11%. This overall increase
resulted primarily from payroll, contract and professional services, truck stop
and casino promotional expenses and new operations.
Payroll related expenses increased $87,394, or 6%, from $1,545,287 in 1997
to $1,632,681 for the six months ended June 30,1998: including an increase due
to the Employment Agreement with Williams as outlined above, equal to $34,583
from April 14 through June 30, 1998; operating the River Port Truck Stop of
$29,682 for six months in 1998 versus one month in 1997; and a decrease from
Cruise Operations of $80,134; all other payroll expenses were up $103,263, an
increase of 7%, which now reflects the full impact of the overall 18.4% increase
in the Federal Minimum Wage from $4.35 per hour to $4.75 per hour (October 1,
1996) and $4.75 per hour to $5.15 per hour (September 1, 1997). This increase
was also passed through by vendors and contractors which raised the Company's
overall level of direct operating expenses.
Contract and professional services (outside services) expenses increased
$61,820, or 14%, from $433,161 in 1997 to $494,981 for the six months ended June
30, 1998; which included legal and accounting fees totaling $212,341 in 1998 and
$143,273 for 1997, an increase of $69,068, or 48%, resulting from regulatory and
licensing issues as discussed above; casino security costs of $157,011 in 1998
and $144,223 for 1997, an increase of $12,788, or 9%, resulting from the
increase in the Federal Minimum Wage; and contract services totaling $125,629 in
1998 and $145,665 for 1997, a decrease of $20,036, or 14%.
Truck stop and casino promotional expenses amounted to $248,407 in 1998, up
53%, or $85,581 from 1997's $162,826, consisting of 4.2% and 3.0% of combined
truck stop and casino revenue for 1998 and 1997 respectively. This increase in
promotional expense was
16
<PAGE>
the result of targeted marketing programs to maintain and/or to increase fuel
sales and to increase the length of time customers spend in the casino.
Complimentary food and beverage was the majority of the increase amounting to
$72,754; the direct cost of revenue being approximately 45%.
Incremental operating expenses, excluding payroll expenses for the River
Port Truck Stop, amounted to $31,813 for the six months ended June 30,1998.
Combined Cruise Operations recorded a decrease of $33,234, or 17%, in other
operating expenses from 1997's $85,022 to $51,788 for the six months ended June
30,1998.
All other expenses totaled $339,836 in 1998 compared to $331,822, a
decrease of $8,014, or 2.4%.
DEPRECIATION AND AMORTIZATION amounted to $155,094 for the six months
ended June 30,1998 and $164,864 in 1997, a decrease of $9,770, or 6%.
Depreciation and amortization on video poker operations, which includes video
poker machines, leasehold improvements and revenue interest rights, amounted to
$55,075 in 1998 compared to $76,410 for 1997. Depreciation and amortization on
truck stop and convenience store operations totaled $14,292 in 1998 and $14,400
for 1997; on cruise operations amounted to $82,847 in 1998 compared to $71,354
for 1997; and $2,880 in 1998 versus 1997's $2,700 on corporate assets. Interest
expense was $75,628 in 1998 and $69,754 for 1997, an increase of $5,875, or 8%.
Net other revenue/(expense) totaled ($95,788) in 1998 compared to 1997's
$29,482. This line item includes rental income, interest income, ATM
commissions and miscellaneous gains and losses on the disposal of assets. In
addition, during 1997 the Company and Operator were subject to court orders
which declared that 50% of the operating profit from King's Lucky Lady Casino
and Truck Stop must be placed in an escrow account effective May 1, 1997 through
March 2, 1998, and 100% from March 3, 1998 until a judgement is made on the
Company's and Operator's appeal. This escrow requirement, recorded as an
expense entitled as a "litigation reserve", amounted to $139,660 through
December 31, 1997, with a total of $249,161 added as a result of six months
ended June 30, 1998 operations and is recorded in the category of other expense.
INCOME TAX EXPENSE amount to $29,600 for the six months ended June, 1998.
This is lower than the Company's statutory rate of 34% as the Company expects to
realize the Net Operating Loss Carry Forward, a portion of which were reserved
and thus not included as a deferred tax asset.
YEAR 2000 ISSUES
The Company is aware of the issues associated with the programming code in
many existing computer systems as the millennium approaches. The "Year 2000"
problem is pervasive; virtually every computer operation may be affected in some
way by the rollover of the digit value to 00. The risk is that computer systems
will not properly recognize sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail, resulting in business interruption.
The Company is conducting a review of its computer systems and is taking
steps to correct Year 2000 compliance issues. The Company benefits from having
relatively new computer systems in most locations and management believes the
Year 2000 issues can be mitigated without a significant potential effect on the
Company's financial position. However, given the complexity of the Year 2000
issue, there can be no assurance that the Company will be able to address the
problem without costs and uncertainties that might affect the future financial
results or cause reported financial information to not be necessarily indicative
of future operating results or future financial condition.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts included in this Form 10-QSB are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 that involve risks and uncertainties that could
cause actual results to differ from projected results. Such statements address
activities, events or developments that the Company expects, believes, projects,
intends or anticipates will or may occur, including such matters as future
capital, debt restructuring, the possible effects of anti-gaming sentiment, the
restructuring of Operator, maintaining or increasing fuel sales, compliance with
other gaming law requirements, maintaining a competitive position in the
Company's markets, pending legal proceedings, business strategies, expansion and
growth of the Company's operations, and cash flow. Factors that could cause
actual results to differ materially ("Cautionary Disclosures") are described
throughout this Form 10-QSB. Cautionary Disclosures include, among others:
general economic conditions, the Company's ability to find, acquire, market,
develop and produce new properties, the strength and financial resources of the
Company's competitors, anti-gaming sentiment, labor relations, availability and
cost of material and equipment, the results of debt restructuring efforts,
regulatory developments and compliance, and pending legal proceedings. All
written and oral forward-looking statements attributable to the Company are
expressly qualified in their entirety by the Cautionary Disclosures. The Company
disclaims any obligation to update or revise any forward-looking statement to
reflect events or circumstances occurring hereafter or to reflect the occurrence
of anticipated or unanticipated events.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 25, 1995, the Company filed a petition for declaratory
judgment 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 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. Longhorn, the other party to the Contract, filed an answer to the
Company's suit on November 28, 1995 claiming that only the old rate of 22.5%
should be deducted, and claiming that Operator was in default for deducting the
higher rate and that the Contract should therefore be terminated. A settlement
was reached effective July 1, 1998 with the Longhorn, whereby the Company would
assume 100% of the cost of casino security and the Longhorn would provide
standard retail value from convenience store, restaurant, motel and beverage
products and services, for casino marketing, equal to 50% of the amount paid by
the Company for casino security. In addition, the Company agreed to reimburse
the Longhorn $60,000 for parking lot paving completed in 1995, payable at $3,000
per month with no interest applied thereon.
T.B. Guillory ("Guillory") et al versus North American Gaming and
Entertainment Corporation and O.M. Operating, L.L.C., 27th Judicial District
Court, St. Landry Parish, Louisiana. The preliminary question to be decided by
the court was whether the option to renew the term of the contract of lease on
King's Lucky Lady Truck Stop was in compliance with the requirements of the
Louisiana Civil Code governing the validity of such options. The validity of
the option was assailed on grounds that the alleged failure of the option to
stipulate a price rendered it invalid. On March 3, 1998, the court rendered
judgment against the Company and Operator on the grounds that the failure to
stipulate a price rendered the option invalid, and the Company and Operator were
ordered to vacate the premises effective April 30, 1997. The Company and
Operator have filed an appeal of this judgment, which appeal is pending. The
Company and Operator intend to vigorously pursue this appeal, but there can be
no assurance that the Company and Operator will prevail. If the judgment is not
set aside, the Company and Operator will lose the right to operate King's Lucky
Lady effective April 30, 1997, unless some other arrangement can be arranged
with Guillory. During the course of the litigation, Operator was ordered by the
court to escrow 50% of the monthly operating profit generated by King's Lucky
Lady, and effective from the date of the judgment on March 3, 1998 Operator will
be required to escrow 100% of the operating profit, unless Operator and the
Company are able to negotiate a different arrangement with Guillory or convince
the court to modify such arrangement. As of July 1, 1998, Operator had placed
in escrow $388,821 for the period from May 1997 through June 30, 1998. Operator
and the Company plan to petition the court in September 1998 to grant a
management fee for services from April 30, 1997 through the date the appeal is
completely concluded. Presently, the Company and Operator plan to also assert a
claim for damages for unjust enrichment against Guillory if they do not prevail
on the appeal. There can be no assurance whether the Company will prevail on
appeal or otherwise be able to negotiate a different arrangement with Guillory
or be granted relief from the court to modify any relief granted.
Harry Woodall, et al v. North American Gaming and Entertainment
Corporation, 2nd Judicial District Court, Claiborne Parish, Louisiana. This
suit represents a suit for declaratory judgment by former holders of Class A
Preferred Stock seeking to have the court order that accrued dividends thereon
must be paid. The Company is legally prevented from paying dividends at this
time under provisions of the Delaware General Corporation Law, and is also
contractually prohibited from paying dividends while certain indebtedness is
outstanding. The Company plans to seek removal of this case to federal court
and a dismissal of this action. The Company believes it will prevail, but there
can be no assurance.
ITEM 2. CHANGES IN SECURITIES.
The Company issued 5,587,544 shares of Common Stock to former holders of
Class A Preferred Stock effective June 4, 1998, and 2,652,456 shares of Common
Stock to former holders of Class A Preferred Stock effective July 3, 1998, as a
result of the forced conversion discussed in Item 3, below, and issued 3,697,580
shares and 1,755,274 shares of Common Stock to International on June 4, 1998 and
July 3, 1998, respectively, pursuant to International's anti-dilution agreement
respecting the conversion of Class A Preferred Stock. The Company relied on the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
for all of the stock issuances.
18
<PAGE>
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%. On May 4, 1998, the Company delivered notice to all
holders of Class A Preferred Stock that the Class A Preferred Stock would be
converted into Common Stock, subject to approval at the annual meeting of
stockholders to be held on June 4, 1998 of an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock to 100 million shares. This Amendment was approved at the
Company's annual meeting of stockholders resulting in the issuance of shares of
Common Stock described in Item 2. above. 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, and will continue to exist as accrued
dividends payable after conversion of the Class A Preferred Stock into Common
Stock.
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."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 4, 1998, the Company held its Annual Meeting of Stockholders, at
which the following matters were approved (with holders of Common Stock, Class A
Preferred and Series B Preferred Stock voting as one class on both items, and
holders of Common Stock voting separately as a class on item (2)):
(1) Each of the three nominated directors, E.H. Hawes, II, Daryl N.
Snadon and Richard P. Crane, Jr. were reelected to the Board of
Directors. The following number of shares were voted for, against
or withheld with respect to each of such directors:
<TABLE>
<CAPTION>
Name Votes For Votes Against Votes Withheld
---- ---------- ------------- --------------
<S> <C> <C> <C>
E. H. Hawes, II 20,111,733 105 564
Daryl N. Snadon 20,111,733 105 564
Richard P. Crane, Jr. 20,111,733 105 564
</TABLE>
(2) An amendment to the Certificate of Incorporation to increase the
number of authorized shares of Common Stock to 100 million shares
was approved with 20,091,044 shares voted for, 3,652,638 shares
voted against, 603 shares withheld and no broker non-votes with
regard to Common Stock, Class A Preferred Stock and Series B
Preferred Stock voting as one class, and 16,746,045 shares for,
3,238,352 shares voted against, 603 shares withheld and no broker
non-votes with regard to Common Stock voting separately as a
class.
ITEM 5. OTHER INFORMATION.
The Company may exercise its discretionary authority to vote proxies on
any matter raised at next year's annual meeting of stockholders which is not
described in the Company's proxy statement unless the Company has received
notice of such matter from a stockholder on or before April 6, 1999.
19
<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 of 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 of Incorporation of the Company
effecting name change, increase of authorized shares, authorization of
Class A preferred stock and stock ownership limitations filed as Exhibit
3.2 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.
*3.1.6 Certificate of Amendment of Certificate of Incorporation of the Company
increasing the number of authorized shares of Common Stock to
100,000,000 shares.
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.
*10.1 Operating Agreement of River Port Truck Stop, LLC between the Company
and Donald I. Williams ("Williams").
*10.2 Amendment to Employment Agreement between River Port Truck Stop, LLC,
O.M. Operating, L.L.C. and Williams.
*10.3 Consulting and Administrative Agreement between the Company and River
Port Truck Stop, LLC.
*10.4 Letter Agreement between the Company and Williams relating to River Port
Truck Stop, LLC.
*10.5 Assignment and Assumption of Lease dated May 19, 1998, by and between
River Port Truck Stop, Inc. and River Port Truck Stop, LLC.
*27.1 Financial Data Schedule required by Item 601 of Regulation S-B.
______________________
* Filed herewith.
20
<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)
Date: August 14, 1998 By: /s/ George J. Akmon
--------------------------------
Executive Vice-President &
Chief Financial Officer (Principal
Financial and Chief Accounting
Officer)
21
<PAGE>
EXHIBIT 3.1.6
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
North American Gaming and Entertainment Corporation (the "Corporation), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
A. Adoption by Directors. That at a meeting of the Board of Directors of
the Corporation resolutions were duly adopted setting forth a proposed amendment
of the Certificate of Incorporation of the Corporation, declaring said amendment
to be advisable and calling a meeting of the stockholders of the Corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
Increase in Authorized Shares
-----------------------------
"RESOLVED, that the Certificate of Incorporation of the Corporation be
amended by changing subparagraph (1) of the Article thereof numbered "FOURTH" so
that, as amended, said subparagraph (1) of said Article "FOURTH" shall be and
read as follows:
FOURTH. The total number of shares of stock which the Corporation
shall have authority to issue is
(1) One hundred million (100,000,000) shares of Common Stock of
the par value of One Cent ($.01) each,"
B. Adoption by Stockholders. That thereafter, pursuant to resolution of
its Board of Directors, an annual meeting of the stockholders of the Corporation
was duly called and held, upon notice in accordance with Section 222 of the
General Corporation Law of the State of Delaware at which meeting the necessary
number of shares as required by statute were voted in favor of the amendment.
C. Authority. That said amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
D. Effect on Capital. That the capital of the Corporation shall not be
reduced under or by reason of said amendment.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by E.H. Hawes, II, its President, as of the 4th day of June, 1998.
NORTH AMERICAN GAMING AND ENTERTAINMENT
CORPORATION
By:
------------------------------------
E.H. Hawes, II, President
<PAGE>
EXHIBIT 10.1
OPERATING AGREEMENT
RIVER PORT TRUCK STOP, L.L.C.
STATE OF TEXAS STATE OF LOUISIANA
COUNTY OF DALLAS PARISH OF
--------------
BEFORE US, the undersigned authorities, Notaries Public, duly commissioned
and qualified, in and for the State of Texas or State of Louisiana, therein
residing, and in the presence of the witnesses hereinafter named and
undersigned:
PERSONALLY CAME AND APPEARED:
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION, A DELAWARE
CORPORATION, DOMICILED IN DALLAS, TEXAS, WHOSE PERMANENT MAILING ADDRESS IS
13150 COIT ROAD, SUITE 125, DALLAS, TEXAS 75240, HEREIN REPRESENTED BY ITS
DULY AUTHORIZED OFFICER (HEREINAFTER REFERRED TO AS "NAMGC")
DONALD I. WILLIAMS, WHOSE PERMANENT MAILING ADDRESS IS 903 EAST MAIN,
NEW ROADS, LOUISIANA 70760 (HEREINAFTER REFERRED TO AS "WILLIAMS")
(HEREINAFTER JOINTLY REFERRED TO AS THE "MEMBERS")
who, as all of the Members of River Port Truck Stop, L.L.C., adopt these
provisions as the Operating Agreement of River Port Truck Stop, L.L.C.:
1. DEFINITIONS
1.1 DEFINITIONS. As used in this Operating Agreement, the following terms
have the following meaning:
1.1.1 "Company" means River Port Truck Stop, L.L.C.
1.1.2 "Act" means the Limited Liability Company Law of the State
of Louisiana and any successor statute as amended.
1.1.3 "Code" means the Internal Revenue Code of 1986 and any
successor statute as amended.
1.1.4 "Member" means any person executing this Operating Agreement
as a Member or hereafter admitted to the Company as a Member as provided in this
Operating Agreement, but does not include any person who has ceased to be a
Member in the Company.
1
<PAGE>
1.1.5 "Person" has the meaning given that term in the Act.
1.1.6 "Sharing Ratio" means the amount specified on Exhibit "A"
attached hereto.
1.2 GENDER. Whenever the context requires, the gender of all words used
in these regulations includes the masculine, feminine and neuter.
1.3 CONSTRUCTION. Whenever the context requires, terms used herein have
the meaning given them in the Act.
2. ORGANIZATION
2.1 FORMATION: TERM. The Company has been organized as a Louisiana
limited liability company by the filing of Articles of Organization (the
"Articles") under the Act and the issuance of a certificate by the Secretary of
State of Louisiana. The Company shall be dissolved on December 31, 2050, unless
sooner dissolved as provided in this Operating Agreement.
2.2 REGISTERED OFFICE AND AGENT. The Company shall maintain a registered
office and a registered agent in the State of Louisiana, which office and agent
may be changed by vote of Members owning 65% of the Sharing Ratios.
2.3 OTHER OFFICES. The Company may have, in addition to its registered
office, offices and places of business at such places, both within and outside
the State of Louisiana, as the Members may from time to time determine or the
business of the Company may require.
2.4 MEETINGS. Meetings of the Members shall be held at the office of the
Company, or at such other place, either in Dallas, Texas or Baton Rouge,
Louisiana, at a time and date as designated by the Manager in the notice.
Failure to hold an annual meeting shall not affect or vitiate the Company's
existence. If there is no Manager, any Member can designate a time, place and
date for a meeting. Either Member may demand that the Manager call a meeting,
with notice to be given not later than five (5) days after such demand.
2.5 NOTICE OF MEETINGS. Written notice of the time and place of the
meeting of Members shall be given by the Manager to all Members entitled to vote
thereat at the Member's last known address, at least five (5) days and not more
than sixty (60) days prior to the date fixed for said meeting. If there is no
Manager, any Member can give notice.
2.6 VOTING.
2.6.1 DEFINITION. At any meeting of the Members, every Member
having the right to vote shall be entitled to vote in person, or by proxy.
2.6.2 VOTING. There shall be one hundred (100) total votes, which
shall be
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apportioned among the Members in accordance with their Sharing Ratios.
2.6.3 VOTE NECESSARY FOR DECISIONS. Except as otherwise provided
in the Act, the Articles or the Operating Agreement, all decisions of the
Members shall be made by Members owning 65% of the Sharing Ratios, and the
reference herein to a "vote of the Members" or similar language shall mean the
vote by Members owning at least 65% of the Sharing Ratios.
2.6.4 WRITTEN BALLOT. On demand of any Member, the vote on any
question shall be by written ballot.
2.7 PROXIES. Members may give their proxy to the other Member or to non-
Members. All proxies shall be in writing, signed and shall be filed prior to or
at the meeting for which they are given.
2.8 WRITTEN CONSENT. Any action may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by
Members holding the requisite number of votes required to authorize such action
at a meeting of Members, and such consent shall have the same force and effect
as a vote of the Members. A photostatic, facsimile, or similar reproduction of a
writing, signed by a Member shall be regarded as an original for all purposes.
2.9 TELEPHONE CONFERENCE CALLS. Members may participate in meetings by
means of a telephone conference call or similar communication equipment.
2.10 COMPANY RECORDS. The Company shall keep a record of all meetings in a
minute book.
3. CAPITAL
3.1 INITIAL CONTRIBUTION. Each Member shall contribute as capital the
property set forth on Exhibit "A".
3.2 NO RIGHT TO RETURN. No Member has the right to require the return of
all or any part of their capital or a distribution of any property from the
Company prior to its termination.
3.3 NO INTEREST. No interest shall be payable on any capital contribution
made to the Company or on any Capital Account.
3.4 CAPITAL ACCOUNTS. A capital account ("Capital Account") shall be
established and maintained for each Member. The Capital Account of each Member
(a) shall be increased by (i) the amount of money contributed by that Member to
the Company, (ii) the fair market value of property contributed by that Member
to the Company (net of liabilities secured by the contributed property that the
Company is considered to assume or take subject to under section 752 of the
Code), and (iii) allocations to that Member of Company income and gain (or items
thereof), including income and
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gain exempt from tax and income and gain described in Treas. Reg (S)1.704-
1(b)(2)(iv)(g), but excluding income and gain described in Treas. Reg. (S)1.704-
1(b)(4)(i), and (b) shall be decreased by (i) the amount of money distributed to
that Member by the Company, (ii) the fair market value of property distributed
to that Member by the Company (net of liabilities secured by the distributed
property that the Member is considered to assume or take subject to under
section 752 of the Code), (iii) allocations to that Member of expenditures of
the Company described in section 705(a)(2)(B) of the Code, and (iv) allocations
of Company loss and deduction (or items thereof), including loss and deduction
described in Treas. Reg. (S)1.704-1(b)(2)(iv)(g), but excluding items described
in clause (b)(iii) above and loss or deduction described in Treas. Reg. (S)
1.704-1 (b)(4)(i) or (S) 1.704-1(b)(4)(iii). The Members' Capital Accounts also
shall be maintained and adjusted as permitted by the provisions of Treas. Reg.
(S)1.704-1(b)(2)(iv)(f) and as required by the other provisions of Treas. Reg.
(S)(S)1.704-1(b)(2)(iv) and 1.704-l(b)(4), including adjustments to reflect the
allocations to the Members of depreciation, depletion, amortization, and gain or
loss as computed for book purposes rather than the allocation of the
corresponding items as computed for tax purposes, as required by Treas. Reg.
(S)1.704-1(b)(2)(iv)(g). Capital Accounts shall be determined on December 31 of
each year by the Manager. On the transfer of all or part of a Member's
Membership Interests and Sharing Ratios, the Capital Account of the transferor
that is attributable to the transferred Membership Interests and Sharing Ratios
shall carry over to the transferee Member in accordance with the provisions of
Treas. Reg. (S)1.704-1(b)(2)(iv)(l).
3.5 INCREASES OR DECREASES IN CAPITAL.
3.5.1 It is recognized and anticipated that (i) adjustments to
each Member's Capital Account may be required in accordance with generally
accepted accounting practices, or (ii) the Company may require additional
capital from time to time. It is hereby agreed that the Members shall, by
unanimous vote, determine the amount by which the capital of the Company shall
be increased or decreased from time to time.
3.5.2 If any Member refuses or fails to contribute his portion of
additional capital within fifteen (15) days following any approved increase in
Company capital, the remaining Member(s) shall have the right to contribute in
proportion to their respective Capital Accounts the additional amounts necessary
to bring the total capital to the approved increased amount.
3.5.3 Both increases and decreases in the Company capital and any
resulting changes in the Members Capital Accounts shall be reflected in the
Company records.
3.6 DEFICIT CAPITAL ACCOUNTS. Notwithstanding anything to the contrary
contained in this Operating Agreement, and notwithstanding any custom or rule of
law to the contrary, to the extent that the deficit, if any, in the Capital
Account of any Member results from or is attributable to deductions and losses
of the Company (including non-cash items such as depreciation), or distributions
of money pursuant to this Operating Agreement to all Members, upon dissolution
of the Company such deficit shall not be an asset of the Company and such Member
shall not be obligated to contribute such amount to the Company to bring the
balance of such Member's Capital Account to zero.
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4. ALLOCATIONS AND DISTRIBUTIONS
4.1 NET PROFIT ALLOCATION. Any profit realized by the Company shall be
credited to the Members as follows in the following priority:
4.1.1 First, profit shall be allocated to Members pro rata based
on the ratios that the negative Capital Account balance of each Member bears to
the aggregate negative Capital Account balances of all the Members until the
Capital Account balances are increased to zero;
4.1.2 Next, profit shall be allocated to the Members pro rata
based on the ratios that the positive Capital Account balance of each Member
bears to the aggregate positive Capital Account balances of all the Members
until the distributions pursuant to Section 4.3.1 have reduced the Members
positive Capital Account balances to zero; and
4.1.3 Next, any remaining profit shall be allocated to the Members
in accordance with their respective Sharing Ratios.
4.2 NET LOSS ALLOCATION. Any loss realized by the Company shall be
charged to the Capital Accounts of the Members as follows in the following order
of priority:
4.2.1 Any loss shall be charged to the Members pro rata based on
the ratio that the positive Capital Account balance of each Member bears to the
aggregate positive Capital Account balances of all the Members until the Capital
Account balances are reduced to zero; and
4.2.2 Any remaining balance of the loss shall be charged to
Members in accordance with their respective Sharing Ratios.
4.3 DISTRIBUTIONS. Distributions of available cash, less a reasonable
reserve to be determined in good faith by the Manager necessary to fund
operations of the Company for two months, shall be distributed monthly in the
following order of priority:
4.3.1 First, to Members in accordance with the respective positive
Capital Account balances (after Capital Accounts have been adjusted to reflect
all profit and loss allocations and distributions above) until such time as the
Capital Account balances are reduced to zero; and
4.3.2 Any remaining distributions shall be distributed to the
Members in accordance with their respective Sharing Ratios.
Notwithstanding the above provisions of this Section 4.3, the Company shall
distribute, if not already distributed through monthly distributions, an amount
to each Member equal to forty percent (40%) of the net taxable income of the
Company for the preceding taxable year allocated to each Member, so the Members
may use such distributions to pay their individual taxes on their pro rata share
of said taxable income, with such distribution, or the remainder thereof after
taking into
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account monthly distributions, to be made within seventy-five (75) days
following the end of the taxable year to which such distribution relates.
4.4 COMPENSATION. Any Member who performs services for the Company shall
be paid a salary, fee, guaranteed payment, or some sort of compensation to
insure they are adequately compensated for said services, as determined by vote
of the Members.
4.5 TRANSFER. If a Member's Membership Interest and Sharing Ratios are
transferred during a fiscal year of the Company, the Company's taxable year
shall not close, instead, all profits and losses shall be prorated for the
entire taxable year.
4.6 QUALIFIED INCOME OFFSET. A Member who unexpectedly receives any
adjustment, allocation or distribution described in Treas. Reg. (S) 1.704-1
(b)(2)(ii)(d)(4), (5) or (6) will be specially allocated items of Company net
profit and gain in an amount and manner sufficient to eliminate, to the extent
required by the Treasury Regulations, the deficient capital accounting of the
Member as quickly as possible.
5. MANAGERS
5.1 ELECTED MANAGERS. If permitted by the Articles of Organization, the
Members may elect one or more Managers by vote of the Members; provided,
however, that notwithstanding the foregoing provision or any other provision in
this Operating Agreement to the contrary, for as long as that certain Note (the
"Note"), dated April 15, 1998, payable by Williams to NAMGC in the original
principal amount of $4,000,000 remains unpaid there shall only be one Manager of
the Company and NAMGC shall be entitled to designate and appoint, and change
from time to time, such Manager with the consent of Williams (which consent
shall not be unreasonably withheld) by delivering written notice to Williams,
whereupon Williams shall have five (5) days to object to such appointment or
change by delivering written notice thereof to NAMGC, and upon any such
objection, NAMGC shall designate a different Manager and deliver written notice
thereof to Williams for his consent; and, provided, further, that in the event
the appointed Manager repeatedly fails to satisfactorily perform such Manager's
duties hereunder, Williams shall have the right to notify NAMGC who shall
appoint a new Manager if the existing Manager does not cure such failures.
NAMGC's designation and appointment as Manager as of the date of this Operating
Agreement is George J. Akmon, which is hereby approved by Williams. Upon
payment in full of the Note, the Manager designated by NAMGC shall be deemed
automatically removed and the Members shall elect one or more Managers under
Section 5.1. A Manager need not be a Member.
5.2 TERM OF OFFICE: REMOVAL. Each Manager shall hold office until his
successor is chosen and qualified or until his earlier death, resignation,
retirement, disqualification or removal from office. Subject to the provisions
of Section 5.1, any Manager elected or appointed by the Members may be removed
at any time by a vote of Members owning 65% of the Sharing Ratios.
5.3 MANAGER: DUTIES. The Manager shall perform such duties as delegated by
the
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Members, or which are incumbent upon him under the provisions of the
Articles and this Operating Agreement. In general, the Manager will manage the
routine daily operations of the Company. Material nondaily operational decisions
will be made by unanimous vote of the Members. The routine daily operations of
the Company (hereinafter referred to as "Non-Major Decisions") shall include:
5.3.1 Signing checks in the name, and on behalf, of the Company;
5.3.2 Opening and closing accounts with banks and other financial
institutions in the name, and on behalf, of the Company;
5.3.3 Putting into effect resolutions and agreements of the
Members adopted under or pursuant to this Operating Agreement;
5.3.4 Retaining, supervising and discharging all employees,
agents, consultants and other persons necessary or appropriate to carry out the
business of the Company, other than Williams under his Amendment to Employment
Agreement described in Section 8.16 or NAMGC under its Consulting and
Administrative Agreement described in Section 8.17;
5.3.5 Taking reasonable and prudent steps to assure that the
Company maintains insurance, in amounts approved by vote of the Members or
included in the current approved budget, to protect the interests of the
Company;
5.3.6 Executing additional video poker operations or other gaming
operating agreements in the name and on behalf of the Company after such
additional agreements have been approved by vote of the Members;
5.3.7 Incurring trade payables and other expenses necessary or
convenient to carry out the purpose and business of the Company in accordance
with the current approved budget;
5.3.8 Keeping and maintaining all books of accounts and other
records of the Company.
5.3.9 Retaining and relying on the advice of legal, accounting and
other consulting professionals to take such actions as are within his authority
otherwise granted in this Section 5.3;
5.3.10 Taking any actions or incurring any expenditures authorized
by a vote of the Members or set forth in the current approved budget approved by
vote of the Members;
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5.3.11 Collecting payments of amounts due the Company under
agreements, contracts, licenses or instruments to which the Company is a party;
and
5.3.12 Taking such actions as such Manager reasonably deems
necessary to assure that the Company complies with all present and future laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments, courts, departments, commissions, boards, and
officers, which may be applicable to the Company and its business.
5.4 No act shall be taken, sum expended, or obligation incurred by the
Company or the Manager with respect to a matter within the ambit of any of the
major decisions ("Major Decisions") affecting the Company, as enumerated below,
unless such Major Decisions have been approved by vote of the Members. The Major
Decisions shall include:
5.4.1 Terminating or otherwise materially modifying any truck stop
video poker operating agreements or any agreement, contract, license or
instrument to which the Company is a party and which was required to be approved
by vote of the Members prior to its original execution;
5.4.2 Assigning Company property in trust for creditors or on the
assignee's promise to pay the debts of
5.4.3 Disposing of the goodwill of the Company;
5.4.4 Doing any other act which would make it impossible to carry
on the ordinary business of the Company;
5.4.5 Confessing or agreeing to a judgment against the Company or
settling or otherwise defending any litigation to which the Company is a party;
5.4.6 Submitting a Company claim or liability to arbitration;
5.4.7 Making, executing or delivering for the Company any note,
bond, mortgage, deed of trust, guarantee, indemnity bond, surety bond or
accommodation paper or accommodation endorsement;
5.4.8 Borrowing money in the Company's name or using Company
property as collateral, or refinancing, recasting, modifying or extending any
loan to the Company or that is secured by the property or assets of the Company;
5.4.9 Assigning, transferring, pledging, compromising or releasing
any claim or debt owing to the Company except upon payment in full;
5.4.10 Assigning the right of the Company in specific Company
property for other than a Company purpose;
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5.4.11 Approving execution of any additional video poker operation
or other gaming operating agreement;
5.4.12 Approving the annual budget (or any modifications thereto)
for the following year's operations;
5.4.13 Buying or selling video poker devices;
5.4.14 Any other decision or action which by any provision of this
Operating Agreement is required to be approved by the Members; and
5.4.15 In the absence of a Manager, taking and approving all Non-
Major Decisions.
5.5 ANNUAL BUDGET. The Manager shall be responsible for preparing and
presenting to the Members at least two (2) weeks prior to January 1st of each
year a budget of the Company's proposed operations and expenditures for the
following year. The Members shall have the right to question and change such
budget, and for the budget to be considered an approved budget, it must be
approved by the Members by vote of Members owning at least 65% of the Sharing
Ratios, and the Members agree to use their reasonable best efforts to obtain
such approval by January 15th of the year to which such budget relates.
6. TRANSFER OF A MEMBER'S INTEREST; WITHDRAWAL
6.1 ASSIGNMENT. A Member shall have the right to assign or transfer all
or any part of their Membership Interest ("Assignment") only in accordance with
these provisions.
6.1.1 UNANIMOUS CONSENT. An Assignment shall only give the
Assignee the right to receive such distributions to which the Assignor was
entitled to the extent assigned. An Assignment shall not entitle the Assignee to
become or to exercise any rights or powers of a Member or participate in any
vote or management of the Company until such time as the other Members
unanimously consent in writing.
6.1.2 CREDITOR. A creditor of a Member shall have the same
rights, and only the same rights, as an Assignee.
6.1.3 DEATH OR INCAPACITY. If an individual Member dies or is
adjudged to be incompetent, the Member's legal representative and successors
shall have the same rights, and only the same rights, as an Assignee.
6.1.4 DISSOLUTION. If a Member is a legal entity and is dissolved
or terminated, the Member's legal representative shall have the same rights, and
only the same rights, as an Assignee.
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6.2 WITHDRAWAL. A Member is not entitled to withdraw as a Member from
the Company without the prior consent of all of the Members. Withdrawal of a
Member, with such consent, shall not dissolve the Company unless, within ninety
(90) days after notice of the withdrawal is received by Company, the remaining
Members by unanimous written consent agree to dissolve the Company. If the
remaining Members have consented to the withdrawal and decided to continue the
Company, they shall, within a reasonable time after withdrawal, pay the
withdrawing Member the fair market value of the withdrawing Member's interest in
the Company.
6.2.1 ACCOUNTANT. The fair market value shall be determined by
the CPA then used by the Company to prepare tax returns and such determination
shall be conclusive on all parties. The fair market value shall be determined as
of the date contributed of the Member's capital contribution. If there is no CPA
so used by the Company, then each party, at its own expense, shall hire a CPA.
If the values differ by less than ten (10%) per cent of the lower value, then
the average of the two shall be the value. If the value as determined by each of
the two CPA's differ by more than ten (10%) per cent of the lower, then the two
CPA's shall appoint a third CPA who shall determine the value. The fee of the
third CPA shall be split equally between the parties.
6.2.2 PAYMENT. The amount shall be paid as follows:
6.2.2.1 CASH. At least ten (10%) per cent of the amount
shall be paid in cash or guaranteed funds at Closing. The Company shall have the
option to pay a larger percentage in cash at Closing.
6.2.2.2 NOTE. The balance shall be represented by one
unsecured promissory note (the "Note"), payable to the order of the withdrawing
Member as appropriate, bearing interest at a rate equal to the applicable
federal rate (as defined in the Code and applicable regulations). Principal and
interest payable: In one hundred twenty (120) equal consecutive monthly
installments, the first monthly installment due and payable on or before thirty
(30) days after Closing, and the remaining installments coming due, one each, on
or before the same day of each subsequent and successive calendar month
thereafter, and so continuing until the Note is paid in full. The amount of each
monthly installment shall be applied and credited first to the accrued interest
then due on the total unpaid principal balance, and the remainder of the
installment shall be applied to reduction of the unpaid principal balance. The
Note shall provide (i) that failure to pay any two installments when due and not
corrected within ten (10) days after written notice thereof, shall give the
holder the option to declare the entire remaining balance immediately due and
payable, and (ii) for reasonable attorney fees in the event of a default, and
(iii) other normal clauses.
6.2.3 DELIVERY OF CERTIFICATE. Upon delivery of the Note and the
cash portion of the Purchase Price, the withdrawing Member shall deliver the
properly endorsed Certificate(s) to Company.
6.3 RIGHT OF FIRST REFUSAL: OPTION. Notwithstanding anything to the
contrary, Williams hereby:
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6.3.1 Agrees not to assign, transfer, sell or encumber his
Membership Interests or Sharing Ratios without NAMGC's prior written consent,
except in accordance with Section 6.4, Section 6.5 or Section 6.6; and
6.3.2 Agrees that he shall not have the right to transfer or
assign his Membership Interests or Sharing Ratios, or any portion thereof or
rights therein, to any person unless such person is a Louisiana resident that
satisfies all of the suitability requirements under applicable Louisiana law
necessary for the Company to obtain and hold all Louisiana gaming licenses
necessary for the operation of its video poker casino, and except in accordance
with Section 6.4, Section 6.5 or Section 6.6.
6.4 TRANSFER TO FAMILY MEMBERS BY WILLIAMS. Notwithstanding any provision
hereof to the contrary, including Sections 6.1, 6.3.1 and 6.3.2, Williams shall
be entitled to transfer all or a portion of his Membership Interests and Sharing
Ratios by inter vivos gift or at death to (i) his spouse, (ii) his descendants,
or (iii) a limited liability company or family partnership owned 100% by
Williams, his spouse and/or his descendants, provided, (a) such transferee shall
take such Membership Interests and Sharing Ratios fully subject to the terms and
conditions of this Agreement and shall execute a written instrument
acknowledging such fact and agreeing to be bound by all of the terms and
conditions of this Agreement, and (b) such transferee is a Louisiana resident
that satisfies all of the suitability requirements under applicable Louisiana
law necessary for the Company to obtain and hold all Louisiana gaming licenses
necessary for the operation of its video poker casino. Upon satisfaction of the
foregoing, such transferee shall be considered a Member hereunder. It shall not
be necessary to obtain the prior consent of NAMGC to any such allowed transfer,
but Williams shall provide prior written notice of the pending transfer to NAMGC
and evidence that all of the conditions set forth in this Section 6.4 have been
satisfied, as a condition precedent to the valid and effective transfer.
6.5 BUY-SELL UPON LOSS OF SUITABILITY. NAMGC and Williams (which shall be
binding on his transferees under Section 6.4) hereby agree to the following buy-
sell provisions in the event either of them fails to meet the suitability
requirements under the Louisiana Video Draw Poker Devices Control Law or other
applicable gaming laws (the "Applicable Laws") necessary for the Company to
obtain and hold all Louisiana gaming licenses necessary for the operation of its
video poker casino, or, in the case of Williams (or such transferees), Williams
(or such transferees) ceases to be a Louisiana resident:
6.5.1 WILLIAMS' LOSS OF SUITABILITY. In the event Williams (or
his transferees under Section 6.4, as applicable) fails to continue to meet the
suitability requirements under Applicable Laws or ceases to be a Louisiana
resident, then the provisions of Section 6.5.3 shall immediately become
applicable and Williams (or such transferee) shall be referred to as the
"Nonsuitable Member" in Section 6.5.3 and NAMGC shall be referred to as the
"Other Member" in Section 6.5.3.
6.5.2 NAMGC'S LOSS OF SUITABILITY. In the event NAMGC fails to
continue to meet the suitability requirements under Applicable Laws, then the
provisions of Section 6.5.3 shall
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immediately become applicable and NAMGC shall be referred to in Section 6.5.3 as
the Nonsuitable Member and Williams (or such transferees) shall be referred to
individually and collectively as the Other Member.
6.5.3 BUY-SELL PROCEDURES. Upon the occurrence of the situation
described in Section 6.5.1 or Section 6.5.2, as applicable, so that this Section
6.5.3 becomes applicable, the Nonsuitable Member shall have the right to
contest, in accordance with applicable administrative and judicial process, at
its or his expense, the determination by the applicable governmental authority
that the Nonsuitable Member has become unsuitable, or the Nonsuitable Member may
accept such determination. Upon the acceptance of such determination (without
contest, or during the administrative and judicial process), or at the
conclusion of the applicable administrative and judicial process at which time
the determination of unsuitability was upheld, whichever occurs first, the
Nonsuitable Member shall have thirty (30) days (or such shorter period of time
if required by law or mandated by applicable governmental authorities) to sell,
gift or otherwise transfer such Nonsuitable Member's Membership Interests and
Sharing Ratios to a transferee who meets the suitability requirements of
Applicable Laws, who must also be a Louisiana resident if Williams (or his
transferee) is the Nonsuitable Member, at such price as may be negotiated
between the Nonsuitable Member and the person or entity to whom the Nonsuitable
Member's Membership Interests and Sharing Ratios will be assigned (the
"Assignee"); provided, however, that the Other Member must give his or its
consent to the transfer to the Assignee and to the Assignee becoming a Member
hereunder, which consent may not be unreasonably withheld; and, provided,
further, that if the Other Member objects and withholds consent, such Other
Member must deliver along with his or its written objection the specific
detailed reasons for objecting to such Assignee and the reasons why the Other
Member believes such reasons satisfy the requirement that the consent has been
withheld in the exercise of "reasonable" discretion. If the Nonsuitable Member
believes that such reasons do not constitute a "reasonable" objection, the
Nonsuitable Member shall be entitled to object by written notice to the Other
Member giving the reasons therefor, and if the Nonsuitable Member and Other
Member shall not be able to agree within five (5) days whether the Assignee is
acceptable or not acceptable, the Nonsuitable Member shall not transfer the
Membership Interests and Sharing Ratios to such proposed Assignee, but shall
retain all rights and remedies, including for damages, which he or it may have
against Other Member if the rejection by the Other Member is ultimately
determined not to have been reasonable. Notwithstanding the foregoing, if the
Other Member has rejected a proposed Assignee, the Nonsuitable Member shall have
the opportunity to present other proposed Assignees who will be reviewed by the
Other Member in accordance with this Section 6.5.3, until expiration of the
thirty (30) days (or such shorter period of time if required by law or mandated
by applicable governmental authorities).
If the Other Member does not object to the proposed Assignee, or objects
but the Nonsuitable Member and Other Member are able to agree that such proposed
Assignee is acceptable during the five (5) day period referenced above, the
Nonsuitable Member shall be entitled to transfer his or its Membership Interests
and Sharing Ratios to the proposed Assignee, which transfer must be effective
prior to the expiration of the thirty (30) day period (or shorter period
required by law or dictated by the governmental authorities) referenced in the
preceding paragraph, and upon closing thereof, the
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Assignee shall take such Membership Interests and Sharing Ratios fully subject
to the terms and conditions of this Agreement and shall execute a written
instrument acknowledging such fact and agreeing to be bound by all of the terms
and conditions of this Agreement. Upon satisfaction of the foregoing, the
Assignee shall be considered a Member hereunder.
In the event the Nonsuitable Member shall not be able to find a proposed
Assignee, or the Other Member objects to such proposed Assignee in the exercise
of reasonable discretion, or the closing of the transfer to the Assignee does
not take place within the required time period noted in the preceding paragraph,
the Other Member shall have the right to locate a suitable purchaser of the
Nonsuitable Member's Membership Interests and Sharing Ratios for a period of
ninety (90) days after the expiration of the thirty (30) day period referenced
in the first paragraph of this Section 6.5.3 to locate a purchaser (including,
but not limited to the Other Member, himself or itself) who meets the
suitability requirements under Applicable Law and the Nonsuitable Member hereby
agrees to sell his or its Membership Interests and Sharing Ratios to such
purchaser at a purchase price equal to two (2) times the Nonsuitable Member's
allocable share of the net operating income of the Company for the preceding
calendar year, with such purchase price to be paid in cash prior to expiration
of said ninety (90) day period.
6.6 RIGHT OF MEMBERS TO SELL MEMBERSHIP INTERESTS AND SHARING RATIOS.
Each Member shall have the absolute right to sell his or its Membership Interest
and Sharing Ratios to any person or entity at such price and upon such terms and
conditions as may be agreed between the selling Member ("Selling Member") and
such person or entity, upon compliance with the terms and conditions of this
Section 6.6. Further, NAMGC shall have the right to assign the Consulting and
Administrative Agreement (referenced in Section 8.17) to such person or entity
upon such terms and conditions as may be negotiated between NAMGC and such
purchaser or entity.
In order for the Selling Member to be able to sell his or its Membership
Interests and Sharing Ratios, and for NAMGC to assign the Consulting and
Administrative Agreement if it is the Selling Member, the Selling Member must
give written notice to the other Member (the "Other Member") that the Selling
Member plans to sell his or its Membership Interests and Sharing Ratios (and
assign the Consulting and Administrative Agreement, if applicable) to a proposed
purchaser (the "Purchaser") at least thirty (30) days prior to consummation of
the proposed sale. The Other Member shall then be required within fifteen (15)
days following receipt of such notice of proposed sale to consent to the
Purchaser purchasing the Selling Member's Membership Interests and Sharing
Ratios (and the Consulting and Administrative Agreement, if applicable) and to
such Purchaser becoming a Member hereunder, which consent may not be
unreasonably withheld. In the event the Other Member objects in writing and
withholds consent within said fifteen (15) day period, such Other Member must
deliver along with his or its written objection the specific detailed reasons
for objecting to such Purchaser becoming a Member, and/or such Purchaser
becoming an assignee under and assuming the Consulting and Administrative
Agreement, if applicable, and the reasons why the Other Member believes such
reasons satisfy the requirement that the consent has been withheld in the
exercise of "reasonable" discretion. If the Selling Member believes that such
reasons do not constitute a "reasonable" objection, the Selling Member shall be
entitled to object by written notice
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to the Other Member giving the reasons therefor, and if the Selling Member and
Other Member shall not be able to agree within five (5) days whether the
Purchaser is acceptable or not acceptable as a Member, or as an assignee under
the Consulting and Administrative Agreement, if applicable, the Selling Member
(i) shall not transfer the Membership Interests and Sharing Ratios to such
proposed Purchaser if that was the objection; or (ii) may sell the Membership
Interests and Sharing Ratios to such proposed Purchaser if the Other Member did
not object, but not assign the Consulting and Administrative Agreement to such
proposed Purchaser if that was the objection; or (iii) may elect not to transfer
the Membership Interest and Sharing Ratios to such proposed Purchaser or assign
the Consulting and Administrative Agreement because said assignment was objected
to by the Other Member; but the Selling Member shall retain all rights and
remedies, including for damages, which he or it may have against the Other
Member if the rejection by the Other Member of either the transfer of Membership
Interests and Sharing Ratios or the assignment of the Consulting and
Administrative Agreement, as applicable, is ultimately determined not to have
been reasonable.
If the Other Member does not object to the proposed Purchaser, or objects
but the Selling Member and Other Member are able to agree that such proposed
Purchaser is acceptable during the five (5) day period referenced above, the
Selling Member shall be entitled to transfer his or its Membership Interests and
Sharing Ratios to the proposed Purchaser, and NAMGC shall be entitled to assign
the Consulting and Administrative Agreement to such Purchaser if allowed under
the preceding paragraph, and upon closing thereof, the Purchaser shall take such
Membership Interests and Sharing Ratios fully subject to the terms and
conditions of this Agreement and shall execute a written instrument
acknowledging such fact and agreeing to be bound by all of the terms and
conditions of this Agreement. Upon satisfaction of the foregoing, the Purchaser
shall be considered a Member hereunder. Further, at such closing, NAMGC shall
assign the Consulting and Administrative Agreement to such Purchaser who shall
assume all of the rights, responsibilities and duties of NAMGC thereunder, and
NAMGC shall be released from any further responsibilities, duties, obligations
or obligations thereunder.
7. DISPUTE RESOLUTION
7.1 AGREEMENT TO USE PROCEDURE. The Members have formed the Company in
good faith and in the belief that it is mutually advantageous to them. It is
with that same spirit of cooperation that they pledge to attempt to resolve any
dispute amicably without the necessity of litigation. Accordingly, they agree if
any dispute arises between them relating to the Company (the "Dispute"), they
will first utilize the procedures specified in this section (the "Procedure")
prior to the commencement of any legal action.
7.2 INITIATION OF PROCEDURE. The party seeking to initiate the Procedure
(the "Initiating Party") shall give written notice to the other party,
describing in general terms the nature of the Dispute, the Initiating Party's
claim for relief and identifying one or more individuals with authority to
settle the Dispute on such party's behalf. The party receiving such notice (the
"Responding Party") shall have five (5) business days within which to designate
by written notice to the Initiating Party, one or more individuals with
authority to settle the Dispute on such party's behalf. (The individuals
14
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so designated shall be known as the "Authorized Individuals".)
7.3 DIRECT NEGOTIATIONS. The Authorized Individuals shall be entitled to
make such investigation of the Dispute as they deem appropriate, but agree to
promptly, and in no event later than thirty (30) days after the date of the
Initiating Party's written notice, meet to discuss resolution of the Dispute.
The Authorized Individuals shall meet at such times and places and with such
frequency as they may agree. If the Dispute has not bee resolved within thirty
(30) days from the date of their initial meeting, the parties shall cease direct
negotiations and shall submit the Dispute to mediation in accordance with the
following procedure.
7.4 SELECTION OF MEDIATOR. The Authorized Individuals shall have five (5)
business days from the date they cease direct negotiations to submit to each
other a written list of acceptable qualified attorney-mediators not affiliated
with any of the parties. Within five (5) days after the date of receipt of such
list, the Authorized Individuals shall rank the mediators in numerical order of
preference and exchange such rankings. If one or more names are on both lists,
the highest ranking person shall be designated as the mediator. If no mediator
has been selected under this procedure, the parties agree jointly to request a
State or Federal District Judge of their choosing to supply within ten (10)
business days a list of potential qualified attorney-mediators. Within five (5)
business days after receipt of the list, the parties shall again rank the
proposed mediators in numerical order of preference and shall simultaneously
exchange such list and shall select as the mediator the individual receiving the
highest combined ranking. If such mediator is not available to serve, they shall
proceed to contact the mediator who was next highest in ranking until they are
able to select a mediator.
7.5 TIME AND PLACE FOR MEDIATION. In consultation with the mediator
selected, the parties shall promptly designate a mutually convenient time and
place for the mediation, and unless circumstances require otherwise, such time
to be not later than (45) days after selection of the mediator.
7.6 EXCHANGE OF INFORMATION. In the event any party to this Agreement has
substantial need for information in the possession of another party to this
Agreement in order to prepare for the mediation, all parties shall attempt in
good faith to agree on procedures for the expeditious exchange of such
information, with the help of the mediator if required.
7.7 SUMMARY OF VIEWS. At least seven (7) days prior to the first
scheduled session of the mediation, each party shall deliver to the mediator and
to the other party a concise written summary of its views on the matter in
Dispute, and such other matters required by the mediator. The mediator may also
require that a confidential issue paper may be submitted by each party to him.
7.8 PARTIES TO BE REPRESENTED. In the mediation, each party shall be
represented by an Authorized Individual and may be represented by counsel. In
addition, each party may, with permission of the mediator, bring such additional
persons as needed to respond to questions, contribute information and
participate in the negotiations.
15
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7.9 CONDUCT OF MEDIATION. The mediator shall determine the format for the
meetings, designed to assure that both the mediator and the Authorized
Individuals have an opportunity to hear an oral presentation of each party's
views on the matter in dispute, and that the Authorized Individuals attempt to
negotiate a resolution of the matter in dispute, with or without the assistance
of counsel or others, but with the assistance of the mediator. To this end, the
mediator is authorized to conduct both joint meetings and separate private
caucuses with the parties. The mediation session shall be private. The mediator
will keep confidential all information learned in private caucus with any party
unless specifically authorized by such party to make disclosures of the
information to the other party. The parties agree to sign a document agreeing
that the mediator shall be governed by such rules as the mediator shall
prescribe. The parties commit to participate in the proceedings in good faith
with the intention of resolving the Dispute if at all possible.
7.10 TERMINATION OF PROCEDURE. The parties agree to participate in the
mediation procedure to its conclusion. The mediation shall be terminated (i) by
the execution of a settlement agreement by the parties, (ii) by a declaration of
the mediator that the mediation is terminated, or (iii) by a written declaration
of a party to the effect that the mediation process is terminated at the
conclusion of one full day's mediation session. Even if the mediation is
terminated without a resolution of the Dispute, the parties agree not to
terminate negotiations and not to commence any legal action or seek other
remedies prior to the expiration of five (5) days following the mediation.
Notwithstanding the foregoing, any part may commence litigation within such (5)
day period if litigation could be barred by an applicable statute of limitations
or in order to request an injunction to prevent irreparable harm.
7.11 FEES OF MEDIATOR; DISQUALIFICATION. The fees and expenses of the
mediator, shall be shared equally by the parties. The mediator shall be
disqualified as a witness, consultant, expert or counsel for any party with
respect to the Dispute and any related matters.
7.12 CONFIDENTIALITY. Mediation is a compromise negotiation for purposes
of the Federal and State Rules of Evidence and constitutes privileged
communication under Louisiana law. The entire mediation process is confidential,
and no stenographic, visual or audio record shall be made. All conduct,
statements, promises, offers, views and opinions, whether oral or written, made
in the course of the mediation by any party, their agents, employees,
representatives or other invitees and by the mediator are confidential and
shall, in addition and where appropriate, be deemed to be privileged. Such
conduct, statements, promises, offers, views and opinions shall not be
discoverable or admissible for any purposes, including impeachment, in any
litigation or other proceeding involving the parties, and shall not be disclosed
to anyone not an agent, employee, expert, witness, or representative of any of
the parties; provided, however, that evidence otherwise discoverable or
admissible is not excluded from discovery or admission as a result of its use in
the mediation.
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8. MISCELLANEOUS
8.1 TAXES.
8.1.1 FISCAL YEAR. The fiscal year of the Company shall begin on
January 1st.
8.1.2 TAX RETURNS. The Manager, if any, or if not the Members
shall cause to be prepared and filed all necessary federal and state tax returns
and make all elections necessary or appropriate.
8.1.3 BASIS ADJUSTMENT. If a distribution of the Company property
as described in Section 734 of the Code occurs or if a transfer of Membership
Interests and Sharing Ratios as described in Section 743 of the Code occurs, on
the written request of any Member, the Company shall elect to adjust the basis
of Company properties pursuant to Code Section 754.
8.1.4 PARTNERSHIP TAXATION. Neither the Company, any Manager nor
any Member may make an election for the Company to be excluded from the
application of the provisions of Subchapter K (Partners & Partnership) of
Chapter 1 (Normal Taxes & Surtaxes) of Subtitle A (Income Taxes) of the Code or
any similar provisions of applicable state law.
8.2 REPORTS. On or before the 60th day following the end of each fiscal
year during the term of the Company, the Manager, if any, or if not, the
Members, shall cause each Member to be furnished with a balance sheet, an income
statement, and a statement of changes in the Members' capital of the Company
for, or as of the end of, that year prepared by a firm of certified public
accountants. These financial statements must be prepared in accordance with
accounting principles generally employed for tax-basis records consistently
applied (except as therein noted), unless required otherwise by NAMGC to satisfy
its financial reporting requirements under applicable securities laws.
8.3 ACCOUNTS. The Managers, if any, or if not, the Members, shall
establish and maintain one or more separate bank and investment accounts and
arrangements for Company funds in the Company name with financial institutions
and firms that the Members determine by vote of Members owning 65% of the
Sharing Ratios. The Company's funds shall not be commingled with the funds of
any Members.
8.4 CERTIFICATES OF OWNERSHIP.
8.4.1 CERTIFICATES. Numbered certificates of ownership may be
issued to each Member certifying the Member's Sharing Ratio in the Company as of
the date of issuance. Each Certificate shall contain the following:
"Notice is hereby given that the sale, transfer, or other disposition
of the Membership Interests and Sharing Ratios represented by this
Certificate is
17
<PAGE>
subject to the terms, conditions and restrictions contained in the
Operating Agreement, a copy of which is on file in the Company's
office."
8.4.2 LOST CERTIFICATES. A new certificate may be issued in
place of any Certificate previously issued upon receipt of an affidavit or bond
acceptable to the Company which indemnifies the Company against any claim which
may be made against it on account of the replacement of the Certificate.
8.4.3 TRANSFER OF CERTIFICATES. Certificates are transferable
only in accordance with the Articles of Organization and this Operating
Agreement.
8.5 NO PARTICIPATION. Except as provided in that certain Operating
Agreement, as amended, of OM Operating, L.L.C. to which NAMGC and Williams are
parties, no Member shall be entitled by virtue of being a Member in the Company
to participate in any other business or venture pursued by the other Member,
even if competitive with the business of the Company, and no Member owes a
fiduciary duty or any other duty to the other Member or to the Company, to
present any other business or opportunity to such Member, or to the Company, or
to allow them to participate therein, or to refrain from participating in any
such other business or venture or opportunity.
8.6 INDEMNIFICATION. Any person made a party to any civil or criminal
action, suit or proceeding by reason of the fact that he, his testator or
predecessor, is or was a Manager, Member, agent or officer of the Company, shall
be indemnified by the Company against the reasonable expenses, including,
without limitation, attorneys' fees and amounts paid in satisfaction of judgment
or in settlement, actually and reasonably incurred by him or imposed upon him in
connection with, or resulting from the defense of, such civil or criminal
action, suit or proceeding, or in connection with or resulting from any appeal
therein, if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
8.7 RECORD DATE. For the purpose of determining Members entitled to
notice of and to vote at a meeting, or to receive a distribution, or for any
other proper purpose, shall, if no other date is appropriate, for the purpose of
determining Members (i) entitled to notice of and to vote at a meeting, the
close of business on the day before the notice of the meeting is mailed, or if
notice is waived, the close of business on the day before the meeting, shall be
the record date for such purpose, or (ii) for any other purpose, the close of
business on the day on which the resolution relating thereto shall be adopted.
8.8 INSURANCE. No Manager or Member shall have any power or incident of
ownership over any life insurance policy insuring their life owned by the
Company. If life insurance is owned by the Company, any Member other than the
Member whose life is insured may exercise all rights in connection therewith.
18
<PAGE>
8.9 INTERPRETATION. Whenever the legislature has declared that any
provision of law is applicable unless the Articles or Operating Agreement
provide otherwise, such provision of law shall be deemed applicable unless
negated or amended by provisions in the Articles or in the Operating Agreement
or unless the applicability of such provision would clearly frustrate the
provisions in the Articles or Operating Agreement.
8.10 NOTICE. Any notice or other communication required or permitted
hereunder shall be in writing, and shall be deemed to have been given if placed
in the United States mail, certified, return receipt requested, postage prepaid,
or if personally delivered, addressed to the latest address of the addressee
appearing in the records of the Company. Each of the foregoing shall be
entitled to specify a different address by giving written notice thereof as
hereinabove provided.
8.11 HEADINGS. Section and paragraph headings are not to be considered
part of this Operating Agreement, are included solely for convenience and are
not intended to be full or accurate descriptions of the content thereof.
8.12 FURTHER ASSURANCES. In connection with this Operating Agreement, each
Member shall execute and deliver any additional documents and instruments and
perform any additional acts that may be necessary or appropriate to effectuate
and perform the provisions of this Operating Agreement.
8.13 WAIVER OF CERTAIN RIGHTS. Each Member irrevocably waives any right it
may have to maintain any action for dissolution or for partition of the property
of the Company.
8.14 INDEMNIFICATION. To the fullest extent permitted by law, each Member
shall indemnify the Company, each Manager and each other Member and hold them
harmless from and against all losses, costs, liabilities, damages, and expenses
(including, without limitation, costs of suit and attorney's fees) they may
incur on account of any breach by that Member of this Operating Agreement.
8.15 AMENDMENT. The Members by unanimous vote only may amend or alter any
provision of this Operating Agreement or the Company's Articles of Organization.
8.16 EMPLOYMENT AGREEMENT WITH WILLIAMS. The Company is hereby authorized
to enter into the Amendment to Employment Agreement (herein so called) with
Williams and OM Operating, L.L.C. ("OM"), dated of even date herewith, in the
form attached hereto as Exhibit "B" pursuant to which the Company will pay to
Williams a pro rata portion of the salary of $250,000 per year payable by OM to
Williams under the existing Employment Agreement dated April 15, 1998 between
Williams and OM, together with a pro rata portion of the benefits payable by OM
to Williams thereunder, such pro rata portion to be based on the number of truck
stop video poker casinos being operated by each of OM and the Company.
Thereafter, there shall be no employment agreement between the Company and
Williams unless NAMGC approves the terms and conditions thereof, including the
salary. As part of the Amendment to Employment Agreement dated of even
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date herewith, Williams shall be reimbursed for reasonable expenses incurred by
him on behalf of the Company or in furtherance of his obligations under the
Amendment to Employment Agreement.
8.17 CONSULTING AND ADMINISTRATIVE AGREEMENT. The Company is hereby
authorized to enter into the Consulting and Administrative Agreement with NAMGC
and OM dated as of the date of this Operating Agreement in the form attached
hereto as Exhibit "C".
8.18 BEST EFFORTS TO RETAIN LICENSES. NAMGC and Williams agree to take
such actions as is deemed reasonably necessary by NAMGC, Williams or the Company
to aid the Company in retaining or obtaining any gaming, liquor or other
licenses of the Company required to operate in Louisiana.
8.19 RIGHT TO INSPECT BOOKS AND RECORDS. Each of the Members and their
representatives shall have the right to inspect and make copies from all books
and records of the Company at any time upon reasonable notice to the Company.
9. DISSOLUTION
9.1 EVENTS CAUSING DISSOLUTION. The Company shall dissolve upon the
occurrence of any of the following events unless the Members unanimously vote to
continue the Company:
9.1.1 The expiration of the term of the Company or any extension
or renewal thereof.
9.1.2 Upon the written agreement of Members owning 100% of the
Sharing Ratios, or upon the occurrence of any event stated herein to cause a
dissolution.
9.1.3 Upon the entry of a decree of judicial dissolution under the
Act.
9.2 WINDING UP AND LIQUIDATION ON DISSOLUTION OF THE COMPANY. Upon the
dissolution of the Company, its business shall be wound up as rapidly as
business circumstances will permit. The liquidation of the assets of the Company
and the winding up of its affairs shall be concluded pursuant to the terms of
the Act by the Managers.
9.3 DISTRIBUTION OF ASSETS ON LIQUIDATION. Upon the dissolution of the
Company, all of the assets of the Company, or the proceeds of sales, if any, of
the Company assets and all other cash and property, if any, then on hand in the
Company, shall be applied and distributed as follows:
9.3.1 All of the valid and binding debts and obligations of the
Company and the expenses of its termination and the settlement of its affairs
(other than debts, if any, owed to any Member) shall be paid or adequately
provided for within the period which the liquidating Manager(s) shall deem
advisable (but not exceeding the later of (i) the end of the taxable year in
which the liquidation occurs, or (ii) ninety (90) days after the date of such
liquidation); provided, however, that
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nothing contained herein shall be construed as an agreement of the Company or
the Members to pay any debt, liability, or obligation which pursuant to the
terms of the instrument(s) creating such debt, obligation, or liability, it and
its Members have no personal liability to pay; and
9.3.2 The remaining assets of the Company, including cash, liquid
investments, notes, bonds, obligations of third parties, other receivables, if
or to the extent owned by the Company on the date of dissolution, shall then be
allocated and distributed in kind to the Members in accordance with Capital
Account balances (after Capital Accounts have been adjusted to reflect all
profits and loss allocations), in the priorities set forth in Section 4.3
hereof.
THUS DONE AND SIGNED by North American Gaming and Entertainment Corporation
in Dallas, Texas, on July __, 1998.
WITNESSES NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
By:
- ---------------------- --------------------------------
E. H. Hawes, II, President
- ----------------------
----------------------
NOTARY PUBLIC
THUS DONE AND SIGNED by Donald I. Williams in ______________, Louisiana on
July __, 1998.
WITNESSES
- ---------------------- ---------------------
DONALD I. WILLIAMS
- ----------------------
---------------------
NOTARY PUBLIC
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RIVER PORT TRUCK STOP, L.L.C.
EXHIBIT "A"
MEMBER INITIAL CONTRIBUTION SHARING RATIO
- ------ -------------------- --------------
North American Gaming and $49.90 49.9 %
Entertainment Corporation
Donald I. Williams $50.10 50.1%
22
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EXHIBIT B
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ( "Amendment") is made and entered
into effective as of July __, 1998, by and between River Port Truck Stop, L.L.C.
("River Port"), OM Operating, L.L.C. ("OM") and Donald I. Williams ("Williams")
and constitutes a new agreement between River Port and Williams and an amendment
to the existing Employment Agreement (herein so called) dated April 15, 1998
between Williams and OM.
1. Williams hereby agrees to provide the same services to River Port as
he is providing to OM under the Employment Agreement, provided the amount of
time expended by him shall be split between River Port and OM based on the
number of truck stop video poker casinos operated by each of them from time to
time.
2. OM shall be responsible for paying a pro rata portion of all
compensation and benefits payable to Williams under the Employment Agreement,
based on the number of truck stop video poker casinos operated by each of them
from time to time, and River Port shall pay the remainder of such compensation
and benefits.
3. River Port shall have all of the rights, duties and responsibilities
with respect to Williams and the truck stop video poker casino operated by River
Port as are set forth for OM in the Employment Agreement, and Williams shall
have all of the rights, duties and responsibilities with respect to River Port
and the truck stop video poker casino operated by River Port as are set forth
for OM in the Employment Agreement.
Executed effective as of the date and year first above written.
RIVER PORT TRUCK STOP, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
OM OPERATING, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
---------------------------------
Donald I. Williams, Individually
23
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EXHIBIT C
CONSULTING AND ADMINISTRATIVE AGREEMENT
This Consulting and Administrative Agreement ( the "Agreement") is made and
entered into effective as of July __, 1998, by and between North American Gaming
and Entertainment Corporation ("Consultant") and River Port Truck Stop, L.L.C.
(the "Company").
Consultant and the Company hereby incorporate by reference into this
Agreement that certain Consulting and Administrative Agreement (the "OM
Consulting Agreement") entered into effective as of April 15, 1998 by and
between Consultant and OM Operating, L.L.C. ("OM") and hereby agree that
Consultant shall perform the same services for the Company related to its truck
stop video poker casino as Consultant is performing for OM under the OM
Operating Agreement, and that the Consultant and the Company shall have the same
rights, duties, responsibilities and obligations to each other as the Consultant
and OM have to each other under the OM Operating Agreement as fully as if the
full OM Operating Agreement were restated herein and executed by Consultant as
the "Consultant" thereunder and by the Company as the "Company" thereunder,
except that the fee payable by the Company to Consultant under this Agreement
shall be an annual fee of $50,000 per year for as long as the Company is
constructing, or owns or operates, its truck stop video poker casino. Without
limiting the foregoing, Consultant and the Company hereby agree that the term of
this Agreement shall be the same term as set forth in the OM Operating
Agreement.
Executed effective as of the date and year first above written.
RIVER PORT TRUCK STOP, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
By:
---------------------------------
Its:
---------------------------------
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EXHIBIT 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ( "Amendment") is made and entered
into effective as of July __, 1998, by and between River Port Truck Stop, L.L.C.
("River Port"), OM Operating, L.L.C. ("OM") and Donald I. Williams ("Williams")
and constitutes a new agreement between River Port and Williams and an amendment
to the existing Employment Agreement (herein so called) dated April 15, 1998
between Williams and OM.
1. Williams hereby agrees to provide the same services to River Port as
he is providing to OM under the Employment Agreement, provided the amount of
time expended by him shall be split between River Port and OM based on the
number of truck stop video poker casinos operated by each of them from time to
time.
2. OM shall be responsible for paying a pro rata portion of all
compensation and benefits payable to Williams under the Employment Agreement,
based on the number of truck stop video poker casinos operated by each of them
from time to time, and OM shall pay the remainder of such compensation and
benefits.
3. River Port shall have all of the rights, duties and responsibilities
with respect to Williams and the truck stop video poker casino operated by River
Port as are set forth for OM in the Employment Agreement, and Williams shall
have all of the rights, duties and responsibilities with respect to River Port
and the truck stop video poker casino operated by River Port as are set forth
for OM in the Employment Agreement.
Executed effective as of the date and year first above written.
RIVER PORT TRUCK STOP, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
OM OPERATING, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
------------------------------------
Donald I. Williams, Individually
-1-
<PAGE>
EXHIBIT 10.3
CONSULTING AND ADMINISTRATIVE AGREEMENT
This Consulting and Administrative Agreement ( the "Agreement") is made and
entered into effective as of July __, 1998, by and between North American Gaming
and Entertainment Corporation ("Consultant") and River Port Truck Stop, L.L.C.
(the "Company").
Consultant and the Company hereby incorporate by reference into this
Agreement that certain Consulting and Administrative Agreement (the "OM
Consulting Agreement") entered into effective as of April 15, 1998 by and
between Consultant and OM Operating, L.L.C. ("OM") and hereby agree that
Consultant shall perform the same services for the Company related to its truck
stop video poker casino as Consultant is performing for OM under the OM
Operating Agreement, and that the Consultant and the Company shall have the same
rights, duties, responsibilities and obligations to each other as the Consultant
and OM have to each other under the OM Operating Agreement as fully as if the
full OM Operating Agreement were restated herein and executed by Consultant as
the "Consultant" thereunder and by the Company as the "Company" thereunder,
except that the fee payable by the Company to Consultant under this Agreement
shall be an annual fee of $50,000 per year for as long as the Company is
constructing, or owns or operates, its truck stop video poker casino. Without
limiting the foregoing, Consultant and the Company hereby agree that the term of
this Agreement shall be the same term as set forth in the OM Operating
Agreement.
Executed effective as of the date and year first above written.
RIVER PORT TRUCK STOP, L.L.C.
By:
---------------------------------
George J. Akmon, Manager
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
By:
---------------------------------
Its:
--------------------------------
-1-
<PAGE>
EXHIBIT 10.4
July 17, 1998
Mr. Don Williams
903 East Main
New Roads, Louisiana 70760
Re: River Port Truck Stop, L.L.C. / Operating Agreement
Dear Don:
Reference is hereby made to the proposed Operating Agreement (the
"Agreement") of River Port Truck Stop, L.L.C. (the "Company"), to be entered
into between Don Williams ("Williams") and North American Gaming and
Entertainment Corporation ("NAG"), in the form delivered to Blane Clark under
cover of the letter of Mike Parsons dated July 17, 1998. The parties have
agreed to delete Section 8.20 of the Agreement and to memorialize their
agreement in respect of the matters contemplated therein, as follows
(capitalized terms not otherwise defined herein shall have the meaning ascribed
in the Agreement):
Issuance of Additional Membership Interests and Sharing Ratios; Net Profits
Interest Participation. Anything contained in the Agreement
notwithstanding, at the election of NAG, additional Membership Interests
and Sharing Ratios may be created and issued by the Company, or transferred
by NAG and Williams, in an amount (i.e., 0.2%) that would first reduce
Williams' Membership Interest and Sharing Ratio so that they are the same
as NAG's Membership Interest and Sharing Ratio and then would reduce each
of NAG's and Williams' Membership Interests and Sharing Ratios pro rata
from such levels (i.e., 49.9%) to as little as 40%, but only to one or more
persons or entities who were formerly holders of Class A Preferred Stock of
NAG, on such terms and conditions, and to such of said former holders of
Class A Preferred Stock of NAG, as NAG may determine, but only for the
purpose of discharging or paying debts or accrued dividends of NAG,
redeeming or acquiring equity securities of NAG and/or settling any other
potential claims of such Class A Preferred Stock holders against OM
Operating, L.L.C., NAG and/or Williams; or, alternatively, at the election
of NAG, the Company may enter into an agreement with one or more persons to
carve out a "net profits interest" to such persons equal to up to 20% of
the net profits and cash flow of the Company which, shall be applied first
against Williams' Sharing Ratio to equalize the
<PAGE>
manner in which the remaining net profits and cash flow are split between
NAG and Williams and then proportionately thereafter. Anything contained
herein to the contrary notwithstanding, in no event shall the Membership
Interests, Sharing Ratio or "net profits interest" of Williams be lower
than that of NAG. NAG and Williams agree to execute such amendments to the
Agreement and such other documents, and to take such actions, as may be
reasonably necessary to effect the foregoing provisions of this paragraph.
It is intended that the "net profits interest" would be a deductible
expense of the Company and that cash flow distributed pursuant to such "net
profits interest" would be a distributed at the same priority level as
distributions to Members of the Company. Notwithstanding the foregoing
provisions, any such additional issuance or any such transfer is
conditioned upon Louisiana residents who meet the suitability requirements
of Applicable Laws owning at least a majority of the Membership Interests
and Sharing Ratios following such issuance or transfer in accordance with
Applicable Laws necessary for the Company to be able to maintain its
licenses to operate a truck stop video poker casino. Upon any such issuance
or transfer, Exhibit "A" to the Agreement shall be amended to reflect the
correct Sharing Ratios.
To the extent of any conflicts or inconsistencies between the Agreement and
this letter agreement, this letter agreement shall control. If the foregoing
accurately reflects the agreement between you and NAG, please sign a copy of
this letter and fax the signed copy back to me.
Yours truly,
NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION
By:
-----------------------------------
E.H. Hawes II, President
ACKNOWLEDGED AND AGREED
THIS __ DAY OF JULY, 1998
- ------------------------
Donald I. Williams
<PAGE>
EXHIBIT 10.5
ASSIGNMENT AND ASSUMPTION OF LEASE
THIS ASSIGNMENT AND ASSUMPTION OF LEASE (this "Agreement" or "Assignment")
is made and entered into as of this ____ day of May, 1998, by and between RIVER
PORT TRUCK STOP, INC. ("Assignor"), and RIVER PORT TRUCK STOP, L.L.C.
("Assignee").
WITNESSETH:
WHEREAS, Assignor heretofore entered into that certain Lease Agreement
dated January 17, 1997 (the "Lease") with S. W. Day and T. Joe Calloway
(collectively, "Landlord") covering certain land and improvements situated in
West Baton Rouge Parish, Louisiana, being more particulary described in the
Lease; and
WHEREAS, Assignee desires to acquire from Assignor, and Assignor desires to
transfer and assign to Assignee, the Lease and all of the rights, benefits,
privileges, obligations and duties of the tenant thereunder.
NOW, THEREFORE, in consideration of the foregoing and the agreements and
covenants herein set forth, together with the sum of TEN DOLLARS ($10.00) and
other good and valuable consideration this day paid and delivered by Assignee to
Assignor, the receipt and sufficiency of all of which are hereby acknowledged by
Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER AND DELIVER the Lease,
and all of the rights, benefits, privileges, obligations and duties of the
tenant thereunder subject to all terms, conditions, reservations and limitations
set forth in the Lease (such Lease, properties, rights, obligations, and
interests, subject as aforesaid, being hereinafter collectively referred to as
the "Assigned Lease") unto Assignee.
TO HAVE AND TO HOLD all and singular the Assigned Lease unto Assignee and
Assignee's heirs, legal and personal representatives, successors, and assigns
forever, and Assignor does hereby bind Assignor, and Assignor's heirs, legal
representatives, successors and assigns, to warrant and forever defend all and
singular the Assigned Lease unto Assignee, and Assignee's successors and
assigns, against every person whomsoever lawfully claiming or to claim the same,
or any part thereof.
1. Representations. Assignor hereby warrants and covenants (i) that
Assignor is the owner of the tenant's interest in the Lease; (ii) that this
Assignment conveys all of the interest of Assignor in the Lease and conveys
Assignor's interest in all security deposits set forth in, required under, or
paid by Assignor pursuant to the Lease, if any; (iii) to the actual
1
<PAGE>
knowledge of Assignor, the Lease is genuine, valid and enforceable in accordance
with its terms; and (iv) that Assignor has full right and authority to make this
Assignment.
2. Assumption by Assignee. By accepting this Assignment and by its
execution hereof, Assignee hereby assumes and agrees to pay, perform and observe
all of the terms, covenants and conditions of the Lease on the part of the
tenant therein required to be performed, including the obligation to pay rent of
every kind and character and other sums due in accordance with the terms of the
Lease to the lessor thereunder accruing from and after the date of this
Assignment, but not prior to such date. Assignor shall be solely responsible
and liable for any rents or other amounts due or owing under the Lease arising
prior to the date of this Assignment.
3. Indemnity. Assignee hereby agrees to indemnify and hold harmless
Assignor from and against any and all claim, liability, loss, cost or expense
(including, without limitation, reasonable attorneys' fees) resulting by reason
of Assignee's failure to perform any of the obligations assumed by Assignee
hereunder.
4. Binding Effect. All of the covenants, terms and conditions set forth
herein shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, legal representatives, successors and
assigns.
5. Ownership of Assignee; Consent of Landlord. Assignee hereby
represents to Assignor and Landlord that Donald I. Williams will own
approximately 40% to 50.1% of the ownership interest in Assignee, and Assignor
and Assignee acknowledge that Landlord has relied on this representation in
determining to grant the consent attached hereto.
6. Counterparts. This instrument may be executed in two or more
counterparts, each of which constitutes an original instrument and all of which
constitute one and the same instrument.
2
<PAGE>
STATE OF
---------------
PARISH/COUNTY OF
-----------------
THUS DONE AND SIGNED by Assignor in the presence of me, Notary Public, and
the undersigned competent witnesses on the ____ day of May, 1998, after a due
reading of the whole.
WITNESSES: ASSIGNOR:
--------
RIVER PORT TRUCK STOP, INC.
By:
- ------------------------------ ----------------------------------
Printed Name:
------------------------
Title:
-------------------------------
- ------------------------------
---------------------------------
Notary Public
My Commission Expires:
----------
3
<PAGE>
STATE OF
---------------
PARISH/COUNTY OF
-----------------
THUS DONE AND SIGNED by Assignee in the presence of me, Notary Public, and
the undersigned competent witnesses on the ____ day of May, 1998, after a due
reading of the whole.
WITNESSES: ASSIGNEE:
--------
RIVER PORT TRUCK STOP, L.L.C.
By: NORTH AMERICAN GAMING AND
ENTERTAINMENT CORPORATION,
a Member
By:
- ------------------------------ ----------------------------------
Printed Name:
------------------------
Title:
-------------------------------
- ------------------------------
---------------------------------
Notary Public
My Commission Expires:
----------
4
<PAGE>
STATE OF LOUISIANA
PARISH OF EAST BATON ROUGE
THUS DONE AND SIGNED by Assignee in the presence of me, Notary Public, and
the undersigned competent witnesses on the ____ day of May, 1998, after a due
reading of the whole.
WITNESSES: ASSIGNEE:
--------
RIVER PORT TRUCK STOP, L.L.C.
By:
- ------------------------------ ----------------------------------
Donald I. Williams, as Member
- ------------------------------
---------------------------------
Notary Public
My Commission Expires:
----------
5
<PAGE>
CONSENT OF LANDLORD AND CONFIRMATION OF EXTENSION
In reliance on the covenants, conditions, representations, and other
provisions of this Assignment, Landlord does hereby consent to the assignment of
the Lessee's interest in the Lease by Assignor to Assignee as evidenced by and
subject to the terms of this Assignment, and Landlord hereby expressly agrees
that the extension of the construction deadline to September 30, 1998, which was
granted by Landlord in a letter dated February 6, 1998, shall be available to
and shall be hereby deemed granted to Assignee, notwithstanding the provisions
of the second paragraph of such letter of February 6, 1998. Landlord joins in
the execution of this Assignment for the sole purpose of evidencing such consent
and confirmation that such extension is available to Assignee.
LANDLORD:
--------
---------------------------------
S. W. Day
---------------------------------
T. Joe Calloway
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 136,199
<SECURITIES> 0
<RECEIVABLES> 253,601
<ALLOWANCES> 0
<INVENTORY> 102,773
<CURRENT-ASSETS> 595,003
<PP&E> 1,126,770
<DEPRECIATION> 376,379
<TOTAL-ASSETS> 4,655,326
<CURRENT-LIABILITIES> 2,439,061
<BONDS> 0
1,242,858
0
<COMMON> 342,848
<OTHER-SE> (2,243,427)
<TOTAL-LIABILITY-AND-EQUITY> 4,655,326
<SALES> 12,490,439
<TOTAL-REVENUES> 12,490,439
<CGS> 7,975,546
<TOTAL-COSTS> 3,616,525
<OTHER-EXPENSES> 186,830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,679
<INCOME-PRETAX> 263,506
<INCOME-TAX> 29,600
<INCOME-CONTINUING> 263,506
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,906
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
