<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
September 30, 1998: 41,788,552
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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
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
30-SEPT-98 31-DEC-97
------------ ------------
ASSETS UNAUDITED
<S> <C> <C>
CURRENT ASSETS:
Cash $ 27,229 $ 428,454
Restricted cash - 187,258
Accounts receivable 257,040 361,684
Inventories, at cost 119,837 151,903
Prepaid Expenses 25,510 94,326
Notes receivable - current 15,650 16,009
Current deferred tax asset 19,030 19,030
----------- -----------
TOTAL CURRENT ASSETS 464,296 1,258,664
----------- -----------
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION 1,489,609 1,351,791
----------- -----------
OTHER ASSETS:
Deposits 118,968 151,768
Long-term deferred tax asset 428,948 428,948
Assets of business that the majority interest
was transferred under contractual agreement 1,683,077 -
Trade name, contract rights and organizational costs, net of
accumulated amortization 137,345 168,418
Goodwill and merger costs 726,265 928,512
Notes Receivable-long-term 15,350 33,523
----------- -----------
3,109,953 1,946,562
----------- -----------
TOTAL ASSETS $ 5,063,858 $ 4,557,017
=========== ===========
LIABILITY AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 769,116 $ 1,333,703
Notes payable - current 1,547,474 1,341,130
Income Taxes Payable - 10,774
Preferred stock dividends payable 780,000 780,000
----------- -----------
TOTAL CURRENT LIABILITIES 3,096,590 3,465,607
LONG-TERM LIABILITIES:
Liabilities of business that the majority interest
was transferred under contractual agreement 1,547,851 -
Notes Payable-long-term 16,099 663,249
Notes Payable to certain stockholders-long-term 1,229,644 1,288,827
----------- -----------
TOTAL LONG-TERM LIABILITIES 2,793,594 1,952,076
----------- -----------
TOTAL LIABILITIES $ 5,890,184 $ 5,417,683
STOCKHOLDERS' EQUITY:
Class A preferred stock,$3.00 par value, 10% annual cumulative dividend
1,600,000 shares authorized, no shares and 1,287,000 shares issued,
at September 30, 1998 and December 31, 1997 - 3,861,000
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares and 8,000,000 shares of series "B" issued at September 30, 1998 80,000
and December 31, 1997 -
Common stock, $.01 par value, 100,000,000 shares authorized, 41,788,552
and 14,709,342 shares issued at September 30, 1998 and December 31, 1997 417,886 200,957
Additional paid-in-capital (deficit) 466,960 (3,257,112)
Retained earnings (deficit) (1,711,172) (1,745,511)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $ (826,326) $ (860,666)
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 5,063,858 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
30-SEPT-98 30-SEPT-97 30-SEPT-98 30-SEPT-97
-------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
Video Poker Revenue $3,820,367 $ 3,575,643 $11,756,218 $11,201,920
Truck Stop and Convenience Store 2,272,855 2,043,576 6,318,292 5,370,586
Cruise Revenue 209,945 339,043 719,096 1,093,183
---------- ----------- ----------- -----------
6,303,167 5,958,262 18,793,606 17,665,689
COST AND EXPENSES:
Cost of Revenues 4,066,703 3,888,136 12,042,249 11,475,638
General and Administrative Expenses 2,071,737 1,826,740 5,688,262 5,093,224
Interest Expense 77,322 103,158 215,001 277,240
Depreciation and Amortization 152,754 198,191 463,107 524,583
---------- ----------- ----------- -----------
6,368,516 6,016,225 18,408,619 17,370,685
---------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (65,349) (57,963) 384,987 295,004
OTHER REVENUE (EXPENSE), NET (79,217) (13,392) (266,047) 32,717
---------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES (144,566) (71,355) 118,940 327,721
PROVISION FOR INCOME TAXES (55,000) (57,772) (84,600) (203,772)
---------- ----------- ----------- -----------
NET INCOME $ (199,566) $ (129,127) $ 34,340 $ 123,949
LESS: Preferred Stock Dividends - - - -
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (199,566) $ (129,127) $ 34,340 $ 123,949
========== =========== =========== ===========
BASIC EARNINGS PER SHARE $ (0.01) $ (0.01) $ 0.00 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
30-SEPT-98 30-SEPT-97
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 34,340 $ 123,949
Adjustments to reconcile net income to net cash:
Depreciation and amortization 463,107 524,583
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 85,438 (72,511)
(Increase) decrease in inventories 5,720 (80,844)
(Increase) decrease in prepaid expenses 28,750 (332)
(Increase) decrease in deposits (739,446) (19,735)
Increase (decrease) in income taxes payable - -
Increase (decrease) in accounts payable and accrued liabilities 229,513 269,242
--------- ---------
Net cash provided (used) by operating activities 107,422 744,352
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (173,142) (173,284)
Proceeds to borrowers 12,003 (1,876)
Repayment by borrowers (7,746) (96,502)
--------- ---------
Net cash provided (used) by investing activities 168,885 (78,658)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in notes payable (242,988) (547,976)
--------- ---------
Net cash provided (used) by financing activities (242,988) (547,976)
--------- ---------
NET INCREASE (DECREASE) IN CASH 181,525 117,718
CASH - beginning of period 615,712 548,494
--------- ---------
CASH - ending of period $ 797,237 $ 666,212
($770,008 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
NINE MONTHS ENDED SEPT 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Total
Class A Preferred Additional Retained Stockholders'
Preferred Stock Common Paid-in Earnings Equity
Stock Series "B" Stock Capital (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 - (80,000) 80,000 - - -
CONVERSION OF CLASS A
PREFERRED STOCK (3,861,000) - 82,400 3,778,600 - -
ISSUANCE OF ADDITIONAL
COMMON STOCK - - 54,529 (54,529) - -
NET INCOME FOR NINE MONTHS
ENDED SEPT. 30, 1998 - - - - 34,340 34,340
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, Sept. 30, 1998 $ - $ - $ 417,886 $ 466,960 $(1,711,172) $ (826,326)
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
5
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NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 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 September 30, 1998 are as follows:
ASSETS
Cash $ 770,008
Accounts Receivable 19,206
Inventory 26,346
----------
Total Current Assets 815,560
Property, Plant and Equipment, net 583,135
Prepaid Expenses 40,066
Intangibles and other, net 244,316
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TOTAL ASSETS $1,683,077
==========
LIABILITIES
Accounts Payable/Accrued Liabilities $ 804,874
Notes Payable - Current 264,150
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Total Current Liabilities 1,069,024
Notes Payable - Long-term 478,827
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TOTAL LIABILITIES $1,547,851
==========
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 end
of the fourth quarter of 1998. The video poker casino is in the final design and
permitting phase and construction is anticipated to commence during November
1998 with completion targeted for April 1, 1999.
On June 10, 1996, the Company acquired 100% of the issued and
outstanding capital stock of GalaxSea Cruises and Tours, Inc.
6
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("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"), which has
been converted into 8,000,000 shares of Common Stock. 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.
The Company has entered into a letter of intent to sell substantially
all of the assets of GalaxSea and I.T. Cruise for an aggregate purchase price of
$1,833,333, payable $1,166,667 at closing with the remaining $666,666 payable
after one year following closing, subject to the gross revenues of the purchased
businesses exceeding a specified amount. The sale of these assets is subject to
negotiation of a definitive purchase agreement and the satisfaction of various
closing conditions. The closing is tentatively scheduled for December 1, 1998.
NOTE 4. PRESENT CASH SHORTFALL
As of October 1, 1998, the Company was approximately twenty one
principal payments in arrears, at regular principal and interest payments of
$50,000 per month (a total of $762,284 of principal and $16,057 in interest
payable; on August 5, 1998 accrued interest of $76,892 was paid current and
principal was reduced by $58,108), 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 $1,062,746 at September 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 $122,097 at October 1, 1998, and require aggregate payments of
principal and interest of $11,250 per month until July 1, 1997 and then $31,114
per month July 1, 1997 through December 31, 1997 and $16,670 per month
thereafter. As of October 1, 1998, 18 monthly payments, for a total of $436,960,
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, 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
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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 October 1, 1998, Operator had placed in escrow $492,376 for
the period from May 1997 through September 1998. Operator and the Company plan
to petition the court in November 1998 to grant a management fee for services
from April 30, 1997 through the date the appeal is completely concluded. The
Third Circuit Court of Appeal heard the appeal on November 6, 1998, and the
outcome is currently pending a ruling from the court. 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
8
<PAGE>
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 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 Operating and 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.
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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 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 15, 1998 through September 30, 1998, operating profits were
$151,169, 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
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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, 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 (which guaranty will be secured by a
second lien on the Company's Gold Rush property). 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 October 1, 1998, the Company was
approximately twenty one months in arrears (a total of $762,284 of principal and
$16,057 in interest payable; on August 5, 1998 accrued interest of $76,892 was
paid current and principal was reduced by $58,108) 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 $1,062,746 at October 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 $122,097 at October 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 first
quarter of 1999, but there can be no assurance. If not, it is possible that the
Company might continue to experience certain cash shortfalls in 1999, 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. If the cruise operations of the Company are sold pursuant
to a definitive purchase agreement that may be negotiated under the letter of
intent to which the Company is a party, the Company will receive at closing
gross proceeds of $1,166,667, with an additional $666,667 payable following
twelve months after closing if certain revenue benchmarks are satisfied. This
cash will enable the Company to meet certain of its cash obligations and,
thereafter, the Company's ability to meet its obligations will be solely
dependent upon revenues generated from the Company's truck stops and video poker
casino operations. The Company believes such operations will provide sufficient
revenues, although the Company may need to negotiate a revised payment schedule
for the Company's indebtedness to facilitate such result.
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
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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 $352,716 for the nine months ended September 30, 1998, the
total escrow amounts to $492,376 for the period from May 1997 through September
30, 1998.
The Company had 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 third quarter of
1998 with $797,237 in cash and other current assets amounting to $536,960,
including accounts receivable of $276,246, inventories and prepaid expenses of
$211,759 and current notes receivable of $29,925. The Company's total
liabilities were $5,890184 at September 30, 1998, including accounts payable and
accrued liabilities of $1,573,990, current notes payable of $1,160,852, long-
term notes payable of $2,375,342 and preferred stock dividends payable of
$780,000. The Company's liabilities increased $472,501 from $5,417,683 at
December 31, 1997 to $5,282,087 at September 30, 1998. This variance was
comprised of an increase in accounts payable and accrued liabilities of
$229,513, an increase due to construction of the River Port Truck Stop amounting
to $739,078, a decrease in liabilities from other notes payable totaling
$61,457, payments on long and short-term debt to banks totaling $161,325 and
payments on the Ozdon notes issued for the stock purchase of the Gold Rush of
$273,308.
Accounts payable and accrued liabilities of $1,573,990 included $767,758 in
trade payables, state franchise taxes of $193,944, casino distributions of
$249,894, payroll and payroll taxes of $194,757, income tax payable of $739,078
and accrued interest of $156,863.
The current portion of other notes payable totaling $1,811,624 includes
$88,306 payable to a bank for the construction of the River Port Truck Stop;
$225,712 payable to a bank for the construction of the Pelican Palace and the
purchase of the Lucky Longhorn; the stock purchase note from the Gold Rush
acquisition amounting to $61,250; $203,762 payable to Class A Preferred
shareholders; $543,384 related to the acquisition of I.T. Cruise and GalaxSea;
and $38,438 in equipment leases and other notes.
Long-term debt of $1,224,570 includes $441,588 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; $553,160 related to the
acquisition of I.T. Cruise and GalaxSea; and $37,238 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 $1,750,030 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. Through September 30, 1998 River Port LLC has
drawn $739,078 towards the construction of the River Port Truck Stop and Casino.
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.
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At June 30, 1998, property and equipment (net) at truck stops, video poker
facilities, cruise marketing and corporate offices totaled $1,333,666.
Effective June 10, 1996, the Company acquired GalaxSea and I.T. Cruise,
companies engaged in the cruise travel industry. Cruise revenue as reported is
presented on an accrual basis, and is estimated based on the receipt of
quarterly cash payments of previous years actual revenue; adjusted for seasonal
variations. Cruise revenue is comprised of overrides and commissions on cruise
sales generated by I.T. Cruise from the International network and GalaxSea's
franchise system. The Cruise lines make payments of overrides and commissions
on a quarterly basis which are received 30-45 days following the end of each
quarter. Bonus overrides and commissions are paid by the cruise lines on an
annual basis, which are received 30-45 days into the next calendar year.
GalaxSea franchisees are billed monthly for license fees.
Intense competition for the business of gaming patrons in Louisiana and
Mississippi resulted in a decline in operating profit margins during 1997 and
1998. 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 NINE MONTHS ENDED ENDED SEPTEMBER 30, 1998.
Company operations resulted in net income before income taxes of $118,940
for the nine months ended September 30, 1998, a decrease of $205,780, or 63%,
from 1997's $324,720. 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 $352,716 for the
nine months ended September 30, 1998 compared to $93,895 for the nine months
ended September 30, 1997. Excluding the litigation reserve, net income
increased 13% to $471,656 for the nine months ended September 30, 1998 compared
to $415,615 in 1997. 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 loss
of $60,408 through September 30,1998 compared to a loss of $32,290 in 1997.
REVENUES TOTALED $18,793,606 THROUGH SEPTEMBER 30, 1998 COMPARED TO $17,665,689
FOR 1997, UP 9%.
VIDEO POKER REVENUES totaled $11,756,218 through September 30, 1998, up
$554,298, or 5% from 1997's $11,201,920. Gains were achieved at the Pelican
Palace - $291,461; the Lucky Longhorn $211,588; King's Lucky Lady - $189,615;
the Gold Rush - $96,018 and the Diamond Jubilee - $63,476. These gains were
partially offset by the closure of Stelly's Southern Gold - $183,852 and the
reduction of Route Operations - $114,008 from 1997 to 1998. Video poker revenue
production by location for 1998 and 1997 was as follows:
Pelican Palace, Toomey, LA - $2,611,042 in 1998 and $2,319,581 in 1997, up
13%; resulting in average daily revenue per device (50 devices) of $191 through
September 30, 1998 compared to 1997's $170.
Lucky Longhorn, Vinton, LA - $2,825,037 in 1998 and $2,613,449 in 1997, up
8%; resulting in average daily revenue per device (50 devices) of $207 through
September 30, 1998 compared to 1997's $191.
King's Lucky Lady, Port Barre, LA - $1,905,163 in 1998 and $1,715,548 in
1997, up 11%; resulting in average daily revenue per device (50 devices) of $140
through September 30, 1998 compared to 1997's $126.
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Gold Rush, Opelousas, LA - $2,394,085 in 1998 and $2,298,067 in 1997, up
4%; resulting in average daily revenue per device (50 devices) of $175 through
September 30, 1998 compared to $168 for 1997.
Diamond Jubilee, New Orleans, LA - $1,853,833 in 1998 and $1,790,357 in
1997, up 4%; resulting in average daily revenue per device (39.2 devices) of
$173 through September 30, 1998 compared to $159 for 1997 (on an average of 41.1
devices).
Route Operations - South LA - $167,059 in 1998 and $281,067 in 1997, down
41%; resulting in average daily revenue per device (13 devices) of $47 through
September 30, 1998 compared to average daily revenue per device ( on an average
of 20.7 devices) of $50 in 1997.
Stelly's-LeBeau, LA - closed May 28, 1997; nine 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 $6,318,292 for the nine months ended September 30,1998
compared to 1997's $5,370,586, an increase of 18%. Fuel sales for 1998 amounted
to $3,988,989, making up 63.1% of the Company's retail sales, compared to 1997's
fuel sales of $3,533,689, contributing 65.8% of the Company's retail sales.
Combined fuel and convenience store sales for the nine months ended
September 30,1998 increased $701,628, or 17%, to $4,909,771 compared to
$4,208,143 in 1997. Convenience store retail sales totaling $920,782 were up
37% for 1998 versus 1997's $674,454. Growth occurred at the Gold Rush, which
reported $2,492,971 in revenue for the nine months ended September 30, 1998
compared to 1997's $2,332,345, up 7%; King's Lucky Lady generated $1,574,914,
down 2% from 1997's $1,602,392; and the River Port Truck Stop posted sales
totaling $748,137, up 174% for the nine months ended September 30,1998 compared
to seven months of operation in 1997 which totaled $273,406. The addition of
Stan's Truck Stop during the third quarter of 1998 contributed sales of $93,749.
Food and beverage sales for the nine months ended September 30, 1998
increased $246,079, or 21%, to $1,408,521, compared to $1,162,442 in 1997.
Food and beverage sales for each location were as follows: King's Lucky Lady
$665,485 in 1998 compared to 1997's $609,307, up 9%; Gold Rush - $352,701 in
1998 compared to $307,573 in 1997, up 15%; Pelican Palace - $290,509 in 1998
versus $192,241 in 1997, up 52%; and the Diamond Jubilee and Stan's Truck
Stop - $99,826 in 1998 compared to $53,321 for 1997, up 89%.
CRUISE REVENUES accrued for I.T. Cruise and GalaxSea totaled $719,096 for
the nine months ended September 30,1998 compared to 1997's $1,093,183. I.T.
Cruise revenue resulting from its contracts with International Tours, Inc.
amounted to accrued overrides and commissions of $160,084 for 1998 compared to
1997's $212,105. The accrual of GalaxSea's franchise system revenues was
comprised of overrides and commissions of $142,699 in 1998 versus $165,283 in
1997; monthly license fees of $150,300 in 1998 compared to $120,097 in 1997;
franchise sales fees of $2,500 in 1998 compared to $28,150 in 1997; marketing
fees totaling $238,731 in 1998 compared to 1997's $510,521; and convention and
training fees of $24,782 in 1998 compared to $54,349 in 1997.
CASINO AND TRUCK STOP OPERATIONS
CASINO AND TRUCK STOP OPERATIONS recorded direct operating profit of
$2,306,715 for the nine months ended September 30, 1998, a decrease of $21,814,
or 1%, from 1997's $2,328,529.
The Gold Rush's casino and truck stop operations produced operating profit
of approximately $910,034 in 1998 compared to $907,425 in 1997. Fuel sales
averaged approximately 215,000 gallons per month versus 177,000 in 1997, up 21%.
The Lucky Longhorn's operating profit was approximately $467,898 in 1998
compared to $494,580 in 1997, down 5%. As a result of the settlement agreement
with the lessor the Company agreed to assume the remaining 50% of casino
security costs ( approximately $4,000 per month) and pay the lessor $3,000 per
month for a 20 month period towards parking lot maintenance. Operating margins
continue to suffer as strong promotional efforts are ongoing in an attempt 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 (owned 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 295,000 gallons per month during 1998 versus 171,000 in 1997, up
73%.
The Pelican Palace generated operating profit of approximately $514,995 in
1998 compared to 1997's $455,007, an increase of 13%. 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
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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 163,000
gallons per month during 1998 versus 141,000 in 1997, up 16%.
King's Lucky Lady's operating profit for 1998 was approximately $423,215
compared to operating profit for 1997 of approximately $364,234, up 16%. 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 139,000
gallons per month during 1998 versus 130,000 in 1997, up 6%.
The Diamond Jubilee / Stan's Truck Stop combined to produce operating
profit of approximately $17,578 in 1998, compared to 1997's $89,680, down 80%.
During 1998 two competitors with a total of 80 video poker devices came into the
market thus diluting The Diamond Jubilee's market share. In addition, 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. The Diamond Jubilee lost 10 devices on January 31, 1997
(100,000 gallons per month is necessary for 50 devices) and an additional five
devices were lost on August 17, 1998 (75,000 gallons per month is necessary for
40 devices) due to the former truck stop sublessee's failure to maintain
required fuel sales for the quarters ended December 31, 1997 and June 30, 1998.
Severe price competition was also prevalent in the area as the former sublessee
failed to maintain the minimum required fuel sales of 50,000 gallons per month
(June - 40,216 gallons and July - 45,039 gallons) required to maintain a video
poker casino license. In order to preserve the video poker license, the Company
began operating Stan's Truck Stop which included fuel and restaurant operations
(see discussion above), effective August 4, 1998. As noted above fuel sales for
the start of the third quarter were well below the required minimum to maintain
a video poker casino license, therefore the Company and NOVP elected to buy out
F & F. 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. 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. The Operator and NOVP
entered into an agreement with the landlord to expend approximately $170,000 to
gain control of the fuel operation and to pay for facility improvements. The
landlord agreed to a reduction in rental payments equal to $85,000 to assist in
this effort. The Company and NOVP have aggressively marketed the fuel operation
and increased the level of sales during the third quarter to exceed the minimum
level (approximately 158,000 gallons) in order to operate 35 video poker
devices. Fuel sales averaged approximately 58,000 gallons per month during the
nine months ended September 30,1998 compared to 92,000 gallons per month in
1997.
Route Operations generated operating profit for 1998 of approximately
$20,694 compared to operating profit for 1997 of approximately $39,148, down
47%. During the nine months ended September 30,1998, the Company had 13 devices
operating within 6 locations, compared to 1997, when the Company operated an
average of 20.7 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
nine months ended September 30, 1997 amounted to $10,345. 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 $47,699 for the nine
months ended September 30, 1998 compared to 1997's operating loss of $31,690 for
seven months of operation. The loss was due to a full charge of rent expense
totaling $63,000 for the nine months ended September 30,1998. Construction of a
complete truck stop and casino complex is currently in progress on this leased
property. Fuel sales averaged approximately 56,000 gallons per month during 1998
versus 50,000 in 1997.
CRUISE OPERATIONS
Combined Cruise Operations recorded an operating loss which amounted to
$89,835 for the nine months ended September 30,1998, on revenues totaling
$719,096, while 1997's operating loss of $90,597 was recorded based on revenues
of $1,093,183. The loss in revenue was due to a major promotion for the film
"Out-to-Sea" which generated promotional revenue of approximately $111,747
during the second quarter of 1997, a restructuring of contracts by certain
cruise lines and a reduction in marketing fees resulting from programs
coordinated to produce cruise industry publications and promotions subscribed to
by the cruise lines. The GalaxSea franchise system included 75 franchisees at
September 30, 1998 compared to 72 at September 30,1997.
GalaxSea's nine months ended September 30, 1998 revenues amounted to
$559,012, with an operating loss of approximately $174,095 compared to $251,728
recorded in 1997; revenues recorded for I.T. Cruise were $160,084, with an
operating profit of approximately $84,260 for the nine months ended September
30,1998 compared to $161,131 recorded in 1997.
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EXPENSES TOTALED $18,408,619 THROUGH SEPTEMBER 30, 1998 COMPARED TO $17,370,685
FOR 1997, UP 6%.
VIDEO POKER operations recorded a direct cost of revenue amounting to
$6,658,629 in 1998 and $6,455,310 in 1997, an increase of 3%. This includes
fees paid to the State of Louisiana of $3,988,742 (33.9% of video poker revenue)
in 1998 and $3,817,227 (34.1% of video poker revenue) in 1997, and profit
sharing payments as defined in operating and management contracts of $2,669,887
(22.7% of video poker revenue) in 1998 and $2,638,083 (23.6% of video poker
revenue) in 1997.
RETAIL operations recorded an increase of $658,288, or 15%, in the cost
of revenue related to fuel, convenience store, food and beverage operations. The
total for the nine months ended September 30, 1998 amounted to $5,103,991 (80.8%
cost margin on retail sales) compared to $4,445,703 (82.8% 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 $636,965 (85.1% cost margin on retail sales)
for 1998 compared to $245,594 (89.8% cost margin on retail sales) for 1997. In
addition Stan's Truck Stop's cost of revenue related to fuel, convenience store
and restaurant operations totaled $102,313 (89.4% cost margin on retail sales)
for 1998. Improvements in the cost of revenue were mainly due to margin
improvements on fuel sales which posted a 92.8% margin in 1998 versus 94.5% in
1997 and food and beverage cost of revenue improvements from 48.4% in 1997 to
46.4% in 1998. Overall convenience store margins declined slightly from 80.9%
in 1997 to 81.4% in 1998.
Fuel cost of goods sold for 1998 amounted to $3,700,639, representing a
cost margin of 92.8%, compared to 1997's fuel cost of goods sold totaling
$3,533,689, with a cost margin of 94.5%. 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 nine months ended September 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.
Convenience store retail cost of goods sold totaling $749,675 (81.4% of
sales) increased 37.4% in 1998 on growth in sales of 36.5%. 1997's retail cost
of goods sold totaled $545,640 (80.9% of sales) .
Food and beverage cost of goods sold totaled $653,677, up 16% in 1998, with
a margin on sales of 46.4% compared to 1997's $562,274, with a margin on sales
of 48.4%; sales were up 21%. 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 four of these low volume restaurants compared to three in
1997.
CRUISE operations recorded a direct cost of revenue amounting to $278,947
for the nine months ended September 30, 1998 compared to 1997's $574,245, a
decrease of 51%. The reduction in cost was mainly due to a major promotion for
the film "Out-to-Sea" for which $118,779 was recorded during the second quarter
of 1997, along with a general reduction in programs coordinated to produce
cruise industry publications and promotions subscribed to by the cruise lines.
1998's marketing, training and promotional expenses totaled $211,916 and royalty
fees were $67,031. 1997's marketing, training and promotional expenses amounted
to $520,877 with royalty fees of $51,277.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES of $5,688,262 in 1998 and
$5,093,224 in 1997 increased 12% and represented 30.3% and 28.8% of total
revenue for 1998 and 1997, respectively.
DEPRECIATION AND AMORTIZATION amounted to $463,107 for the nine months
ended September 30, 1998 and $524,583 in 1997, a 12% decrease. Interest expense
was $215,001 in 1998 and $277,240 in 1997, a 22% decrease. Net other
revenue/(expense) was ($266,047) in 1998, compared to 32,717 in 1997. The
majority of this expense was due to a total of $352,716 added to the litigation
reserve for the nine months ended September 1998 compared to 1997's litigation
reserve of $93,895. Off-setting these expenses were combined interest and
rental income which amounted to $53,652 in 1998 and $35,266 for 1997.
COMPARISON OF 1998 TO 1997
VIDEO POKER revenues increased to $11,756,218 during the nine months ended
September 30, 1998 from $11,201,920 in 1997, up $554,298, or 5%. The Pelican
Palace produced $2,611,042 in 1998 versus $2,319,581 in 1997, an increase of
$291,461, or 13%. King's Lucky Lady recorded video poker revenues of $1,905,163
in 1998 versus $1,715,548 in 1997, up $189,615, or 11%. The Lucky Longhorn
generated $2,825,037 in 1998 compared to $2,613,042 in 1997, up $211,995, or 8%.
The Gold Rush posted $2,394,085 in 1998 compared with $2,298,067 in 1997, up
$96,018, or 4%. The Diamond Jubilee produced $1,853,833 in 1998 versus
$1,790,357 in 1997, an increase of $63,476, or 4%. The Company experienced
declines in video poker revenue related to the closure of Stelly's Southern Gold
on May 28, 1997, the nine months ended September 30, 1997 production was
$183,853; and the reduction of Route Operations resulting in $167,059 in 1998
down from $281,067 in 1997, down $114,008, or 41%.
RETAIL revenues from fuel and convenience store, food and beverage
operations amounted to $6,318,292 for the nine months ended September 30,1998;
compared to 1997's $5,370,586, an increase of 18%. The cost of revenue related
to fuel, convenience store, food and
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beverage operations increased $658,288, or 15% from $4,445,703 in 1997 to
$5,103,991 in 1998, including $636,965 for the River Port Truck Stop, up from
1997's $245,594 and Stan's Truck Stop which recorded a cost of revenue totaling
$102,313. The cost of revenue excluding the River Port Truck Stop and Stan's
Truck Stop increased 3.9% on growth in sales of 7%.
GENERAL OPERATING AND ADMINISTRATIVE EXPENSES totaled $5,688,262 in 1998
and $5,093,224 for 1997, an increase of $595,038, or 12%. This overall increase
resulted primarily from payroll, contract and professional services, truck stop
and casino marketing expenses and new operations.
Payroll related expenses increased $211,699, or 9%, from $2,341,981 in 1997
to $2,553,680 for the nine months ended September 30,1998; including an increase
due to the Employment Agreement with Williams as outlined above, equal to
$80,938 from April 14 through September 30, 1998; operating the River Port Truck
Stop of $29,671 for nine months in 1998 versus seven months in 1997; Stan's
Truck Stop added $35,719; and a decrease from Cruise Operations of $116,416;
all other payroll expenses were up $181,787, an increase of 8.5%, 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
$35,884, or 4%, from $830,961 in 1997 to $866,845 for the nine months ended
September 30, 1998, which included legal and accounting fees totaling $308,029
in 1998 and $345,581 for 1997; a decrease of $37,552, or 11%, resulting from
regulatory and licensing issues as discussed above; casino security costs of
$239,798 in 1998 and $226,327 for 1997, an increase of $13,471, or 6%, resulting
from the increase in the Federal Minimum Wage; and contract and consulting
services totaling $319,018 in 1998 and $259,053 for 1997, a decrease of $59,965,
or 23%. The reduction in payroll reflected in cruise operations was off-set by
out-sourcing certain marketing services which resulted in expenditures totaling
$216,792 during 1998 compared to $86,270 in 1997, an increase of $130,522.
Truck stop and casino marketing expenses amounted to $826,239 in 1998, up
48%, or $266,899 from 1997's $559,340, consisting of 4.6% and 3.4% of combined
truck stop and casino revenue for 1998 and 1997 respectively. This increase in
marketing expense was the result of targeted marketing programs to maintain
and/or to increase fuel sales, the implementation of a gift premium and customer
rewards and complimentary food and beverage promotions to increase the length of
time customers spend in the casino. Complimentary food and beverage was the
majority of the increase amounting to $218,676; the direct cost of revenue being
approximately 46%.
New operations contributed $116,539 to the increase in general operating
expenses from 1997 to 1998. All other expenses totaled $1,283,545 in 1998
compared to 1997's $1,319,528, a decrease of $35,983, or 2.7%.
DEPRECIATION AND AMORTIZATION amounted to $463,107 for the nine months
ended September 30,1998 and $524,583 in 1997, a decrease of $61,476, or 12%.
Depreciation and amortization on video poker operations, which includes video
poker machines, leasehold improvements and revenue interest rights, amounted to
$161,949 in 1998 compared to $255,965 for 1997. Depreciation and amortization
on truck stop and convenience store operations totaled $42,876 in 1998 and
$46,800 for 1997; on cruise operations amounted to $249,642 in 1998 compared to
$213,718 for 1997; and $8,640 in 1998 versus 1997's $8,100 on corporate assets.
Interest expense was $215,001 in 1998 and $277,240 for 1997, a decrease of
$62,239, or 22%. Net other revenue / (expense) totaled ($266,047) in 1998
compared to 1997's $32,718. 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 an additional $352,716 added as a result of nine months
ended September 30, 1998 operations and is recorded in the category of other
expense. Income Tax Expense amount to $84,600 for the nine months ended
September 30, 1998.
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. As a result of certain programs being written using two
digits rather than four digits to define the applicable year, any of the
Company's computer programs that have data sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities. The Company has
implemented a year 2000 program to review the functionality of the Company's
information technology and non-information technology systems and applications
beyond 1999 as well as year 2000 issues related to the Company's third-party
vendors. The Company operates its video poker devices under a license granted
by the Louisiana State Police Video Gaming Division. The Company currently
operates 248 video poker machines which are linked to an on-line tracking and
accounting system maintained by the Gaming Division's technical department. The
Gaming Division's technical department is currently in the testing stages for an
upgrade to its computer system to satisfy the year 2000 compliance issue. The
Gaming Division is scheduled to install its new computer system in January of
1999 and will require
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software upgrades for all video poker "Clerk Validation Terminals". There will
be a mandatory chip upgrade during the first quarter of 1999 to coincide with
Year 2000 compliance. The expected cost of the chip will be in the $75 to $100
range, which will require the Company to spend approximately $18,600 to $24,800
on hardware, and it is anticipated that to complete the conversion the Company
will also incur an estimated amount of $15,000 for labor and testing. The second
major system which controls the Company's payrolls is managed by a third party
(Automatic Data Processing). The conversion of this system was completed during
the third quarter of 1998. Another third party vendor who provides accounting
software support (Great Plains Software) has warranted that its software will
accurately reflect the change from the year 1999 to the year 2000 and beyond.
The Company integrates all of its execute office systems through a "Novell" Lan
software networking environment. The Company has plans to upgrade its current
server with software upgrades provided by Novell and intends to upgrade all
networked hardware to ensure compatibility and compliance with year 2000
requirements. It is estimated that this conversion will cost approximately
$15,000 and is scheduled for completion during the first quarter of 1999.
Computer terminals in use at Louisiana truck stop locations are not currently in
full compliance with the year 2000 roll-over requirements. Older personal
computers will not support an automatic roll-over to January 1, 2000. It is
planned that a BIOS upgrade will be scheduled for all older personal computers
to ensure that the units will comply. The estimated cost of BIOS upgrades will
not exceed $300 per personal computer, a total of $3,600. At this time, the
company has identified twelve (12) units which will require a BIOS upgrade. In
addition, custom application programs, written internally, will also require an
upgrade at an estimated cost of $10,000. It is also anticipated that to
complete the conversion and upgrade, certain hardware purchases might be
necessary if old equipment fails to meet the new standards. The Company
estimates that this could cost up to $20,000.
The Company's current plan contemplates expenditures totaling $90,000 to
implement all conversions to meet year 2000 compliance.
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.
PART II. OTHER INFORMATION
ITEM 4 IS OMITTED FROM THIS REPORT AS INAPPLICABLE.
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
deduct the full 32.5% and 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
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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 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 October 1, 1998, Operator had placed in
escrow $492,376 for the period from May 1997 through September 30, 1998.
Operator and the Company plan to petition the court in November 1998 to grant a
management fee for services from April 30, 1997 through the date the appeal is
completely concluded. The Third Circuit Court of Appeals heard the appeal on
November 6, 1998, and the outcome is currently pending a ruling from the court.
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, Civil Action No. 98-1503 S, United States District Court, Western
District of Louisiana, Shreveport Division, which was removed to federal
district court on August 17, 1998. 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 believes it is
legally prevented from paying dividends at this time under provisions of the
Delaware General Corporation Law, and it is also contractually prohibited from
paying dividends while certain indebtedness is outstanding. The Company
believes it will prevail, but there can be no assurance.
ITEM 2. CHANGES IN SECURITIES.
The Company issued 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 1,755,274 shares of Common
Stock to International effective July 3, 1998 pursuant to International's anti-
dilution agreement respecting the conversion of Class A Preferred Stock.
Effective September 18, 1998, International converted 3,096,000 shares of Series
B Preferred Stock into 3,096,000 shares of Common Stock and the Company issued
such 3,096,000 shares of Common Stock to International. 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.
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 so that upon the
issuance of such shares of Common Stock to the former holders of Class A
Preferred Stock, International was 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.
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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 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 after January 1, 1999 and on or
before February 15, 1999. The Company's Amended and Restated Bylaws also provide
that no matter may be brought before the annual meeting of stockholders unless
it is contained in the Company's Proxy Statement delivered to stockholders with
regard to such annual meeting.
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 filed as Exhibit 3.1.6 to the Company's Quarterly
Report on Form 10-QSB for the second quarter of 1998.
*3.2 Amended and Restated Bylaws of the Company.
10.1 Operating Agreement of River Port Truck Stop, LLC between the Company
and Donald I. Williams ("Williams") filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the second quarter of
1998.
10.2 Amendment to Employment Agreement between River Port Truck Stop, LLC,
O.M. Operating, L.L.C. and Williams filed as Exhibit 10.2 to the
Company's Quarterly Report on Form 10-QSB for the second quarter of
1998.
10.3 Consulting and Administrative Agreement between the Company and River
Port Truck Stop, LLC filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the second quarter of 1998.
10.4 Letter Agreement between the Company and Williams relating to River Port
Truck Stop, LLC filed as Exhibit 10.4 to the Company's Quarterly Report
on Form 10-QSB for the second quarter of 1998.
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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 filed as
Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB for the
second quarter of 1998.
*27.1 Financial Data Schedule required by Item 601 of Regulation S-B.
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* Filed herewith.
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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: November 12, 1998 By: /s/ George J. Akmon
--------------------------------
Executive Vice-President &
Chief Financial Officer (Principal
Financial and Chief Accounting
Officer)
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
A DELAWARE CORPORATION
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
A DELAWARE CORPORATION
INDEX
Article Page
I - OFFICES................................................................ 3
1.01 Registered Office............................................. 3
1.02 Other Offices................................................. 3
II - SEAL.................................................................. 3
2.01 Seal.......................................................... 3
III - STOCKHOLDERS' MEETINGS............................................... 3
3.01 Place of Meetings............................................. 3
3.02 Annual Meetings............................................... 3
3.03 Election of Directors......................................... 3
3.04 Special Meetings.............................................. 3
3.05 Quorum and Adjournment........................................ 4
3.06 Voting and Proxies............................................ 4
3.07 Determination of Stockholders Entitled to Vote................ 5
3.08 Notice of Meetings............................................ 5
3.09 Determination of Stockholders Entitled to Consent............. 5
3.10 Consent in Lieu of Meetings................................... 6
3.11 List of Stockholders.......................................... 6
IV - DIRECTORS............................................................. 6
4.01 Qualification, Election and Term.............................. 6
4.02 Powers........................................................ 7
4.03 Good Faith Reliance; Extent................................... 7
4.04 Annual, Regular and Special Meetings.......................... 7
4.05 Quorum........................................................ 7
4.06 Consent in Lieu of Meeting.................................... 7
4.07 Conference Telephone.......................................... 8
4.08 Compensation.................................................. 8
4.09 Appointment of Committees..................................... 8
4.10 Removal....................................................... 8
V - OFFICERS............................................................... 9
5.01 Title and Number.............................................. 9
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5.02 Salaries...................................................... 9
5.03 Term of Office................................................ 9
5.04 Chairman of the Board......................................... 9
5.05 President..................................................... 9
5.06 Vice-President................................................ 10
5.07 Secretary..................................................... 10
5.08 Treasurer..................................................... 10
5.09 Other Officers and Agents..................................... 10
VI - INDEMNIFICATION....................................................... 10
6.01 Persons and Extent............................................ 10
6.02 Expenses and Costs............................................ 11
6.03 Insurance..................................................... 12
VII - VACANCIES............................................................ 12
7.01 Vacancies..................................................... 12
7.02 Resignations Effective at Future Date......................... 13
7.03 Vacancy of Entire Board....................................... 13
VIII - CORPORATE RECORDS................................................... 13
8.01 Review of Records............................................. 13
IX - STOCK CERTIFICATES, DIVIDENDS, ETC.................................... 13
9.01 Description................................................... 13
9.02 Transfers..................................................... 13
9.03 Lost Certificate.............................................. 14
9.04 Determination of Record Date for Dividends or Stock Rights.... 14
9.05 Dividends..................................................... 14
9.06 Reserves...................................................... 14
X - MISCELLANEOUS PROVISIONS............................................... 14
10.01 Checks........................................................ 14
10.02 Fiscal Year................................................... 15
10.03 Notice........................................................ 15
10.04 Waiver of Notice.............................................. 15
10.05 Disallowed Compensation....................................... 15
XI - ANNUAL STATEMENT...................................................... 15
11.01 Financial Statements.......................................... 15
XII - AMENDMENTS........................................................... 16
12.01 Amendments.................................................... 16
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<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
ARTICLE I - OFFICES
1.01 REGISTERED OFFICE. The registered office of the corporation in the
State of Delaware shall be at Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801. The registered agent in charge thereof shall be The
Corporation Trust Company.
1.02 OTHER OFFICES. The corporation may also have offices at such other
places as the Board of Directors may from time to time appoint or the business
of the corporation may require.
ARTICLE II - SEAL
2.01 SEAL. The corporation may have a seal which shall have inscribed
thereon the name of the corporation and such other information as the Board of
Directors may determine.
ARTICLE III - STOCKHOLDERS' MEETINGS
3.01 PLACE OF MEETINGS. Meetings of stockholders shall be held at the
registered office of the corporation in this state or at such place, either
within or without this state, as may be selected from time to time by the Board
of Directors (the "Board").
3.02 ANNUAL MEETINGS. The annual meeting of the stockholders shall be
held on the third Tuesday of May in each year if not a legal holiday, and if a
legal holiday, then on the next secular day following at 10:00 o'clock A.M.,
when they shall elect the members of the Board and transact such other business
as may properly be brought before the meeting. If the annual meeting for
election of directors is not held on the date designated therefor, the directors
shall cause the meeting to be held as soon thereafter as convenient.
Notwithstanding any other provision of these Bylaws to the contrary, no
matter may be brought before the annual meeting of stockholders unless it is
contained in the Corporation's Proxy Statement delivered to stockholders with
regard to such annual meeting. Any stockholder who desires to include a
proposal for consideration at the annual meeting must submit such proposal
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to the Board of Directors in writing, by delivering such notice to the attention
of the President at the Corporation's executive offices, no earlier than January
1 of the year in which such annual meeting will be held and not later than
February 15 of the year in which such annual meeting will be held.
3.03 ELECTION OF DIRECTORS. Elections of the directors need not be by
written ballot, except upon demand by a stockholder at the election and before
voting begins.
3.04 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the President and shall be called
by the President or Secretary at the request in writing of a majority of the
Board of Directors, or at the request in writing of stockholders owning a
majority in amount of the entire capital stock of the corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
Business transacted at all special meetings shall be confined to the
objects stated in the call and matters germane thereto, unless all stockholders
entitled to vote are present and consent.
Written notice of a special meeting of stockholders stating the time and
place and object thereof, shall be given to each stockholder entitled to vote
thereat at least ten (10) days before such meeting, unless a greater period of
notice is required by statute in a particular case.
3.05 QUORUM AND ADJOURNMENT. A majority of the outstanding shares
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of stockholders. In all matters other than the election of
directors or where required by the provisions of the Delaware General
Corporation Law, the affirmative vote of the majority of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders. Directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors.
Where a separate vote by a class or classes is required by statute, a
majority of the outstanding shares of such class or classes, present in person
or represented by proxy, shall constitute a quorum entitled to take action with
respect to that vote on that matter and the affirmative vote of the majority of
shares of such class or classes present in person or represented by proxy at the
meeting shall be the act of such class.
If less than a majority of the outstanding shares entitled to vote is
represented at a meeting, a majority of the shares so represented may adjourn
the meeting from time to time without further notice. At such adjourned and
subsequently reconvened meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the adjourned meeting as originally noticed. The stockholders present at a duly
organized meeting
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may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shares entitled to vote to leave less than a quorum.
3.06 VOTING AND PROXIES. Each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder. Each stockholder
entitled to vote at a meeting or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy, but no such proxy shall be voted or acted upon after three
(3) years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. All
proxies shall be filed with the Secretary of the meeting before being voted
upon.
3.07 DETERMINATION OF STOCKHOLDERS ENTITLED TO VOTE. The Board may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof by adopting a resolution fixing a record
date for such determination; PROVIDED, HOWEVER, that the record date shall not
(a) precede the date on which the resolution fixing such record date is adopted
by the Board, or (b) be more than sixty (60) or less than ten (10) days before
the date of such meeting.
If no record date is fixed by the Board, the record date for such
determination shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
PROVIDED, HOWEVER, that the Board may fix a new record date for the adjourned
and subsequently reconvened meeting.
3.08 NOTICE OF MEETINGS. Whenever stockholders are required or
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called.
Unless otherwise provided by law, written notice of any meeting shall be
given to each stockholder entitled to vote at such meeting not less than ten
(10) nor more than sixty (60) days before the date of the meeting.
3.09 DETERMINATION OF STOCKHOLDERS ENTITLED TO CONSENT. The Board may
determine the stockholders entitled to consent to a corporate action in writing
without a meeting by adopting a resolution fixing a record date for such
determination; PROVIDED, HOWEVER, that the record
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date shall not (a) precede the date on which the resolution fixing such record
date is adopted, (b) be more than ten (10) days after the date the resolution
fixing such record date is adopted by the Board, or (c) less than ten (10) days
or more than sixty (60) days before the date of such meeting.
If no record date is fixed by the Board, the record date for such
determination (when no prior action by the Board is required by statute) shall
be the first date on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the corporation by delivery to (i)
its registered office in Delaware, (ii) its principal place of business, or
(iii) an officer or agent of the corporation having custody of the book in which
proceedings of stockholders' meetings are recorded. Delivery shall be made by
hand or by certified or registered mail, return receipt requested.
If no record date has been fixed by the Board and prior action by the
Board is required by statute, the record date shall be at the close of business
on the day on which the Board adopts the resolution taking such prior action.
3.10 CONSENT IN LIEU OF MEETINGS. Any action required or permitted to
be taken at any annual or special meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be delivered to the
corporation by delivery to (i) its registered office in Delaware, (ii) its
principal place of business, or (iii) an officer or agent having custody of the
book in which proceedings of stockholders' meetings are recorded. Delivery shall
be made by hand or by certified or registered mail, return receipt requested.
Every written consent must be signed by, and bear the date of signature
of, each consenting stockholder. No written consent shall be effective to take
the corporate action referred to therein unless within sixty (60) days of the
earliest dated consent delivered to the corporation in the manner required in
Section 3.09 above, written consents signed by a sufficient number of holders to
take action are delivered to the corporation.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
3.11 LIST OF STOCKHOLDERS. The officer who has charge of the stock
ledger shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
No share of stock upon which any installment is due and unpaid shall be voted at
any meeting. The list shall be open to the examination of any stockholder, for
any purpose germane to the
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meeting, during ordinary business hours, for a period of at least ten (10) days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE IV - DIRECTORS
4.01 QUALIFICATION, ELECTION AND TERM. The business and affairs of this
corporation shall be managed by its Board. The number of members to constitute
the Board shall be not less than three nor more than fifteen, as established by
resolution of the Board, or by an action of the stockholders. The directors
need not be residents of this state or stockholders. They shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the meeting and entitled to vote on the election of directors at the annual
meeting of stockholders. Each director shall be elected for the term of one
year, and until his successor shall be elected and shall qualify or until his
earlier resignation or removal.
4.02 POWERS. The Board shall exercise all of the powers of the
corporation except such as are by law, or by the certificate of incorporation or
by these bylaws conferred upon or reserved to the stockholders.
4.03 GOOD FAITH RELIANCE; EXTENT. A member of the Board, or a member of
any committee designated by the Board under Section 4.09 hereof, shall be fully
protected in relying in good faith upon the corporation's records and upon such
information, opinions, reports or statements presented to the corporation by any
of its officers or employees, or committees of the Board, or by any other person
as to matters the director reasonably believes are within such other person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the corporation, as to the value and amount of the assets,
liabilities and/or net profits of the corporation, or any other facts pertinent
to the existence and amount of surplus or other funds from which dividends might
properly be declared and paid, or with which the corporation's stock might
properly be purchased or redeemed.
4.04 ANNUAL, REGULAR AND SPECIAL MEETINGS. The Board may hold its
meetings, and have an office or offices, outside of this state.
Annual meetings of the directors shall be held immediately after the
annual meeting of the stockholders, or if a quorum is not then present, at a
time and place to be determined by the Chairman of the Board or the President.
Regular meetings of the Board shall be held without notice at the
registered office of the corporation, at such time and place as shall be
determined by the Board.
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Special Meetings of the Board may be called by the Chairman of the Board,
if one is elected, or the President on three (3) days notice to each director,
either personally or by mail or by telegram; special meetings shall be called by
the President or the Secretary in like manner and on like notice on the written
request of a majority of the directors then in office.
4.05 QUORUM. A majority of the total number of directors shall
constitute a quorum for the transaction of business. If at any meeting of the
Board there shall be less than a quorum present, a majority of those present may
adjourn the meeting from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at the meeting which
shall be so adjourned.
4.06 CONSENT IN LIEU OF MEETING. Any action required or permitted to be
taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
4.07 CONFERENCE TELEPHONE. One or more directors may participate in a
meeting of the Board, of a committee of the Board or of the stockholders, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other;
participation in this manner shall constitute presence in person at such
meeting.
4.08 COMPENSATION. Directors as such, shall not receive any stated
salary for their services, but by resolution of the Board, a fixed sum and
expenses of attendance, if any, may be allowed for attendance at each regular or
special meeting of the Board, PROVIDED that nothing herein contained shall be
construed to preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
4.09 APPOINTMENT OF COMMITTEES. The Board may, by resolution passed by
a majority of the entire Board, designate one (1) or more committees, each
committee to consist of one (1) or more directors. Any such committee, to the
extent provided in the resolution of the Board creating such committee, shall
have and may exercise all of the powers and authority of the Board in the
management of the business and affairs of the corporation, and may authorize the
corporation's seal to be affixed to all papers which may require it. PROVIDED,
HOWEVER, that no committee shall have any power or authority to (i) amend the
certificate of incorporation, EXCEPT, to the extent authorized by resolution
providing for issuance of shares of stock adopted by the Board, a committee may
fix the designations and preferences or rights of shares relating to dividends,
redemption, dissolution, distribution of assets of the corporation, or the
conversion of shares into, or the exchange of shares for shares of any other
class or classes, or series of the same or any other class or classes of stock,
or fix the number of shares of any series of stock or increase or decrease the
number of shares of any series; (ii) adopt an agreement of merger or
consolidation; (iii) recommend to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property and assets; (iv)
recommend to the stockholders a
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dissolution of the corporation or a revocation of a dissolution; (v) amend the
bylaws; (vi) declare a dividend; (vii) authorize the issuance of stock; or
(viii) adopt a certificate of ownership or merger.
The Board may provide that in the absence or disqualification of a member
of a committee, the member or members present at any meeting and not
disqualified from voting may unanimously appoint another member of the Board to
act at a meeting in place of such absent or disqualified committee member. The
Board may also designate one (1) or more directors as alternate committee
members who may replace any absent or disqualified member at any committee
member.
4.10 REMOVAL. Any director or the entire Board may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that when cumulative voting is permitted, if
less than the entire Board is to be removed, no director may be removed without
cause if the votes cast against his removal would be sufficient to elect him if
then cumulatively voted at an election of the entire Board, or, if there be
classes of directors, at an election of the class of directors of which he is a
part.
4.11 DISCLOSURE TO GAMING REGULATORY AUTHORITIES. Each director must
agree to provide such background information, including a financial statement,
and consent to such background investigation, as may be required by gaming
regulatory authorities of any state or other jurisdiction in or subject to which
the corporation does or proposes to do business, and must agree to respond to
questions from such gaming regulatory authorities. If any director is unwilling
or unable to obtain within a reasonable period of time any necessary approval by
gaming regulatory authorities in any such state or other jurisdiction, then such
director shall, if so requested by a majority of the remaining directors, resign
from the Board. If and to the extent required by the gaming regulatory
authorities of any state or other jurisdiction in which the corporation does or
proposes to do business, or of any state or jurisdiction whose laws or
regulations are otherwise applicable to the corporation, such director shall
abstain from participating in any action with respect to operations of the
corporation in such state or jurisdiction pending such background check or
approval.
ARTICLE V - OFFICERS
5.01 TITLE AND NUMBER. The executive officers shall be chosen by the
directors and shall be a President and a Secretary. The Board may also choose a
Chairman of the Board, one or more Vice Presidents, a Treasurer, and such other
officers as it shall deem necessary. Any number of offices may be held by the
same person. None of the officers of the corporation need be directors. The
officers shall be elected at the first meeting of the Board after each annual
meeting.
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5.02 SALARIES. Salaries of all officers and agents shall be fixed by
the Board.
5.03 TERM OF OFFICE. The officers shall hold office for one year and
until their successors are chosen and have qualified. Any officer or agent
elected or appointed by the Board may be removed by the Board whenever in its
judgment the best interest of the corporation will be served thereby.
5.04 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is
elected, shall preside at all meetings of the Board and he shall have and
perform such other duties as from time to time may be assigned to him by the
Board.
5.05 PRESIDENT. The President shall be the chief executive officer; he
shall preside at all meetings of the stockholders and directors; he shall have
general and active management of the business of the corporation, shall see that
all orders and resolutions of the Board are carried into effect, subject,
however, to the right of the directors to delegate any specific powers, except
such as may be by statute exclusively conferred on the President, to any other
officer or officers. He shall execute bonds, mortgages and other contracts
requiring a seal, under the corporation's seal. He shall be EX-OFFICIO a member
of all committees, and shall have the general power and duties of supervision
and management usually vested in the office of president of a corporation.
5.06 VICE-PRESIDENT. Each Vice-President shall have such powers and
shall perform such duties as shall be assigned to him by the Board.
5.07 SECRETARY. The Secretary shall attend all sessions of the Board
and all meetings of the stockholders and act as clerk thereof, and record all
the votes of the corporation and the minutes of all its transactions in a book
to be kept for that purpose, and shall perform like duties for all committees of
the Board when required. He shall give, or cause to be given, notice of all
meetings of the stockholders and of the Board, and shall perform such other
duties as may be prescribed by the Board or the President, and under whose
supervision he shall be. He shall keep in safe custody the corporate seal, and
when authorized by the Board, affix the same to any instrument requiring it.
5.08 TREASURER. If a Treasurer is elected or appointed, the Treasurer
shall have custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation, and shall keep the moneys of the corporation in a separate account
to the credit of the corporation. He shall disburse therefrom such funds as may
be ordered by the Board, taking proper vouchers for such disbursements, and
shall render to the President and the directors at the regular meetings of the
Board, or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the corporation.
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5.09 OTHER OFFICERS AND AGENTS. The Board may appoint such other
officers and agents as it may deem advisable, who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
ARTICLE VI - INDEMNIFICATION
6.01 PERSONS AND EXTENT. Subject to the provisions of Section 145 of
the Delaware General Corporation law, the corporation may indemnify any person
who:
(a) was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by
or in the right of the corporation) by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding 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 corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interest of the corporation,
and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(b) was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorney's
fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit 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 corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only
to the extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application
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that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other
court shall deem proper.
Any indemnification under subsections (a) and (b) of this section, unless
ordered by a court, shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
6.02 EXPENSES AND COSTS. To the extent that a director, officer,
employee or agent has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Section 6.01 or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the corporation as authorized in this Article VI. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board deems appropriate.
The indemnification and advancement of expenses provided by, or granted
pursuant to, any provision of this Article shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
The indemnification and advancement of expenses provided by, or granted
pursuant hereto shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
6.03 INSURANCE. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status
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<PAGE>
as such, whether or not the corporation would have the power to indemnify him
against such liability under this section.
ARTICLE VII - VACANCIES
7.01 VACANCIES. Any vacancy occurring in any office by death,
resignation, removal or otherwise, shall be filled by the Board. Vacancies and
newly created directorships resulting from any increase in the authorized number
of directors may be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. If at any time,
by reason of death or resignation or other cause, the corporation should have no
directors in office, then any officer or any stockholder or an executor,
administrator, trustee or guardian of a stockholder, or other fiduciary
entrusted with like responsibility for the person or estate of a stockholder,
may call a special meeting of stockholders in accordance with the provisions of
these Bylaws.
7.02 RESIGNATIONS EFFECTIVE AT FUTURE DATE. A resignation of a director
shall be effective only upon the date accepted by the Board or at such future
date as may be agreed to by the Board. In the event the resignation of a
director is to become effective at a future date, the Board, including the
director whose resignation is being acted upon, may by majority vote, elect a
replacement director whose election to the Board shall become effective on the
date such resignation takes effect.
7.03 VACANCY OF ENTIRE BOARD. If at any time the corporation should
have no directors in office, then any officer, stockholder or an executor,
administrator, trustee or guardian of a stockholder, or a fiduciary entrusted
with a like responsibility for the person or estate of a stockholder may call a
special meeting of stockholders for the purpose of electing directors, or may
apply to the Court of Chancery, State of Delaware, for a decree ordering an
election of directors.
ARTICLE VIII - CORPORATE RECORDS
8.01 REVIEW OF RECORDS. Any stockholder of record, in person or by
attorney or other agent, shall, upon written demand under oath stating the
purpose thereof, have the right during the usual hours for business to inspect
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other books and records, and to make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or
other agent shall be the person who seeks the right to inspection, the demand
under oath shall be accompanied by a power of attorney or such other writing
which authorizes the attorney or other agent to so act on behalf of the
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<PAGE>
stockholder. The demand under oath shall be directed to the corporation at its
registered office in this state or at its principal place of business.
ARTICLE IX - STOCK CERTIFICATES, DIVIDENDS, ETC.
9.01 DESCRIPTION. Stock certificates shall be numbered and registered
in the corporation's share ledger and transfer books as they are issued. They
shall bear the corporate seal and shall be signed by the Chairman or Vice-
Chairman of the Board, if they be elected, the President or Vice-President, and
the Treasurer or an Assistant Treasurer, or Secretary or Assistant Secretary,
and shall be issued to each stockholder certifying the number of shares owned by
him. When such certificates are countersigned (1) by a transfer agent other than
the corporation or its employee, or, (2) by a registrar other than the
corporation or its employee, the signatures of such officers may be facsimiles.
9.02 TRANSFERS. The shares shall be transferrable only upon its books
by the holders thereof in person or by their duly authorized attorneys or legal
representatives. Upon such transfer the old certificate shall be surrendered to
the corporation by the delivery thereof to the person in charge of the stock and
transfer books and ledgers, or to such other person as the directors may
designate, by whom they shall be cancelled, and new certificates shall thereupon
be issued. A record shall be made of each transfer and whenever a transfer shall
be made for collateral security, and not absolutely, it shall be so expressed in
the entry of the transfer.
9.03 LOST CERTIFICATE. The corporation may issue a new certificate in
the place of any certificate theretofore signed by it, alleged to have been
lost, stolen or destroyed, and the corporation may require the owner of the
lost, stolen or destroyed certificate, or his legal representative, to give the
corporation a bond sufficient to indemnify it against any claim that may be made
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
9.04 DETERMINATION OF RECORD DATE FOR DIVIDENDS OR STOCK RIGHTS. In
order that the corporation may determine the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights, or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board by resolution may fix a record date, which record date shall not (a)
precede the date upon which the resolution fixing such record date was adopted,
or (b) be more than sixty (60) days prior to such action.
If a record date is not fixed, the record date for such determination
shall be at the close of business on the day on which the board of directors
adopts the resolution relating to any of the purposes set forth in this Section
9.04.
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<PAGE>
9.05 DIVIDENDS. The Board may declare and pay dividends upon the
outstanding shares, from time to time and to such extent as they deem advisable,
in the manner and upon the terms and conditions provided by statute and the
certificate of incorporation.
9.06 RESERVES. Before payment of any dividend there may be set aside
out of the net profits of the corporation such sum or sums as the directors,
from time to time, in their absolute discretion, think proper as a reserve fund
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for such other purpose as the
directors shall think conducive to the interests of the corporation, and the
directors may abolish any such reserve in the manner in which it was created.
ARTICLE X - MISCELLANEOUS PROVISIONS
10.01 CHECKS. All checks, drafts or other demands for the payment of
money or demands for money, notes or other evidences of indebtedness issued in
the name of the corporation shall be signed by such officer or officers, agent
or agents as the Board may from time to time designate.
10.02 FISCAL YEAR. The fiscal year shall begin on the first day of
January of each year.
10.03 NOTICE. Whenever written notice is required to be given to any
person, it may be given to such person, either personally or by sending a copy
thereof through the mail, or by telegram, charges prepaid, to his address
appearing on the books of the corporation, or supplied by him to the corporation
for the purpose of notice. If the notice is sent by mail or by telegraph, it
shall be deemed to have been given to the person entitled thereto when deposited
in the United States mail or with a telegraph office for transmission to such
person. Such notice shall specify the place, day and hour of the meeting and,
in the case of a special meeting of stockholders, the general nature of the
business to be transacted.
10.04 WAIVER OF NOTICE. Whenever any written notice is required by
statute, or by the certificate of incorporation or the bylaws a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Except in the case of a special meeting of stockholders,
neither the business to be transacted at nor the purpose of the meeting need be
specified in the waiver of notice of such meeting. Attendance of a person
either in person or by proxy, at any meeting shall constitute a waiver of notice
of such meeting, except where a person attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting was not
lawfully called or convened.
10.05 DISALLOWED COMPENSATION. Any payments made to an officer or
employee such as a salary, commission, bonus, interest, rent, travel or
entertainment expense incurred by him,
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<PAGE>
which shall be disallowed in whole or in part as a deductible expense by the
Internal Revenue Service, shall be reimbursed by such officer or employee to the
corporation to the full extent of such disallowance. It shall be the duty of the
directors, as a Board, to enforce payment of each such amount disallowed. In
lieu of payment by the officer or employee, subject to the determination of the
directors, proportionate amounts may be withheld from his future compensation
payments until the amount owed has been recovered.
ARTICLE XI - ANNUAL STATEMENT
11.01 FINANCIAL STATEMENTS. The President and the Board shall present at
each annual meeting a full and complete statement of the business and affairs of
the corporation for the preceding year. Such statement shall be prepared and
presented in whatever manner the Board shall deem advisable and need not be
verified by a certified public accountant.
ARTICLE XII - AMENDMENTS
12.01 AMENDMENTS. These bylaws may be amended or repealed, or new bylaws
may be adopted, by the Board; PROVIDED HOWEVER, the conferring of this power
upon the Board, shall not divest nor limit the power of the stockholders to
adopt, amend or repeal bylaws.
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 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> SEP-30-1998
<CASH> 27,229
<SECURITIES> 0
<RECEIVABLES> 257,040
<ALLOWANCES> 0
<INVENTORY> 119,837
<CURRENT-ASSETS> 464,296
<PP&E> 1,883,524
<DEPRECIATION> 393,915
<TOTAL-ASSETS> 5,063,858
<CURRENT-LIABILITIES> 3,096,590
<BONDS> 0
0
0
<COMMON> 417,886
<OTHER-SE> (1,244,212)
<TOTAL-LIABILITY-AND-EQUITY> 5,063,858
<SALES> 18,793,606
<TOTAL-REVENUES> 18,793,606
<CGS> 12,042,249
<TOTAL-COSTS> 5,688,262
<OTHER-EXPENSES> 266,047
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,001
<INCOME-PRETAX> 118,940
<INCOME-TAX> 84,600
<INCOME-CONTINUING> 118,940
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,340
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
